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, and references to "Lumen Technologies" or "Lumen" refer to our ultimate parent company, Lumen Technologies, Inc., and its consolidated subsidiaries including Level 3 Parent, LLC, referred to as "Level 3".
(1) Background and Summary of Significant Accounting Policies
General
We are an integrated facilities-based communications company focused on providing our business and mass markets customers with a broad array of communications products and services. Our specific products and services are detailed in Note 3—Revenue Recognition of this report.
We generate the majority of our total consolidated operating revenue from services provided in the 14-state region of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. We refer to this region as our local service area.
Basis of Presentation
The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries. Intercompany amounts and transactions with our consolidated subsidiaries have been eliminated. Transactions with our non-consolidated affiliates (referred to herein as affiliates) have not been eliminated.
We reclassified certain prior period amounts to conform to the current period presentation, including our revenue by product and service categories. See Note 3—Revenue Recognition for additional information. These changes had no impact on total operating revenue, total operating expenses or net income for any period.
Segments
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
Use of Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we make when accounting for specific items and matters are reasonable, based on information available at the time they are made. These estimates, judgments and assumptions can materially affect the reported amounts of assets, liabilities and components of stockholder's equity as of the dates of the consolidated balance sheets, as well as the reported amounts of revenue, expenses and components of cash flows during the periods presented in our other consolidated financial statements. We also make estimates in our assessments of potential losses in relation to threatened or pending tax and legal matters. See Note 12—Income Taxes and Note 14—Commitments, Contingencies and Other Items for additional information.
For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. If we have the potential to recover a portion of the estimated loss from a third party, we make a separate assessment of recoverability and reduce the estimated loss if recovery is also deemed probable.
For matters related to income taxes, if we determine that the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Interest is recognized on the amount of unrecognized benefit from uncertain tax positions.
For all of these and other matters, actual results could differ materially from our estimates.
Revenue Recognition
We earn most of our consolidated revenue from contracts with customers, primarily through the provision of communications and other services. Revenue from contracts with customers is accounted for under Accounting Standards Codification ("ASC") 606. We also earn revenue from leasing arrangements (primarily fiber capacity agreements) and governmental subsidy payments, neither of which are accounted for under ASC 606.
Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. Revenue is recognized based on the following five-step model:
•Identification of the contract with a customer;
•Identification of the performance obligations in the contract;
•Determination of the transaction price;
•Allocation of the transaction price to the performance obligations in the contract; and
•Recognition of revenue when, or as, we satisfy a performance obligation.
We provide an array of communications services to business and residential customers, including local voice, VPN, Ethernet, data, broadband, private line (including special access), network access, transport, voice, information technology, video and other ancillary services. We provide these services to a wide range of businesses, including global/international, enterprise, wholesale, government, small and medium business customers. Certain contracts also include the sale of equipment, which is not significant to our business.
We recognize revenue for services when we provide the applicable service or when control is transferred. Recognition of certain payments received in advance of services being provided is deferred. 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 typically ranges from one to five years depending on the service. In most cases, termination fees or other fees on existing contracts that are negotiated in conjunction with new contracts are deferred and recognized over the new contract term.
For access services, we generally bill fixed monthly charges one month in advance to customers and recognize revenue as service is provided over the contract term in alignment with the customer's receipt of service. For usage and other ancillary services, we generally bill in arrears and recognize revenue as usage or delivery occurs. In most cases, the amount invoiced for our service offerings constitutes the price that would be billed on a standalone basis.
In certain cases, customers may be permitted to modify their contracts. We evaluate the change in scope or price to identify whether the modification should be treated as a separate contract, whether the modification is a termination of the existing contract and creation of a new contract, or if it is a change to the existing contract.
Customer contracts are evaluated to determine whether the performance obligations are separable. If the performance obligations are deemed separable and separate earnings processes exist, the total transaction price that we expect to receive with the customer is allocated to each performance obligation based on its relative standalone selling price. The revenue associated with each performance obligation is then recognized as earned.
We periodically sell transmission capacity on our network. These transactions are structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically 20 years. In most cases, we account for the cash consideration received on transfers of transmission capacity as ASC 606 revenue, which is adjusted for the time value of money and is recognized ratably over the term of the agreement. Cash consideration received on transfers of dark fiber is accounted for as non-ASC 606 lease revenue, which we also recognize ratably over the term of the agreement. We do not recognize revenue on any contemporaneous exchanges of our transmission capacity assets for other non-owned transmission capacity assets.
In connection with offering products and services provided to the end user by third-party vendors, we review the relationship between us, the vendor and the end user to assess whether revenue should be reported on a gross or net basis. In assessing whether revenue should be reported on a gross or net basis, we consider whether we act as a principal in the transaction and control the goods and services used to fulfill the performance obligations associated with the transaction.
We have service level commitments pursuant to contracts with certain of our customers. To the extent that such service levels are not achieved or are otherwise disputed due to performance or service issues or other service interruptions or conditions, we will estimate the amount of credits to be issued and record a corresponding reduction to revenue in the period that the service level commitment was not met or may not be met.
Customer payments are made based on billing schedules included in our customer contracts, which is typically on a monthly basis.
We defer (or capitalize) incremental contract acquisition and fulfillment costs and recognize (or amortize) such costs over the average contract life. Our deferred contract costs for our customers have average amortization periods of approximately 32 months for mass markets and 30 months for business. These deferred costs are monitored every period to reflect any significant change in assumptions.
See Note 3—Revenue Recognition for additional information.
Affiliate Transactions
We provide to our affiliates telecommunications services that we also provide to external customers. In addition, we provide to our affiliates application development and support services. Services provided by us to our affiliates are recognized as operating revenue-affiliates in our consolidated statements of operations. We also purchase services from our affiliates including telecommunications services, marketing and employee-related support services. Services provided to us from our affiliates are recognized as operating expenses-affiliates on our consolidated statements of operations. Because of the significance of the services we provide to our affiliates and our affiliates provide to us, the results of operations, financial position and cash flows presented herein are not necessarily indicative of the results of operations, financial position and cash flows we would have achieved had we operated as a stand-alone entity during the periods presented.
We recognize intercompany charges at the amounts billed to us by our affiliates and we recognize intercompany revenue for services we bill to our affiliates. For additional information, see Note 13—Affiliate Transactions.
Our ultimate parent company, Lumen Technologies, Inc. has cash management arrangements or loan arrangements with a majority of its subsidiaries that include lines of credit, affiliate obligations, capital contributions and dividends. As part of these cash management arrangements, affiliates provide lines of credit to certain other affiliates. Amounts outstanding under these lines of credit and intercompany obligations vary from time to time. Under these arrangements, the majority of our cash balance is transferred on a daily basis for centralized management by Lumen's service company affiliate. From time to time, we may declare and pay dividends to QSC, our direct parent, using cash owed to us under these advances, which has the net effect of reducing the amount of these advances. We report the balance of these transfers on our consolidated balance sheet as advances to affiliates. Dividends paid are reflected on our consolidated statements of stockholder's equity and the consolidated statements of cash flows reflects the changes in advances to affiliates as investing activities and changes in advances from affiliates as financing activities. Interest is assessed on advances to and from affiliates using the current interest rate for our note payable-affiliate.
The affiliate obligations, net in current and noncurrent liabilities on our consolidated balance sheets primarily represents the cumulative allocation of expense, net of payments, associated with QCII’s pension plans and post-retirement benefits plans prior to the plan mergers. In 2015, we agreed to a plan to settle the outstanding affiliate obligations, net balance with QCII over a 30 year term. Under the plan, payments are scheduled to be made on a monthly basis. For the years ended December 31, 2022 and 2021, we made settlement payments of $61 million and $46 million, respectively, to QCII in accordance with the plan. Changes in the affiliate obligations, net are reflected in operating activities on our consolidated statements of cash flows.
In the normal course of business, we transfer assets to and from various affiliates through our parent, QSC, which are recorded through our equity. It is our policy to record asset transfers based on carrying values. These
transactions may reduce our capital resources for debt repayments and other purposes.
On September 30, 2022, Qwest Corporation repaid the outstanding principal and interest on the Note Payable - Affiliate to an affiliate of our ultimate parent company, Lumen Technologies, Inc., under a revolving promissory note. For additional information, see "Note Payable - Affiliate" in Note 6—Long-Term Debt and Note Payable - Affiliate.
Advertising Costs
Costs related to advertising are expensed as incurred and included in selling, general and administrative expenses in our consolidated statements of operations. Our advertising expense was $26 million, $24 million and $25 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Legal Costs
In the normal course of our business, we incur costs to hire and retain external legal counsel to advise us on regulatory, litigation and other matters. We expense these costs as the related services are received.
Income Taxes
Our results are included in the Lumen Technologies consolidated federal income tax return and certain combined state income tax returns. Lumen Technologies allocates income tax expense to us based upon a separate return 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, 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. policy. 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. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to differences between the financial statement carrying value of assets and liabilities and the tax basis of those assets and liabilities. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date.
We establish valuation allowances when necessary to reduce deferred income tax assets to the amounts that we believe are more likely than not to be recovered. Each quarter we evaluate the need to retain all or a portion of the valuation allowance on our deferred tax assets. See Note 12—Income Taxes for additional information.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates. As a result, the value at which cash and cash equivalents are reported in our consolidated financial statements approximates their fair value. Our cash collections are transferred to Lumen Technologies, Inc. on a daily basis and our ultimate parent funds our cash disbursement needs. The net cash transferred to Lumen Technologies, Inc. has been reflected as advances to affiliates in our consolidated balance sheets.
Book overdrafts occur when checks have been issued but have not been presented to our controlled disbursement bank accounts for payment. Disbursement bank accounts allow us to delay funding of issued checks until the checks are presented for payment. Until the issued checks are presented for payment, the book overdrafts are included in accounts payable on our consolidated balance sheet. This activity is included in the operating activities section in our consolidated statements of cash flows. There were no book overdrafts included in accounts payable at December 31, 2022 or December 31, 2021.
Restricted Cash
Restricted cash consists primarily of cash and investments that serve to collateralize certain performance and operating obligations. Restricted cash is recorded as current or non-current assets in the consolidated balance sheets depending on the duration of the restriction and the purpose for which the restriction exists.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are recognized based upon the amount due from customers for the services provided or at cost for purchased and other receivables less an allowance for credit losses. We use a loss rate method to estimate our allowance for credit losses. For more information on our methodology for estimating our allowance for credit losses, see Note 5—Credit Losses on Financial Instruments.
We generally consider our accounts past due if they are outstanding over 30 days. Our past due accounts are written off against our allowance for credit losses 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 credit losses, approximates fair value.
Property, Plant and Equipment
As a result of our indirect acquisition by Lumen Technologies, Inc., property, plant and equipment acquired at the time of acquisition was recorded based on its estimated fair value as of the acquisition date. Subsequently purchased and constructed property, plant and equipment are recorded at cost. Property, plant and equipment is depreciated primarily using the straight-line group method. Under the straight-line group method, assets dedicated to providing telecommunications services (which comprise the majority of our property, plant and equipment) that have similar physical characteristics, use and expected useful lives are pooled for purposes of depreciation and tracking. The equal life group procedure is used to establish each pool's average remaining useful life. Generally, under the straight-line group method, when an asset is sold or retired in the course of normal business activities, the cost is deducted from property, plant and equipment and charged to accumulated depreciation without recognition of a gain or loss. A gain or loss is recognized in our consolidated statements of operations only if a disposal is unusual. Leasehold improvements are amortized over the shorter of the useful lives of the assets or the expected lease term. Expenditures for maintenance and repairs are expensed as incurred. During the construction phase of network and other internal-use capital projects, we capitalize related employee and interest costs. Property, plant and equipment supplies used internally are carried at average cost, except for significant individual items for which cost is based on specific identification.
We perform annual internal reviews to evaluate the reasonableness of the depreciable lives for our property, plant and equipment. Our reviews utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution and, in certain instances, actuarially determined probabilities to estimate the remaining useful life of our asset base. Our remaining useful life assessments evaluate the possible loss in service value of assets that may precede the physical retirement. Assets shared among many customers may lose service value as those customers reduce their use of the network. However, the asset is not retired until all customers no longer utilize the asset and we determine there is no alternative use for the asset.
We review long-lived tangible assets for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. For assessment purposes, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, absent a material change in operations. An impairment loss is recognized only if the carrying amount of the asset group is not recoverable and exceeds its estimated fair value. Recoverability of the asset group to be held and used is assessed by comparing the carrying amount of the asset group to the estimated undiscounted future net cash flows expected to be generated by the asset group. If the asset group's carrying value is not recoverable, we recognize an impairment charge for the amount by which the carrying amount of the asset group exceeds its estimated fair value.
Goodwill, Customer Relationships and Other Intangible Assets
Intangible assets arising from business combinations, such as goodwill, customer relationships and capitalized software are initially recorded at estimated fair value. Prior to customer relationships becoming fully amortized in March 2021, we primarily amortized those assets over an estimated life of 10 years, using the sum-of-years digits method, depending on the type of customer. We amortize capitalized software using the straight-line method over estimated lives ranging up to 7 years. Other intangible assets not arising from business combinations are initially recorded at cost.
Internally used software, whether purchased or developed by us, is capitalized and amortized using the straight-line method over its estimated useful life. We have capitalized certain costs associated with software such as costs of employees devoting time to the projects and external direct costs for materials and services. Costs associated with software to be used for internal purposes are expensed until the point at which the project has reached the development stage. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance, data conversion and training costs are expensed in the period in which they are incurred. We review the remaining economic lives of our capitalized software annually. Capitalized software is included in other intangible assets, net, in our consolidated balance sheets.
We are required to assess our goodwill for impairment annually, or more frequently if an event occurs or circumstances change that would indicate an impairment may have occurred. We are required to write-down the value of goodwill of the reporting unit in periods in which the carrying amount of the reporting unit equity exceeds the estimated fair value of the equity of the reporting unit limited to the goodwill balance. The impairment assessment is performed at the reporting unit level. We have determined that our operations consist of one reporting unit, consistent with our determination that our business consists of one operating segment. See Note 2—Goodwill, Customer Relationships and Other Intangible Assets for additional information.
Pension and Post-Retirement Benefits
A substantial portion of our active and retired employees participate in the Lumen Combined Pension Plan. On December 31, 2014, the QCII pension plan and a pension plan of an affiliate were merged into the CenturyLink Retirement Plan, and the CenturyLink Retirement Plan is now named the Lumen Combined Pension Plan. Prior to the pension plan merger, the above-noted employees participated in the QCII pension plan. In addition, certain of our employees participate in Lumen's post-retirement health care and life insurance benefit plans. Lumen Technologies allocates service costs relating to pension and post-retirement health care and life insurance benefits to us and its other affiliates. The amounts contributed by us through Lumen Technologies are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other employees of Lumen Technologies. The allocation of the service costs to us is based upon our employees who are currently earning benefits under the plans.
For further information on qualified pension, post-retirement and other post-employment benefit plans, see Note 11—Employee Benefits to the consolidated financial statements in Item 8 of Part II of Lumen's annual report on Form 10-K for the year ended December 31, 2022.
Recently Adopted Accounting Pronouncements
During 2022, we adopted Accounting Standards Update ("ASU") 2021-10, "Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance” (“ASU 2021-10”) and ASU 2021-05, “Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments” (“ASU 2021-05”). During 2021, we adopted ASU 2020-09 "Debt (Topic 470) Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762," ("ASU 2020-09"), ASU 2020-01 "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815)" ("ASU 2020-01") and ASU 2019-12 "Simplifying the Accounting for Income Taxes (Topic 740). ("ASU 2019-12")" During 2020, we adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13").
Each of these is described further below.
Government Assistance
On January 1, 2022, we adopted ASU 2021-10. This ASU requires business entities to disclose information about certain types of government assistance they receive. Please refer to Note 3—Revenue Recognition for more information.
Leases
On January 1, 2022, we adopted ASU 2021-05. This ASU (i) amends the lease classification requirements for lessors to align them with practice under ASC Topic 840, (ii) provides criteria for lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease, and (iii) provides guidance with respect to net investments by lessors under operating leases and other related topics. The adoption of ASU 2021-05 did not have a material impact to our consolidated financial statements.
Debt
On January 1, 2021, we adopted ASU 2020-09. This ASU amends and supersedes various SEC guidance 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 adoption of ASU 2020-09 did not have a material impact to our consolidated financial statements.
Investments
On January 1, 2021, we adopted ASU 2020-01. This ASU, among other things, clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments - Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. As of December 31, 2022, we determined there was no application or discontinuation of the equity method during the reporting periods covered by this report. The adoption of ASU 2020-01 did not have an impact to our consolidated financial statements.
Income Taxes
On January 1, 2021, we adopted ASU 2019-12. This ASU removes certain exceptions for investments, intra-period allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. The adoption of ASU 2019-12 did not have a material impact to our consolidated financial statements.
Measurement of Credit Losses on Financial Instruments
We adopted 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.
Recently Issued Accounting Pronouncements
In December 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-06, “Reference Rate Reform (Topic 848) – Deferral of the Sunset Date of Topic 848" ("ASU 2022-06"). These amendments extend the period of time preparers can utilize the reference rate reform relief guidance in Topic 848, which defers the sunset date from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. ASU 2022-06 is effective upon issuance. Based on our review of our key material contracts through December 31, 2022, we do not expect ASU 2022-06 to have a material impact to our consolidated financial statements.
In September 2022, the FASB issued ASU 2022-04, “Liabilities-Supplier Finance Program (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations” (“ASU 2022-04”). These amendments require that a company that uses a supplier finance program in connection with the purchase of goods or services disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, program activity during the period, changes from period to period and potential magnitude of program transactions. ASU 2022-04 will become effective for us in the first quarter of fiscal 2023. As of December 31, 2022, we are reviewing our supplier finance agreements to determine the impact to disclosures in our consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (“ASU 2022-03”). These amendments clarify that a contractual restriction on the sales of an investment in equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. ASU 2022-03 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of December 31, 2022, we do not expect ASU 2022-03 to have an impact to our consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings (“TDR”) and Vintage Disclosures” (“ASU 2022-02”). These amendments eliminate the TDR recognition and measurement guidance, enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. ASU 2022-02 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of December 31, 2022, we do not expect ASU 2022-02 to have an impact to our consolidated financial statements.
In March 2022, the FASB issued ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method” ("ASU 2022-01"). The ASU expands the current single-layer method to allow multiple hedged layers of a single closed portfolio under the method. ASU 2022-01 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of December 31, 2022, we do not expect ASU 2022-01 to have an impact to our consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”), which requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. ASU 2021-08 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of December 31, 2022, we do not expect ASU 2021-08 to have an impact to our consolidated financial statements.
In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope" ("ASU 2021-01"), which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. These amendments may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. ASU 2021-01 provides optional expedients for a limited time to ease the potential burden in accounting for reference rate reform. Based on our review of our key material contracts through December 31, 2022, ASU 2021-01 will not have a material impact to 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" ("ASU 2020-04" or "Reference Rate Reform"), 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. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. ASU 2020-04 provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. Based on our review of our key material contracts through December 31, 2022, we do not expect ASU 2020-04 to have a material impact to our consolidated financial statements.
(2) Goodwill, Customer Relationships and Other Intangible Assets
Goodwill, customer relationships and other intangible assets consisted of the following:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
| Goodwill | $ | 9,360 | | | 9,360 | |
Customer relationships, less accumulated amortization of $— and $5,699 (1) | $ | — | | | — | |
Other intangible assets, less accumulated amortization of $1,924 and $1,876 | 138 | | | 199 | |
| Total other intangible assets, net | $ | 138 | | | 199 | |
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(1)Customer relationships with a gross carrying value of $5.7 billion became fully amortized during 2021 and were retired during the first quarter of 2022.
As of December 31, 2022, the gross carrying amount of goodwill, customer relationships and other intangible assets was $11.4 billion.
Substantially all of our goodwill was derived from Lumen's acquisition of us where the purchase price exceeded the fair value of the net assets acquired.
We are required to assess our goodwill for impairment annually, or under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment. We are required to write down the value of goodwill only when our assessment determines the carrying value of equity of our reporting unit exceeds its fair value. Our annual impairment assessment date for goodwill is October 31, at which date we assess goodwill at our reporting unit. In reviewing the criteria for reporting units, we have determined that we are one reporting unit.
At October 31, 2022, 2021 and 2020, we estimated the fair value of equity by considering both a market approach and a discounted cash flow method. The market approach method includes the use of comparable multiples of publicly traded companies whose services are comparable to ours. The discounted cash flow method is based on the present value of projected cash flows and a terminal value, equal to the present value of all normalized cash flows after the projection period. Based on our assessment performed, the estimated fair value of our equity exceeded our carrying value of equity by approximately 24%, 42% and 48% at October 31, 2022, 2021 and 2020, respectively. We concluded that goodwill was not impaired as of October 31, 2022, 2021 and 2020.
Our fair value estimates for evaluating goodwill incorporated significant judgments and assumptions including forecast revenues and expenses, cost of capital, and control premiums. In developing market multiples, we also considered observed trends of our industry participants and other qualitative factors that required significant judgment. Alternative estimates, judgments, and interpretations of these factors could have resulted in different conclusions regarding the need for an impairment charge.
We annually review the estimated lives and methods used to amortize our other intangible assets. The actual amounts of amortization expense may differ materially from our estimates, depending on the results of our annual reviews. As of December 31, 2022, the weighted average remaining useful life was 2 years for capitalized software.
Total amortization expense for intangible assets for the years ended December 31, 2022, 2021 and 2020 was $79 million, $176 million and $481 million, respectively.
We estimate that total amortization expense for intangible assets for the years ending December 31, 2023 through 2027 will be as follows:
| | | | | |
| (Dollars in millions) |
| Year ending December 31, | |
| 2023 | $ | 61 | |
| 2024 | 33 | |
| 2025 | 15 | |
| 2026 | 9 | |
| 2027 | 7 | |
(3) Revenue Recognition
We categorize our products, services and revenue among the following 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; and
•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.
Reconciliation of Total Revenue to Revenue from Contracts with Customers
The following tables provide our total revenue by product and service category as well as the amount of revenue that is not subject to ASC 606, "Revenue from Contracts with Customers" ("ASC 606"), but is instead governed by other accounting standards:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 |
| Total Revenue | | Adjustments for Non-ASC 606 Revenue(1) | | Total Revenue from Contracts with Customers |
| | (Dollars in millions) |
| Voice and Other | $ | 1,749 | | | (197) | | | 1,552 | |
| Fiber Infrastructure | 1,955 | | | (131) | | | 1,824 | |
| IP and Data Services | 451 | | | — | | | 451 | |
| Affiliate Services | 2,294 | | | (45) | | | 2,249 | |
| Total revenue | $ | 6,449 | | | (373) | | | 6,076 | |
| | | | | |
| Timing of revenue | | | | | |
| Goods and services transferred at a point in time | | | | | $ | 28 | |
| Services performed over time | | | | | 6,048 | |
| Total revenue from contracts with customers | | | | | $ | 6,076 | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
| Total Revenue | | Adjustments for Non-ASC 606 Revenue(1) | | Total Revenue from Contracts with Customers |
| | (Dollars in millions) |
| Voice and Other | $ | 2,099 | | | (334) | | | 1,765 | |
| Fiber Infrastructure | 1,990 | | | (120) | | | 1,870 | |
| IP and Data Services | 473 | | | — | | | 473 | |
| Affiliate Services | 2,389 | | | (29) | | | 2,360 | |
| Total revenue | $ | 6,951 | | | (483) | | | 6,468 | |
| | | | | |
| Timing of revenue | | | | | |
| Goods and services transferred at a point in time | | | | | $ | 30 | |
| Services performed over time | | | | | 6,438 | |
| Total revenue from contracts with customers | | | | | $ | 6,468 | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
| Total Revenue | | Adjustments for Non-ASC 606 Revenue(1) | | Total Revenue from Contracts with Customers |
| | (Dollars in millions) |
| Voice and Other | $ | 2,281 | | | (352) | | | 1,929 | |
| Fiber Infrastructure | 2,033 | | | (123) | | | 1,910 | |
| IP and Data Services | 512 | | | — | | | 512 | |
| Affiliate Services | 2,487 | | | (4) | | | 2,483 | |
| Total revenue | $ | 7,313 | | | (479) | | | 6,834 | |
| | | | | |
| Timing of revenue | | | | | |
| Goods and services transferred at a point in time | | | | | $ | 46 | |
| Services performed over time | | | | | 6,788 | |
| Total revenue from contracts with customers | | | | | $ | 6,834 | |
_______________________________________________________________________________
(1)Includes regulatory revenue and lease revenue not within the scope of ASC 606.
We do not have any single external customer that comprises more than 10% of our total consolidated operating revenue. Substantially all of our consolidated revenue comes from customers located in the United States.
Customer Receivables and Contract Balances
The following table provides balances of customer receivables, contract assets and contract liabilities as of December 31, 2022 and 2021:
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| | (Dollars in millions) |
Customer receivables (1) | $ | 297 | | | 298 | |
| Contract assets | 9 | | | 10 | |
| Contract liabilities | 343 | | | 317 | |
_______________________________________________________________________________
(1)Reflects gross customer receivables, including gross affiliate receivables, of $324 million and $328 million, net of allowance for credit losses of $27 million and $30 million, at December 31, 2022 and December 31, 2021, respectively.
Contract liabilities consist of consideration we have received from our customers or billed in advance of providing goods or services promised in the future. We defer recognizing this consideration as revenue until we have satisfied the related performance obligation to the customer. Contract liabilities include recurring services billed one month in advance and installation and maintenance charges that are deferred and recognized over the actual or expected contract term, which ranges from one to five years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheets. During the years ended December 31, 2022 and December 31, 2021, we recognized $192 million and $199 million, respectively, of revenue that was included in contract liabilities of $317 million and $300 million as of January 1, 2022 and 2021, respectively.
Performance Obligations
As of December 31, 2022, we expect to recognize approximately $1.7 billion of revenue in the future related to performance obligations associated with existing customer contracts that are partially or wholly unsatisfied. We expect to recognize approximately 91% of this revenue through 2025.
These amounts exclude (i) the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), and (ii) contracts that are classified as leasing arrangements that are not subject to ASC 606.
Contract Costs
The following tables provide changes in our contract acquisition costs and fulfillment costs:
| | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Acquisition Costs | | Fulfillment Costs |
| | (Dollars in millions) |
| Beginning of period balance | $ | 64 | | | 47 | |
| Costs incurred | 50 | | | 39 | |
| Amortization | (53) | | | (40) | |
| End of period balance | $ | 61 | | | 46 | |
| | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Acquisition Costs | | Fulfillment Costs |
| | (Dollars in millions) |
| Beginning of period balance | $ | 73 | | | 54 | |
| Costs incurred | 49 | | | 27 | |
| Amortization | (58) | | | (34) | |
| End of period balance | $ | 64 | | | 47 | |
Acquisition costs include commission fees paid to employees as a result of obtaining contracts. Fulfillment costs include third party and internal costs associated with the provision, installation and activation of communications services to customers, including labor and materials consumed for these activities.
Deferred acquisition and fulfillment costs are amortized based on the transfer of services on a straight-line basis over the average contract life of 32 months for mass markets customers and average contract life of 30 months for business customers. 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 a quarterly basis.
Governmental Funding
Lumen participates in various U.S. federal and state programs under which government support payments are received to offset costs associated with providing services in targeted locations such as unserved or underserved high-cost or rural areas, or for certain types of customers, including non-profit organizations, educational institutions and local governmental bodies. Support payments may be conditioned on specified infrastructure buildouts by milestone deadlines or provision of services at specified locations and speed requirements. Commitments may be made annually, on a multi-year basis ranging from one to ten years or be on-going subject to periodic change or termination. Consistent with customary practice and as referenced in ASC 832 Government Assistance, Lumen applies a grant model of accounting by which it accounts for these transactions as non-ASC 606 revenue over the periods in which the costs for which the funding is intended to compensate are incurred. This non-ASC 606 revenue is included in operating revenue in our consolidated statements of operations. Corresponding receivables are recorded when services have been provided to the customers and costs incurred, but the cash has not been received. These amounts are included in our accounts receivable, less allowance in our consolidated balance sheets. Certain programs are subject to audits of compliance with program commitments and, subject to the outcomes of those assessments, Lumen may be required to reimburse the government entity for cash previously received, or, in some cases, pay a penalty. Lumen evaluates each program and establishes a liability under the principles of ASC 450 if it is probable support payments will be recaptured or a penalty will be imposed.
For the year ended December 31, 2022, Lumen recorded non-customer revenue of $22 million under government assistance programs, of which 34% was associated with state universal service fund support programs.
Between 2015 and 2021, Lumen received approximately $500 million annually through the FCC's Connect America Fund II ("CAF II"), a federal multi-year recurring subsidy program for more extensive broadband deployment in price-cap ILEC territories. This program ended on December 31, 2021. Our share of this CAF II funding was approximately $145 million annually. In connection with the CAF II funding, we were required to meet certain specified infrastructure buildout requirements in 13 states by the end of 2021, which required substantial capital expenditures. In the first quarter of 2022, we recognized $13 million of previously deferred revenue related to the conclusion of the CAF II program based upon our final buildout and filing submissions. The government has the right to audit our compliance with the CAF II program and the ultimate outcome of any remaining examinations is unknown, but could result in a liability to us in excess of our reserve accruals established for these matters.
In early 2020, the FCC created the Rural Digital Opportunity Fund (the “RDOF”), which is a federal support program designed to replace the CAF 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.
We participate in multiple state sponsored programs for broadband deployment in unserved and underserved areas for which the states have state universal service funds sourced from fees levied on telecommunications providers and passed on to consumers. During the year ending December 31, 2022, we participated in these types of programs primarily in the states of Minnesota, Nebraska, and New Mexico.
(4) Leases
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 our consolidated balance sheets; we recognize lease expense for these leases on a straight-line basis over the lease term.
We determine if an arrangement is a lease at inception and whether that lease meets the classification criteria of a finance or operating lease. Lease-related assets, or right-of-use assets, are recognized at the lease commencement date at amounts equal to the respective lease liabilities. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rates. As part of the present value calculation for the lease liabilities, we use an incremental borrowing rate as the rates implicit in the leases are not readily determinable. The incremental borrowing rates used for lease accounting are based on our unsecured rates, adjusted to approximate the rates at which we could borrow on a collateralized basis over a term similar to the recognized lease term. We apply the incremental borrowing rates to lease components using a portfolio approach based upon the length of the lease term and the reporting entity in which the lease resides. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Operating lease assets are included in Other, net under goodwill and other assets on our consolidated balance sheets. Current operating lease liabilities are included in Other under accrued expenses and other liabilities on our consolidated balance sheets. Noncurrent operating lease liabilities are included in Other under deferred credits and other liabilities on our consolidated balance sheets.
Some of our lease arrangements contain lease components, non-lease components (including common-area maintenance costs) and executory costs (including real estate taxes and insurance costs). We generally account for each component separately based on the estimated standalone price of each component. For colocation leases, we account for the lease and non-lease components as a single lease component.
Many of our lease agreements contain renewal options; however, we do not recognize right-of-use assets or lease liabilities for renewal periods unless we determine that we are reasonably certain of renewing the lease. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain to be exercised. Our lease agreements do not generally contain any material residual value guarantees or material restrictive covenants.
Lease expense consisted of the following:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Dollars in millions) |
| Operating and short-term lease cost | $ | 25 | | | 26 | | | 67 | |
| Finance lease cost: | | | | | |
| Amortization of right-of-use assets | 1 | | | 1 | | | 5 | |
| | | | | |
| Total finance lease cost | 1 | | | 1 | | | 5 | |
| Total lease cost | $ | 26 | | | 27 | | | 72 | |
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. Any rent abatements, along with rent escalations, are included in the computation of rent expense calculated on a straight-line basis over the lease term. The lease term for most leases includes the initial non-cancelable term plus any term under renewal options that are reasonably assured. For the years ended December 31, 2022, 2021 and 2020, our gross rental expense was $26 million, $27 million and $72 million, respectively. We also received sublease rental income for the years ended December 31, 2022, 2021 and 2020 of $9 million, $10 million and $12 million, respectively.
Supplemental consolidated balance sheet information and other information related to leases is included below:
| | | | | | | | | | | | | | |
| | As of December 31, |
| Leases (Dollars in millions) | Classification on the Balance Sheet | 2022 | | 2021 |
| Assets | | | | |
| Operating lease assets | Other, net | $ | 68 | | | 69 | |
| Finance lease assets | Property, plant and equipment, net of accumulated depreciation | 5 | | | 5 | |
| Total leased assets | $ | 73 | | | 74 | |
| | | | |
| Liabilities | | | | |
| Current | | | | |
| Operating | Other | $ | 21 | | | 33 | |
| Finance | Current maturities of long-term debt | 2 | | | 1 | |
| Noncurrent | | | | |
| Operating | Other | 58 | | | 63 | |
| Finance | Long-term debt | 2 | | | 1 | |
| Total lease liabilities | $ | 83 | | | 98 | |
| | | | |
| Weighted-average remaining lease term (years) | | | |
| Operating leases | | 4.8 | | 4.2 |
| Finance leases | | 10.0 | | 6.3 |
| Weighted-average discount rate | | | |
| Operating leases | | 4.08 | % | | 3.97 | % |
| Finance leases | | 4.08 | % | | 6.21 | % |
Supplemental consolidated cash flow statement information related to leases is included below:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows for operating leases | $ | 40 | | | 36 | |
| Operating cash flows for finance leases | — | | | — | |
| Financing cash flows for finance leases | 1 | | | 1 | |
| Supplemental lease cash flow disclosures | | | |
| Operating lease right-of-use assets obtained in exchange for new operating lease liabilities | $ | 23 | | | 18 | |
| Right-of-use assets obtained in exchange for new finance lease liabilities | 1 | | | — | |
As of December 31, 2022, maturities of lease liabilities were as follows:
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
| (Dollars in millions) |
| 2023 | $ | 24 | | | 2 | |
| 2024 | 22 | | | 1 | |
| 2025 | 16 | | | 1 | |
| 2026 | 11 | | | — | |
| 2027 | 7 | | | — | |
| Thereafter | 10 | | | — | |
| Total lease payments | 90 | | | 4 | |
| Less: interest | (11) | | | — | |
| Total | 79 | | | 4 | |
| Less: current portion | (21) | | | (2) | |
| Long-term portion | $ | 58 | | | $ | 2 | |
Operating Lease Income
We lease various data transmission capacity, office facilities, switching facilities and other network sites to third parties under operating leases. Lease and sublease income are included in operating revenue in the consolidated statements of operations. See "Revenue Recognition" in Note 1—Background and Summary of Significant Accounting Policies.
For the years ended December 31, 2022, 2021 and 2020, our gross rental income was $346 million, $324 million and $312 million, respectively which represents 5%, 5% and 4%, respectively, of our operating revenue for the years ended December 31, 2022, 2021 and 2020.
(5) Credit Losses on Financial Instruments
To assess our expected credit losses on financial instruments, we aggregate financial assets with similar risk characteristics to monitor their credit quality or deterioration over the life of such assets. We periodically monitor certain risk characteristics within our aggregated financial assets and revise their composition accordingly, to the extent internal and external risk factors change. We separately evaluate financial assets that do not share risk characteristics with other financial assets. Our financial assets measured at amortized cost primarily consist of accounts receivable.
We use a loss rate method to estimate our allowance for credit losses. Our determination of the current expected credit loss rate begins with our review of historical loss experience as a percentage of accounts receivable. We measure our historical loss period based on the average days to recognize accounts receivable as credit losses. When asset specific characteristics and current conditions change from those in the historical period, due to changes in our credit and collections strategy, certain classes of aged balances, or credit loss and recovery policies, we perform a qualitative and quantitative assessment to adjust our historical loss rate. We use regression analysis to develop an expected loss rate using historical experience and economic data over a forecast period. We measure our forecast period based on the average days to collect payment on billed accounts receivable. To determine our current allowance for credit losses, we combine the historical and expected credit loss rates and apply them to our period end accounts receivable.
If there is an unexpected deterioration of a customer's financial condition or an unexpected change in economic conditions, including macroeconomic events, we assess the need to adjust the allowance for credit losses. Any such resulting adjustments would affect earnings in the period that adjustments are made.
The assessment of the correlation between historical observed default rates, current conditions and forecasted economic conditions requires judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding our allowance for credit losses. The amount of credit loss is sensitive to changes in circumstances and forecasted economic conditions. Our historical credit loss experience, current conditions and forecast of economic conditions may also not be representative of the customers' actual default experience in the future, and we may use methodologies that differ from those used by other companies.
The following table presents the activity of our allowance for credit losses by accounts receivable portfolio for the years ended December 31, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | |
| Business | | Mass Markets | | Total | | | | |
| (Dollars in millions) | | | | |
Beginning balance at January 1, 2021(1) | $ | 25 | | | 36 | | | 61 | | | | | |
| Provision for expected losses | 10 | | | 17 | | | 27 | | | | | |
| Write-offs charged against the allowance | (19) | | | (35) | | | (54) | | | | | |
| Recoveries collected | 3 | | | 1 | | | 4 | | | | | |
| Beginning balance at December 31, 2021 | $ | 19 | | | 19 | | | 38 | | | | | |
| Provision for expected losses | 13 | | | 47 | | | 60 | | | | | |
| Write-offs charged against the allowance | (14) | | | (50) | | | (64) | | | | | |
| Recoveries collected | 2 | | | — | | | 2 | | | | | |
| Ending Balance at December 31, 2022 | $ | 20 | | | 16 | | | 36 | | | | | |
______________________________________________________________________
(1)Due to an internal reorganization of our reporting categories on January 1, 2021, our accounts receivable portfolios were changed to align with changes to how we manage our customers. Allowance for credit losses previously included in the Consumer and Business portfolio of $32 million and $4 million, respectively, were reclassified to the Mass Markets allowance for credit losses on January 1, 2021, as a result of this change.
For the year ended December 31, 2022, we decreased our allowance for credit losses for our Mass Markets accounts receivable portfolio primarily due to higher write-off activity.
For the year ended December 31, 2021, we decreased our allowance for credit losses for our business and mass markets accounts receivable portfolio primarily due to higher write-off activity in 2021, along with the easing of prior delays due to COVID-19 related restrictions from 2020.
(6) Long-Term Debt and Note Payable - Affiliate
The following chart reflects (i) the consolidated long-term debt of Qwest Corporation and its subsidiaries, including finance lease and other obligations, unamortized premiums, net, unamortized debt issuance costs and (ii) note payable-affiliate:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | As of December 31, |
| Interest Rates (1) | | Maturities (1) | | 2022 | | 2021 |
| | | | | (Dollars in millions) |
| Senior notes | 6.500% - 7.750% | | 2025 - 2057 | | $ | 1,986 | | | 1,986 | |
Term loan (2) | LIBOR + 2.25% | | 2027 | | 215 | | | 215 | |
| Finance lease and other | Various | | Various | | 3 | | | 2 | |
| Unamortized premiums, net | | | | | 5 | | | 6 | |
| Unamortized debt issuance costs | | | | | (52) | | | (53) | |
| Total long-term debt | | | | | 2,157 | | | 2,156 | |
| Less current maturities | | | | | (2) | | | — | |
| Long-term debt, excluding current maturities | | | | | $ | 2,155 | | | 2,156 | |
| Note payable-affiliate | 5.424% | | 2027 | | $ | — | | | 1,187 | |
_______________________________________________________________________________
(1) As of December 31, 2022.
(2) Qwest Corporation's Term Loan had interest rates of 6.640% and 2.110% as of December 31, 2022 and December 31, 2021.
Repayments
On December 1, 2021, Qwest Corporation paid at maturity the $950 million principal amount of its 6.750% Senior Notes.
Redemption of Senior Notes
On February 16, 2021, Qwest Corporation fully redeemed all $235 million aggregate principal amount of its outstanding 7.000% Senior Notes due 2056. This redemption resulted in a loss of $8 million.
Term Loan
In the fourth quarter of 2020, we borrowed $215 million under a variable-rate term loan with CoBank ACB. The outstanding unpaid principal amount of this 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.
Long-Term Debt Maturities
Set forth below is the aggregate principal amount of our long-term debt as of December 31, 2022 (excluding unamortized premiums, net, unamortized debt issuance costs and note payable-affiliate) maturing during the following years:
| | | | | |
| (Dollars in millions) |
| 2023 | $ | 2 | |
| 2024 | — | |
| 2025 | 251 | |
| 2026 | — | |
| 2027 | 215 | |
| 2028 and thereafter | 1,736 | |
| Total long-term debt | $ | 2,204 | |
Note Payable - Affiliate
On June 30, 2022, Qwest Corporation entered into an amended and restated revolving promissory note ("Note Payable - Affiliate") with an affiliate of our ultimate parent company, Lumen Technologies, Inc. ("Lender"), that replaces the previous revolving promissory agreement that was scheduled to mature on June 30, 2022 ("Prior Note Payable - Affiliate"). The Note Payable - Affiliate, as amended, provides Qwest Corporation with a funding commitment of up to $2.0 billion. Any outstanding principal balance owed by Qwest Corporation under the Note Payable - Affiliate and the accrued interest thereon is due and payable on demand, but if no demand is made, then on the maturity date. The Note Payable - Affiliate has an initial maturity date of June 30, 2027, but will automatically renew for an unlimited number of successive 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.
In accordance with the terms of the amended Note Payable - Affiliate, interest is assessed every six months ending on June 30th and December 31st (an "Interest Period") and is payable within 30 days of the end of the respective Interest Period. Interest is accrued on the outstanding principal balance during the respective Interest Period using a weighted average per annum interest rate on the consolidated outstanding debt of Lumen Technologies, Inc. and its subsidiaries.
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.
Interest Expense
Interest expense includes interest on total long-term debt. The following table presents the amount of gross interest expense, net of capitalized interest and interest expense-affiliates, net:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Dollars in millions) |
| Interest expense: | | | | | |
| Gross interest expense | $ | 141 | | | 200 | | | 308 | |
| Capitalized interest | (29) | | | (19) | | | (29) | |
| Total interest expense | $ | 112 | | | 181 | | | 279 | |
| Interest expense-affiliates, net | $ | 60 | | | 105 | | | 74 | |
Covenants
Our senior notes were issued under indentures dated April 15, 1990 and October 15, 1999. These indentures contain certain covenants including, but not limited to: (i) a prohibition on certain liens on our assets; and (ii) a limitation on mergers or sales of all, or substantially all, of our assets, which limitation requires that a successor assume the obligation with regard to these notes. These indentures do not contain any cross-default provisions. These indentures do not contain any financial covenants or restrictions on our ability to issue new securities thereunder. Except for our notes maturing in 2027 or before, we can redeem our senior notes, at our option, at par plus accrued and unpaid interest.
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. The term loan also has a cross payment default and cross acceleration provisions. When present, these provisions could have a wider impact on liquidity than might otherwise arise from a default or acceleration of a single debt instrument. Our debt to EBITDA ratio could be adversely impacted by a wide variety of events, including unforeseen contingencies, many of which are beyond our control. This could reduce our financing flexibility due to potential restrictions on incurring additional debt under certain provisions of our debt agreements or, in certain circumstances, could result in a default under certain provisions of such agreements.
None of our long-term debt is secured or guaranteed by other companies.
Compliance
At December 31, 2022 and 2021, we believe we were in compliance with the financial covenants contained in our material debt agreements in all material respects.
(7) Accounts Receivable
The following table presents details of our accounts receivable balances:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
| Trade and purchased receivables | $ | 282 | | | 268 | |
| Earned and unbilled receivables | 23 | | | 35 | |
| Other | 40 | | | 36 | |
| Total accounts receivable | 345 | | | 339 | |
| Less: allowance for credit losses | (36) | | | (38) | |
| Accounts receivable, less allowance | $ | 309 | | | 301 | |
We are exposed to concentrations of credit risk from our customers. We generally do not require collateral to secure our receivable balances. We have agreements with other telecommunications service providers whereby we agree to bill and collect on their behalf for services rendered by those providers to our customers within our local service area. We purchase accounts receivable from other telecommunications service providers primarily on a recourse basis and include these amounts in our accounts receivable balance. We have not experienced any significant loss associated with these purchased receivables.
The following table presents details of our allowance for credit losses:
| | | | | | | | | | | | | | | | | | | | | | | |
| Beginning
Balance | | Additions | | Deductions | | Ending
Balance |
| | (Dollars in millions) |
| 2022 | $ | 38 | | | 60 | | | (62) | | | 36 | |
| 2021 | 61 | | | 27 | | | (50) | | | 38 | |
2020(1) | 39 | | | 66 | | | (44) | | | 61 | |
_______________________________________________________________________________
(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:
| | | | | | | | | | | | | | | | | |
| Depreciable
Lives | | As of December 31, |
| | 2022 | | 2021 |
| | | (Dollars in millions) |
| Property, plant and equipment: | | | | | |
| Land | N/A | | $ | 339 | | | 335 | |
Fiber, conduit and other outside plant(1) | 15-45 years | | 6,755 | | | 6,406 | |
Central office and other network electronics(2) | 7-10 years | | 5,283 | | | 5,106 | |
Support assets(3) | 3-30 years | | 2,766 | | | 2,721 | |
Construction in progress(4) | N/A | | 747 | | | 491 | |
| Gross property, plant and equipment | | | 15,890 | | | 15,059 | |
| Accumulated depreciation | | | (7,617) | | | (6,879) | |
| Net property, plant and equipment | | | $ | 8,273 | | | 8,180 | |
_______________________________________________________________________________
(1)Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures.
(2)Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics providing service to customers.
(3)Support assets consist of buildings, computers and other administrative and support equipment.
(4)Construction in progress includes inventory held for construction and property of the aforementioned categories that has not been placed in service as it is still under construction.
We recorded depreciation expense of $781 million, $833 million and $834 million for the years ended December 31, 2022, 2021 and 2020, respectively.
(9) Employee Benefits
Pension and Post-Retirement Benefits
QCII's post-retirement benefit plans were merged into Lumen's post-retirement benefit plans on January 1, 2012 and on December 31, 2014, QCII's qualified pension plan and a pension plan of an affiliate were merged into the CenturyLink Retirement Plan, which is now named the Lumen Combined Pension Plan (the "LCPP"). Based on current laws and circumstances, (i) Lumen Technologies was not required to make a cash contribution to the LCPP in 2022 and (ii) Lumen Technologies does not expect it will be required to make a contribution in 2023. The amount of required contributions to the LCPP in 2023 and beyond will depend on earnings on plan investments, prevailing discount rates, demographic experience, changes in plan benefits and changes in funding laws and regulations. Lumen Technologies occasionally makes voluntary contributions in addition to required contributions. Lumen Technologies did not make a voluntary contribution to the LCPP in 2022 or 2021.
The unfunded status of Lumen's qualified and non-qualified pension plans for accounting purposes was approximately $615 million and $1.2 billion as of December 31, 2022 and 2021, which includes the merged QCII qualified pension plan. The unfunded status of Lumen's post-retirement benefit plans for accounting purposes was $2.0 billion and $2.8 billion as of December 31, 2022 and 2021.
Lumen Technologies allocates current service costs to subsidiaries relative to employees who are currently earning benefits under the pension and post-retirement benefit plans. The net cost allocated to us is paid on a monthly basis through Lumen's intercompany cash management process.
The affiliate obligations, net in current and noncurrent liabilities on the consolidated balance sheets primarily represents the cumulative allocation of expense, net of payments, associated with QCII's pension plans and post-retirement benefits plans prior to the plan mergers. In 2015, we agreed to a plan to settle the outstanding pension and post-retirement affiliate obligations, net balance with QCII over a 30 year term. Under the plan, payments are scheduled to be made on a monthly basis. For the years ended December 31, 2022 and 2021, we made settlement payments in the aggregate of $61 million and $46 million, respectively, to QCII under the plan. Changes in the affiliate obligations, net are reflected in operating activities on our consolidated statements of cash flows.
We were allocated $31 million of pension service costs and $7 million of post-retirement service costs during the year ended December 31, 2022, which represented 72% 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, 2022.
We were allocated $38 million of pension service costs and $10 million of post-retirement service costs during the year ended December 31, 2021, which represented 69% 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, 2021.
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.
Lumen Technologies sponsors a noncontributory qualified defined benefit pension plan that covers certain of our eligible employees. The LCPP also provides survivor and disability benefits to certain employees. In November 2009, and prior to the plan merger, the pension plan was amended to no longer provide pension benefit accruals for active non-represented employees after December 31, 2009. In addition, non-represented employees hired after January 1, 2009 are not eligible to participate in the plans. Active non-represented employees who participate in these plans retain their accrued pension benefit earned as of December 31, 2009 and certain participants will continue to earn interest credits on their benefit after December 31, 2009. Employees are eligible to receive their vested accrued benefit when they separate from Lumen Technologies. The plans also provided a death benefit for eligible beneficiaries of certain retirees; however, the plan was amended to eliminate this benefit effective March 1, 2010 for retirees who retired prior to January 1, 2004 and whose deaths occur after February 28, 2010 and eliminate the death benefit for eligible beneficiaries of certain retirees who retired after December 31, 2003.
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, 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, Lumen's contribution under its post-1990 non-represented retirees' health care plan is capped at a specific dollar amount.
Medicare Prescription Drug, Improvement and Modernization Act of 2003
Lumen Technologies sponsors post-retirement health care plans with several benefit options that provide prescription drug benefits that Lumen Technologies deems actuarially equivalent to or exceeding Medicare Part D. Lumen Technologies recognizes the impact of the federal subsidy received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the calculation of its post-retirement benefit obligation and net periodic post-retirement benefit expense.
Other Benefit Plans
Health Care and Life Insurance
We provide health care and life insurance benefits to essentially all of our active employees. We are largely self-funded for the cost of the health care plan. Our health care benefit expense for current employees was $99 million, $110 million and $132 million for the years ended December 31, 2022, 2021 and 2020, respectively. Employees' group basic life insurance plans are fully insured and the premiums are paid by Lumen Technologies.
401(k) Plans
Lumen Technologies sponsors a qualified defined contribution plan covering substantially all of our employees. Under this plan, employees may contribute a percentage of their annual compensation up to certain maximums, as defined by the plan and by the Internal Revenue Service ("IRS"). Currently, we match a percentage of our employees' contributions in cash. We recognized $27 million, $29 million and $34 million in expense related to this plan for the years ended December 31, 2022, 2021 and 2020, respectively.
(10) Stock-based Compensation
Stock-based compensation expenses are included in cost of services and products, and selling, general, and administrative expenses in our consolidated statements of operations.
For the years ended December 31, 2022, 2021 and 2020, we recorded stock-based compensation expense of approximately $13 million, $15 million and $21 million, respectively. We recognized an income tax benefit from our compensation expense of approximately $3 million, $4 million and $5 million during the years ended December 31, 2022, 2021 and 2020, respectively.
(11) Fair Value of Financial Instruments
Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, advances to and from affiliates, accounts payable, note payable-affiliate and long-term debt, excluding finance lease and other obligations. Due to their short-term nature, the carrying amounts of our cash and cash equivalents, restricted cash, accounts receivable, advances to and from affiliates, accounts payable and note payable-affiliate approximate their fair values.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy. We determined the fair values of our long-term debt, including the current portion, based on quoted market prices where available or, if not available, based on inputs other than quoted market prices in active markets that are either directly or indirectly observable such as discounted future cash flows using current market interest rates.
The three input levels in the hierarchy of fair value measurements are defined by the FASB generally as follows:
| | | | | | | | |
| Input Level | | Description of Input |
| | |
| Level 1 | | Observable inputs such as quoted market prices in active markets. |
| Level 2 | | Inputs other than quoted prices in active markets that are either directly or indirectly observable. |
| Level 3 | | Unobservable inputs in which little or no market data exists. |
The following table presents the carrying amounts and estimated fair values of our financial liabilities as of December 31, 2022, as well as the input level used to determine the fair values indicated below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2022 | | As of December 31, 2021 |
| Input
Level | | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
| | | (Dollars in millions) |
Liabilities-Long-term debt (excluding finance lease and other obligations) | 2 | | $ | 2,154 | | | 1,691 | | | 2,154 | | | 2,298 | |
(12) Income Taxes
The components of the income tax expense from continuing operations are as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Dollars in millions) |
| Income tax expense: | | | | | |
| Federal and foreign | | | | | |
| Current | $ | 514 | | | 553 | | | 425 | |
| Deferred | 6 | | | 17 | | | 40 | |
| State and local | | | | | |
| Current | 137 | | | 129 | | | 128 | |
| Deferred | 14 | | | 10 | | | 2 | |
| Income tax expense | $ | 671 | | | 709 | | | 595 | |
The effective income tax rate for continuing operations differs from the statutory tax rate as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (in percent) |
| Effective income tax rate: | | | | | |
| Federal statutory income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes-net of federal effect | 4.3 | % | | 3.7 | % | | 4.4 | % |
| Other | 0.6 | % | | 0.5 | % | | 0.4 | % |
| Effective income tax rate | 25.9 | % | | 25.2 | % | | 25.8 | % |
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
| Deferred tax liabilities: | | | |
| Property, plant and equipment | $ | (1,414) | | | (1,386) | |
| Intangible assets | (114) | | | (129) | |
| Other | (54) | | | (25) | |
| Total deferred tax liabilities | (1,582) | | | (1,540) | |
| Deferred tax assets: | | | |
| Payable to affiliate due to post-retirement benefit plan participation | 302 | | | 274 | |
| | | |
| Gross deferred tax assets | 302 | | | 274 | |
| Less valuation allowance on deferred tax assets | — | | | (8) | |
| Net deferred tax assets | 302 | | | 266 | |
| Net deferred tax liabilities | $ | (1,280) | | | (1,274) | |
At December 31, 2022, we had no established valuation allowance based on our assessment of whether it is not more likely than not that our deferred tax assets will be realized.
As of both December 31, 2022 and 2021, the $1.3 billion net deferred tax liabilities are included in long-term liabilities on our consolidated balance sheet.
With few exceptions, we are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2016. The Internal Revenue Service and state and local taxing authorities reserve the right to audit any period where net operating loss carryforwards are available.
A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from January 1st to December 31st for 2022 and 2021 are as follows:
| | | | | | | | | | | |
| Years ended December 31, |
| 2022 | | 2021 |
| | (Dollars in millions) |
| Unrecognized tax benefits at beginning of period | $ | 360 | | | 388 | |
| | | |
| Decrease due to tax positions taken in a prior year | (28) | | | (28) | |
| Unrecognized tax benefits at end of period | $ | 332 | | | 360 | |
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 $397 million and $407 million as of December 31, 2022 and 2021, respectively.
Our policy is to reflect interest expense associated with unrecognized tax benefits in income tax expense. We had accrued interest (presented before related tax benefits) of approximately $95 million and $75 million as of December 31, 2022 and 2021, respectively.
Based on our current assessment of various factors, including (i) the potential outcomes of these ongoing examinations, (ii) the expiration of statute of limitations for specific jurisdictions, (iii) the negotiated settlement of certain disputed issues, and (iv) the administrative practices of applicable taxing jurisdictions, it is reasonably possible that the related unrecognized tax benefits for uncertain tax positions previously taken may not change in the next 12 months. The actual amount of changes, if any, will depend on future developments and events, many of which are outside our control.
We paid $673 million, $697 million, and $556 million related to income taxes for the years ended December 31, 2022, 2021, and 2020, respectively.
(13) Affiliate Transactions
We provide telecommunications service to our affiliates that we also provide to external customers. In addition, we provide to our affiliates, application development and support services and network support and technical services.
Below are details of the services we provide to our affiliates:
•Telecommunications services. Data, broadband and voice services in support of our affiliates' service offerings;
•Application development and support services. Information technology services primarily include the labor cost of developing, testing and implementing the system changes necessary to support order entry, provisioning, billing, network and financial systems, as well as the cost of improving, maintaining and operating our operations support systems and shared internal communications networks; and
•Network support and technical services. Network support and technical services relate to forecasting demand volumes and developing plans around network utilization and optimization, developing and implementing plans for overall product development, provisioning and customer care.
We charge our affiliates for services that we also provide to external customers, while other services that we provide only to our affiliates are priced by applying a fully distributed cost ("FDC") methodology. FDC rates include salaries and wages, payroll taxes, employee related benefits, miscellaneous expenses, and charges for the use of our buildings, computing and software assets. Whenever possible, costs are directly assigned to our affiliates for the services they use. If costs cannot be directly assigned, they are allocated among all affiliates based upon cost causative measures; or if no cost causative measure is available, these costs are allocated based on a general allocator. These cost allocation methodologies are reasonable. From time to time, we adjust the basis for allocating the costs of a shared service among affiliates. Such changes in allocation methodologies are generally billed prospectively.
We also purchase services from our affiliates including telecommunication services, insurance, flight services and other support services such as legal, regulatory, finance and accounting, tax, human resources and executive support. Our affiliates charge us for these services based on FDC.
(14) Commitments, Contingencies and Other Items
We are subject to various claims, legal proceedings and other contingent liabilities, including the matters described below, which individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. As a matter of course, we are prepared to both litigate these matters to judgment as needed, as well as to evaluate and consider reasonable settlement opportunities.
Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and could cause significant expenditure and diversion of management attention. We review our litigation accrual liabilities on a quarterly basis, but in accordance with applicable accounting guidelines only establish accrual liabilities when losses are deemed probable and reasonably estimable and only revise previously-established accrual liabilities when warranted by changes in circumstances, in each case based on then-available information. As such, as of any given date we could have exposure to losses under proceedings as to which no liability has been accrued or as to which the accrued liability is inadequate. Amounts accrued for our litigation and non-income tax contingencies for both December 31, 2022 and December 31, 2021 aggregated to approximately $19 million, and are included in "Other" current liabilities and "Other Liabilities" in our consolidated balance sheet as of such date. The establishment of an accrual does not mean that actual funds have been set aside to satisfy a given contingency. Thus, the resolution of a particular contingency for the amount accrued could have no effect on our results of operations but nonetheless could have an adverse effect on our cash flows.
Principal Proceedings
Billing Practices Suits
In June 2017, a former employee of a Lumen Technologies subsidiary filed an employment lawsuit against Lumen Technologies (at the time named CenturyLink, Inc.) claiming that she was wrongfully terminated for alleging that Lumen charged some of its retail customers for products and services they did not authorize. Thereafter, based in part on the allegations made by the former employee, several legal proceedings were filed, including consumer class actions in federal and state courts, a series of securities investor class actions in federal courts, and several shareholder derivative actions in federal and Louisiana state courts. The derivative cases were brought on behalf of CenturyLink, Inc. against certain current and former officers and directors of the Company and seek damages for alleged breaches of fiduciary duties.
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. Lumen Technologies has settled the consumer and securities investor class actions. Those settlements are final. The derivative actions remain pending.
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.
AT&T Proceedings
In August 2022, certain of our indirect affiliates filed a complaint in federal district court in Colorado captioned Central Telephone Company of Virginia, et al, v. AT&T Corp., et al. The suit seeks relief and damages for AT&T’s failure to pay amounts for services it receives. AT&T disputes those claims and has asserted counterclaims alleging breach of contract and seeking declaratory relief. It has requested the court to enjoin the plaintiffs (including us) from terminating services for its failure to pay, and it has requested the court transfer the case to federal court in the southern district of New York for further proceedings. Also in August 2022, AT&T filed a separate lawsuit in federal court in the western district of Louisiana against Central Telephone Company of Virginia, us, and other of our indirect affiliates alleging, among other claims, breach of contract provisions pertaining to network architecture. We and the other plaintiff entities dispute AT&T’s claims.
Other Proceedings, Disputes and Contingencies
From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, regulatory hearings relating primarily to our rates or services, actions relating to employee claims, various tax issues, environmental law issues, grievance hearings before labor regulatory agencies and miscellaneous third-party tort actions or commercial disputes.
We are currently defending several patent infringement lawsuits asserted against us by non-practicing entities, many of which are seeking substantial recoveries. These cases have progressed to various stages and one or more may go to trial within the next twelve months if they are not otherwise resolved. Where applicable, we are seeking full or partial indemnification from our vendors and suppliers. As with all litigation, we are vigorously defending these actions and, as a matter of course, are prepared to litigate these matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities.
We are subject to various federal, state and local environmental protection and health and safety laws. From time to time, we are subject to judicial and administrative proceedings brought by various governmental authorities under these laws. Several such proceedings are currently pending, but none is reasonably expected to exceed $300,000 in fines and penalties.
The outcome of these other proceedings described under this heading is not predictable. However, based on current circumstances, we do not believe that the ultimate resolution of these other proceedings, after considering available defenses and any insurance coverage or indemnification rights, will have a material adverse effect on us.
The matters listed in this Note do not reflect all of our contingencies. The ultimate outcome of the above-described matters may differ materially from the outcomes anticipated, estimated, projected or implied by us in certain of our statements appearing above in this Note, and proceedings currently viewed as immaterial by us may ultimately materially impact us.
Right-of-Way
At December 31, 2022, our future rental commitments and Right-of-Way ("ROW") agreements were as follows:
| | | | | |
| Future Rental Commitments and ROW Agreements |
| (Dollars in millions) |
| 2023 | $ | 20 | |
| 2024 | 6 | |
| 2025 | 6 | |
| 2026 | 5 | |
| 2027 | 4 | |
| 2028 and thereafter | 34 | |
Total future minimum payments | $ | 75 | |
Purchase Commitments
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 $123 million at December 31, 2022. Of this amount, we expect to purchase $39 million in 2023, $26 million in 2024 through 2025, $14 million in 2026 through 2027 and $44 million in 2028 and thereafter. 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, 2022.
(15) Other Financial Information
Other Current Assets
The following table presents details of other current assets in our consolidated balance sheets:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
| Prepaid expenses | $ | 46 | | | 50 | |
| Contract acquisition costs | 38 | | | 43 | |
| Contract fulfillment costs | 30 | | | 31 | |
| Receivable for sale of land | — | | | 56 | |
| Other | 6 | | | 7 | |
| Total other current assets | $ | 120 | | | 187 | |
Other Current Liabilities
The following table presents details of other current liabilities in our consolidated balance sheets:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
| Current affiliate obligation | $ | 57 | | | 74 | |
| Current operating lease liability | 21 | | | 33 | |
| Other | 52 | | | 75 | |
| Total other current liabilities | $ | 130 | | | $ | 182 | |
Other Noncurrent Liabilities
The following table presents details of other noncurrent liabilities in our consolidated balance sheets:
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
| Unrecognized tax benefits | $ | 427 | | | 435 | |
| Noncurrent operating lease liability | 58 | | | 63 | |
| Other | 169 | | | 172 | |
| Total other noncurrent liabilities | $ | 654 | | | 670 | |
(16) Labor Union Contracts
As of December 31, 2022, approximately 43% of our employees were represented by the Communication Workers of America ("CWA") or the International Brotherhood of Electrical Workers ("IBEW"). Approximately 1% of our represented employees are subject to collective bargaining agreements that are scheduled to expire within the 12 month period ending December 31, 2023. We believe relations with our employees continue to be generally good.
(17) Stockholder's Equity
Common Stock
We have one share of common stock (no par value) issued and outstanding, which is owned by QSC.
In addition, in the normal course of business, we transfer assets and liabilities to and from QSC and its affiliates, which are recorded through our equity. It is our policy to record these asset transfers based on carrying values.
Dividends
We declared and paid the following cash dividend to QSC:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Dollars in millions) |
| Cash dividend declared to QSC | $ | — | | | 570 | | | 1,725 | |
| Cash dividend paid to QSC | — | | | 570 | | | 1,725 | |
The timing of cash payments for declared dividends to QSC is at our discretion in consultation with QSC. We may declare and pay dividends to QSC in excess of our earnings to the extent permitted by applicable law. Our debt covenants do not limit the amount of dividends we can pay to QSC. Dividends paid are reflected on our consolidated statement of cash flows as financing activities.
