Table of Contents


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20182019
or
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                to                               
Commission File No. 001-03040
 
Q W E S T  C O R P O R A T I O N
(Exact name of registrant as specified in its charter)
 
Colorado84-0273800
Colorado
(State or other jurisdiction of
incorporation or organization)
 
84-0273800
(I.R.S. Employer
Identification No.)
100 CenturyLink Drive,
Monroe,Louisiana
71203
(Address of principal executive offices) 
71203
(Zip Code)
(318) (318) 388-9000
(Registrant's telephone number, including area code)
 

THE REGISTRANT, A WHOLLY OWNED INDIRECT SUBSIDIARY OF CENTURYLINK, INC., MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yesx☒    No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yesx☒    No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filero
☐
Accelerated filero
☐
Non-accelerated filerx
☒
Smaller reporting companyo
☐
      
Emerging growth companyo
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o☐    No x☒


Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
6.125% Notes Due 2053CTYNew York Stock Exchange
6.875% Notes Due 2054CTVNew York Stock Exchange
6.625% Notes Due 2055CTZNew York Stock Exchange
7.00% Notes Due 2056CTAANew York Stock Exchange
6.5% Notes Due 2056CTBBNew York Stock Exchange
6.75% Notes Due 2057CTDDNew York Stock Exchange
On November 12, 2018,8, 2019, there was one1 share of common stock outstanding.
 

TABLE OF CONTENTS


   
Part I.Special Note Regarding Forward-Looking Statements
4
Part I.
Financial Information
Item 1.
Financial Statements
 
 
Special Note Regarding Forward-Looking Statements
3
Item 1.
Financial Statements
Consolidated Statements of Operations (Unaudited)
5
Consolidated Balance Sheets (Unaudited)
6
 
Consolidated Statements of Cash FlowsBalance Sheets (Unaudited)
7
 
Consolidated Statements of Stockholder's EquityCash Flows (Unaudited)
8
 
Consolidated Statements of Stockholder's Equity (Unaudited)
9
Notes to Consolidated Financial Statements (Unaudited) *
910
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
2324
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
34
Item 4.
Controls and Procedures
34
Part II.
Other Information
 
Item 1.
Legal Proceedings
35
Item 1A.
Risk Factors
35
Item 6.
Exhibits
36
Signature
37
   
* All references to "Notes" in this quarterly report refer to these Notes to Consolidated Financial Statements.

Special Note Regarding Forward-Looking Statements


AllThis report and other documents filed by us under the federal securities law include, and future oral or written statements other thanor press releases by us and our management may include, forward-looking statements of historical fact contained in this Quarterly Report on Form 10-Qabout our business, financial condition, operating results and prospects. These "forward-looking" statements are “forward-looking” statements, as defined by, (andand are subject to the “safe harbor”"safe harbor" protections under)under, the federal securities laws. When used herein,These statements include, among others:
forecasts of our anticipated future results of operations, cash flows or financial position;
statements concerning the anticipated impact of our transactions, investments, product development, transformational projects and other initiatives, including the impact of our participation in government programs;
statements about our liquidity, profit margins, tax position, tax rates, asset values, contingent liabilities, growth opportunities and growth rates, business prospects, regulatory and competitive outlook, market share, product capabilities, investment and expenditure plans, business strategies, capital allocation plans, financing alternatives and sources, and pricing plans; and
other similar statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts, many of which are highlighted by words “anticipates,such as “may,” “will,” “would,” “could,” “should,” “plan,” “believes,” “expects,” “believes,“anticipates,” “estimates,” “projects,” “intends,” “likely,” “seeks,” “hopes,” “intends,” “plans,” “projects,” “will” andor variations or similar words and expressions are intendedwith respect to identifythe future.
These forward-looking statements. Forward-looking statements are based on a number of judgmentsupon our judgment and assumptions as of the date such statements are made aboutconcerning future developments and events, many of which are beyond our control. These forward-looking statements, and the assumptions onupon which they are based, (i) are not guarantees of future events,results, (ii) are inherently speculative and (iii) are subject to significanta number of risks and uncertainties. Actual events and results may differ materially from those anticipated, estimated, projected or implied by us in those statements if one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect. All of our forward-looking statements are qualified in their entirety by reference to our discussion of certain important factors that could cause our actual results to differ materially from those anticipated, estimated, projected or implied by us in those forward-lookingforward looking statements. Factors that could cause ouraffect actual results to differ materially from the expectations expressed in such forward-looking statements include but are not limited to the following:to:
the effects of competition from a wide variety of competitive providers, including decreased demand for our traditional wirelinemore mature service offerings and increased pricing pressures;
the effects of new, emerging or competing technologies, including those that could make our products less desirable or obsolete;
the effects of ongoing changes in the regulation of the communications industry, including the outcome of regulatory or judicial proceedings relating to intercarrier compensation, interconnection obligations, universal service, broadband deployment, data protection and net neutrality;
the ability of our parent company, CenturyLink, Inc. ("CenturyLink") to timely realize the anticipated benefits of its recently-completed combination with Level 3, including its ability to attain anticipatedour key operating imperatives, including simplifying and consolidating our network, simplifying and automating our service support systems, strengthening our relationships with customers and attaining projected cost savings, to use Level 3's net operating loss carryforwards in the amounts projected, to retain key personnel and to avoid unanticipated integration disruptions;savings;
our ability to safeguard our network, and to avoid the adverse impact on our business from possible security breaches, service outages, system failures, equipment breakage, or similar events impacting our network or the availability and quality of our services;
the effects of ongoing changes in the regulation of the communications industry, including the outcome of regulatory or judicial proceedings relating to intercarrier compensation, interconnection obligations, special access, universal service, broadband deployment, data protection and net neutrality;
our ability to effectively adjust to changes in the communications industry and changes in the composition of our markets and product mix;
possible changes in the demand for our products and services, including our ability to effectively respond to increased demand for high-speed broadband service;data transmission services;
our ability to successfully maintain the quality and profitability of our existing product and service offerings to provision them successfully to our customers and to introduce profitable new offerings on a timely and cost-effective basis;
our ability to generate cash flows sufficient to fund our financial commitments and objectives, including our capital expenditures, operating costs, debt repayments dividends and other benefits payments;dividends;
changes in
our ability to implement our operating plans, corporate strategies orand capital allocation plans or changes in such plans, whether based upon changes in our cash flows, cash requirements, financial performance, financial position, market conditions or otherwise;
our ability to effectively retain and hire key personnel and to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages;
the negative impact of increases in the costs of CenturyLink'sCenturyLink’s pension, health, post-employment or other benefits, including those caused by changes in markets, interest rates, mortality rates, demographics or regulations, which may in turn impactcould affect our business and liquidity;
adverse changes in our access to credit markets on favorable terms, whether caused by changes in our financial position, lower debt credit ratings, unstable markets or otherwise;
our ability to meet the terms and conditions of our debt obligations;
our ability to maintain favorable relations with our key business partners, suppliers, vendors, landlords, lenders and financial institutions;

our ability to effectively manage our network buildout project and our other expansion opportunities;
our ability to collect our receivables from financially troubled customers;
any adverse developments in legal or regulatory proceedings involving us or our affiliates, (including CenturyLink);including CenturyLink;
changes in tax, communications, healthcare or other laws or regulations, in governmental support programs, or in general government funding levels;
the effects of changes in accounting policies, practices or practices,assumptions, including changes that could potentially require future impairment charges;
the effects of adverse weather, terrorism or other natural or man-made disasters;
the effects of more general factors such as changes in interest rates, in exchange rates, in operating costs, in public policy, in the views of financial analysts, or in general market, labor, economic or geo-political conditions;
adverse effects of material weaknesses or any other significant deficiencies identified in our internal controls over financial reporting; and
other risks identifiedreferenced in this report or other of our "Risk Factors" disclosures included in our annual report on Form 10-K forfilings with the year ended December 31, 2017.

SEC.
Additional factors or risks that we currently deem immaterial, that are not presently known to us or that arise in the future could also cause our actual results to differ materially from our expected results. Given these uncertainties, investors are cautioned not to unduly rely upon our forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or otherwise. Furthermore, any information about our intentions contained in any of our forward-looking statements reflects our intentions as of the date of such forward-looking statement, and is based upon, among other things, existing regulatory, technological, industry, competitive, economic and market conditions, and our assumptions as of such date. We may change our intentions, strategies or plans (including our dividend or other capital allocation plans) at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.


PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QWEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)


Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 20172019 2018 2019 2018
(Dollars in millions)(Dollars in millions)
OPERATING REVENUES       
Operating revenues$1,397
 1,456
 4,209
 4,406
Operating revenues - affiliates752
 685
 2,171
 2,030
Total operating revenues2,149
 2,141
 6,380
 6,436
OPERATING REVENUE       
Operating revenue$1,338
 1,397
 4,002
 4,209
Operating revenue - affiliates701
 752
 2,143
 2,171
Total operating revenue2,039
 2,149
 6,145
 6,380
OPERATING EXPENSES              
Cost of services and products (exclusive of depreciation and amortization)697
 742
 2,106
 2,185
630
 697
 1,825
 2,106
Selling, general and administrative172
 231
 602
 710
131
 172
 445
 602
Operating expenses - affiliates203
 211
 616
 647
186
 203
 600
 616
Depreciation and amortization360
 397
 1,081
 1,181
344
 360
 1,017
 1,081
Total operating expenses1,432
 1,581
 4,405
 4,723
1,291
 1,432
 3,887
 4,405
OPERATING INCOME717
 560
 1,975
 1,713
748
 717
 2,258
 1,975
OTHER (EXPENSE) INCOME              
Interest expense(112) (117) (350) (348)(95) (112) (286) (350)
Interest expense - affiliates, net(15) (16) (42) (47)(15) (15) (46) (42)
Net loss on early retirement of debt(34) —
 (34) (5)
Other income, net8
 6
 33
 10
5
 (26) 19
 (1)
Total other expense, net(153) (127) (393) (390)(105) (153) (313) (393)
INCOME BEFORE INCOME TAX EXPENSE564
 433
 1,582
 1,323
INCOME BEFORE INCOME TAXES643
 564
 1,945
 1,582
Income tax expense111
 168
 322
 512
166
 111
 504
 322
NET INCOME$453
 265
 1,260
 811
$477
 453
 1,441
 1,260
See accompanying notes to consolidated financial statements.

QWEST CORPORATION
CONSOLIDATED BALANCE SHEETS


September 30, 2018 (Unaudited) December 31, 2017September 30, 2019 (Unaudited) December 31, 2018
(Dollars in millions)(Dollars in millions)
ASSETS      
CURRENT ASSETS      
Cash and cash equivalents$6
 1
$3
 5
Accounts receivable, less allowance of $46 and $47592
 646
Accounts receivable, less allowance of $41 and $41505
 546
Advances to affiliates669
 1,024
1,604
 1,148
Other278
 98
141
 147
Total current assets1,545
 1,769
2,253
 1,846
Property, plant and equipment, net of accumulated depreciation of $6,964 and $6,3927,944
 7,924
Property, plant and equipment, net of accumulated depreciation of $7,530 and $6,9518,103
 8,077
GOODWILL AND OTHER ASSETS      
Goodwill9,360
 9,360
9,360
 9,360
Operating lease assets117
 —
Customer relationships, net1,006
 1,362
570
 893
Other intangibles, net328
 379
Other intangible assets, net329
 311
Other, net126
 75
98
 96
Total goodwill and other assets10,820
 11,176
10,474
 10,660
TOTAL ASSETS$20,309
 20,869
$20,830
 20,583
LIABILITIES AND STOCKHOLDER'S EQUITY      
CURRENT LIABILITIES      
Current maturities of long-term debt$13
 17
$7
 11
Accounts payable298
 317
412
 441
Note payable - affiliate1,008
 965
1,069
 1,008
Accrued expenses and other liabilities      
Salaries and benefits193
 238
167
 251
Income and other taxes167
 174
153
 140
Interest58
 77
58
 55
Other67
 61
84
 75
Current affiliate obligations, net79
 82
73
 79
Current portion of deferred revenues249
 265
Current portion of deferred revenue205
 212
Total current liabilities2,132
 2,196
2,228
 2,272
LONG-TERM DEBT5,950
 7,264
5,946
 5,948
DEFERRED CREDITS AND OTHER LIABILITIES      
Deferred revenues128
 128
Deferred revenue99
 91
Deferred income taxes, net1,062
 1,001
1,001
 1,098
Noncurrent operating lease liabilities90
 —
Affiliate obligations, net770
 861
698
 759
Other448
 82
559
 547
Total deferred credits and other liabilities2,408
 2,072
2,447
 2,495
COMMITMENTS AND CONTINGENCIES (Note 7)
 
COMMITMENTS AND CONTINGENCIES (Note 8)

 

STOCKHOLDER'S EQUITY      
Common stock - one share without par value, owned by Qwest Services Corporation10,050
 10,050
10,050
 10,050
Accumulated deficit(231) (713)
Retained earnings (accumulated deficit)159
 (182)
Total stockholder's equity9,819
 9,337
10,209
 9,868
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY$20,309
 20,869
$20,830
 20,583
See accompanying notes to consolidated financial statements.

QWEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


Nine Months Ended September 30,Nine Months Ended September 30,
2018 20172019 2018
(Dollars in millions)(Dollars in millions)
OPERATING ACTIVITIES      
Net income$1,260
 811
$1,441
 1,260
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization1,081
 1,181
1,017
 1,081
Deferred income taxes9
 (93)(96) 9
Provision for uncollectible accounts51
 55
36
 51
Accrued interest on affiliate note43
 51
61
 43
Net loss on early retirement of debt30
 5
—
 30
Changes in current assets and liabilities:      
Accounts receivable3
 (39)5
 3
Accounts payable(5) (2)(14) (5)
Accrued income and other taxes(7) (9)13
 (7)
Other current assets and liabilities, net(108) (95)(88) (108)
Other current assets and liabilities - affiliates, net(7) (5)(14) (7)
Changes in other noncurrent assets and liabilities, net385
 24
6
 385
Changes in affiliate obligations, net(94) (66)(67) (94)
Other, net11
 (3)17
 11
Net cash provided by operating activities2,652
 1,815
2,317
 2,652
INVESTING ACTIVITIES      
Capital expenditures(732) (1,086)(777) (732)
Changes in advances to affiliates360
 23
(456) 360
Proceeds from sale of property, plant and equipment and other assets5
 43
24
 5
Other—
 (5)
Net cash used in investing activities(367) (1,025)(1,209) (367)
FINANCING ACTIVITIES      
Net proceeds from issuance of long-term debt—
 638
Payments of long-term debt(1,355) (629)(10) (1,355)
Dividends paid to Qwest Services Corporation(925) (800)(1,100) (925)
Net cash used in financing activities(2,280) (791)(1,110) (2,280)
Net increase in cash, cash equivalents and restricted cash5
 (1)
Net (decrease) increase in cash, cash equivalents and restricted cash(2) 5
Cash, cash equivalents and restricted cash at beginning of period3
 7
7
 3
Cash, cash equivalents and restricted cash at end of period$8
 6
$5
 8
Supplemental cash flow information:      
Income taxes (paid) refunded, net$(584) 58
Interest paid (net of capitalized interest of $19 and $20)$(281) (366)
   
Cash, cash equivalents and restricted cash:   
Cash and cash equivalents$3
 6
Restricted cash included in other noncurrent assets$2
 2
2
 2
Income taxes refunded (paid), net$58
 (604)
Interest paid (net of capitalized interest of $20 and $24)$(366) (343)
Total$5
 8
See accompanying notes to consolidated financial statements.

QWEST CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(UNAUDITED)


Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 20172019 2018 2019 2018
(Dollars in millions)(Dollars in millions)
COMMON STOCK              
Balance at beginning of period$10,050
 10,050
 10,050
 10,050
$10,050
 10,050
 10,050
 10,050
Balance at end of period10,050
 10,050
 10,050
 10,050
10,050
 10,050
 10,050
 10,050
ACCUMULATED DEFICIT       
RETAINED EARNINGS (ACCUMULATED DEFICIT)       
Balance at beginning of period(353) (1,424) (713) (1,358)82
 (353) (182) (713)
Net income453
 265
 1,260
 811
477
 453
 1,441
 1,260
Cumulative net effect of adoption of ASU 2014-09, Revenue from Contracts with Customers, net of $(7), $—, $(50) and $— tax19
 —
 147
 —
Cumulative net effect of adoption of ASU 2014-09, Revenue from Contracts with Customers, net of $—, ($7), $— and ($50) taxes
—
 19
 —
 147
Dividends declared to Qwest Services Corporation(350) (200) (925) (800)(400) (350) (1,100) (925)
Dividend of equity interest in limited liability company to Qwest Services Corporation—
 —
 —
 (12)
Balance at end of period(231) (1,359) (231) (1,359)159
 (231) 159
 (231)
TOTAL STOCKHOLDER'S EQUITY$9,819
 8,691
 9,819
 8,691
$10,209
 9,819
 10,209
 9,819
See accompanying notes to consolidated financial statements.

QWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 "CenturyLink" refer to our ultimate parent company, CenturyLink, Inc. and its consolidated subsidiaries including Level 3 Parent, LLC, referred to as "Level 3".
(1) Background


General
We are an integrated communications company engaged primarily in providing an array of communications services to our residential and business customers. Our communicationsspecific products and services include local voice, broadband, private line (including special access), Ethernet, network access, information technologyare detailed in Note 7—Products and other ancillary services. In certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers.Services Revenue of this report.
We generate the majority of our total consolidated operating revenuesrevenue 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


Our consolidated balance sheet as of December 31, 2017,2018, which was derived from our audited consolidated financial statements, and our unaudited interim consolidated financial statements provided herein have been prepared in accordance with the instructions for Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission ("SEC"); however, in our opinion, the disclosures made are adequate to make the information presented not misleading. We believe that these consolidated financial statements include all normal recurring adjustments necessary to fairly present the results for the interim periods. The consolidated results of operations and cash flows for the first nine months of the year are not necessarily indicative of the consolidated results of operations and cash flows that might be expected for the entire year. These consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2017.2018.


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. See Note 7—Products and Services Revenue for additional information. These changes had no impact on total operating revenues,revenue, total operating expenses or net income for any period.


Segments


Our operations are integrated into and reported as part of the consolidated segment data of CenturyLink. CenturyLink's chief operating decision maker ("CODM") is our CODM but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the Securities and Exchange Commission.SEC. Consequently, we do not provide our discrete financial information to the CODM on a regular basis. As such, we have one1 reportable segment.


Income Taxes

As of September 30, 2018, we have not completed our accounting for the tax effects of the Tax Cuts and Jobs Act (the "Act"), which was signed into law in late December 2017. In order to complete our accounting for the impact of the Act, we continue to obtain, analyze and interpret additional guidance as such guidance becomes available from the U.S. Treasury Department, the Internal Revenue Service (“IRS”), state taxing jurisdictions, the Financial Accounting Standards Board (“FASB”) and other standard-setting and regulatory bodies. Guidance issued by these bodies to date does not allow us to definitively calculate the tax effects of the Act. New guidance or interpretations may materially impact our provision for income taxes in future periods.

Additional information that is needed to complete the analysis but is currently unavailable includes, but is not limited to, the final determination of certain net deferred tax assets subject to remeasurement and the tax treatment of such provisions of the Act by various state tax authorities. We have provisionally recognized the tax impacts related to the remeasurement of deferred tax assets and liabilities. The ultimate impact may differ from our current provisional estimate due to additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Act. The change from our current provisional estimates will be reflected in fourth quarter statements of operations and could be material. We expect to complete the accounting in the fourth quarter of 2018.

The Act reduced the U.S. corporate income tax rate from a maximum of 35% to 21% for all C corporations, effective January 1, 2018, introduced further limitations on the deductibility of interest expense, made certain changes to the tax treatment of capital expenditures and various other items, and imposed a one-time repatriation tax on certain earnings of certain foreign subsidiaries. In addition, the Tax Act introduces additional base-broadening measures, including Global Intangible Low-Taxed Income and the Base-Erosion Anti-Abuse Tax. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21%, we provisionally re-measured our net deferred tax liabilities at December 31, 2017 and recognized a tax benefit of approximately $555 million in our consolidated statement of operations for the year ended December 31, 2017. During the first nine months of 2018, we reduced this $555 million tax benefit by the net tax impact of certain tax accounting method changes filed with CenturyLink's 2017 Federal income tax return that significantly accelerated certain tax deductions into 2017. The tax impact of these accelerated deductions resulted in a net reduction to the provisional benefit recorded of $137 million.

During the third quarter of 2018, we continued to evaluate and analyze the tax impacts of the Act. While we have not finalized our analysis, we do not expect the provisions of the Act, exclusive of the rate reduction, to materially impact us during the remainder of 2018. However, we cannot provide any assurance that, upon completion of our analysis, the impact will not be material or that there will not be material tax impacts in future years. Accordingly, other than as noted above, we have not made any additional adjustments related to the Act in our consolidated financial statements.

Recently Adopted Accounting Pronouncements


In the first quarter of 2018, weWe adopted Accounting Standards Update (“ASU”("ASU") 2014-09, “Revenue from Contracts with Customers”2016-02, "Leases (ASC 842)", as of January 1, 2019, using the non-comparative transition option pursuant to ASU 2018-11. Therefore, we have not restated comparative period financial information for the effects of ASC 842, and ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory”.

Each of these is described further below.

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09 which replaces virtually all existing generally accepted accounting principles on revenue recognition and replaces them with a principles-based approach for determining revenue recognition using a new five step model. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes new accounting principles related to the deferral and amortization of contract acquisition and fulfillment costs.

We adoptedwe will not make the new revenue recognition standardrequired lease disclosures for comparative periods beginning before January 1, 2019. Instead, we recognized ASC 842's cumulative effect transition adjustment (discussed below) as of January 1, 2019. In addition, we elected the package of practical expedients permitted under the modified retrospective transition method. Duringguidance within the three and nine months ended September 30, 2018, we recorded a cumulative catch-up adjustment that increased our retained earnings by $19 million, net of $7 million of income taxes and $147 million, net of $50 million of income taxes, respectively. The catch-up adjustment recorded duringnew standard, which among other things (i) allowed us to carry forward the three months ended September 30, 2018 resulted from the identification of additional fulfillment costs that should have been considered in our adoption and from correcting certain issues in the accounting system we utilize in calculating revenuehistorical lease classification; (ii) did not require us to reassess whether any expired or existing contracts are or contain leases under the new revenue recognitiondefinition of a lease; and (iii) did not require us to reassess whether previously capitalized initial direct costs for any existing leases would qualify for capitalization under ASC 842. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements. We did not elect the hindsight practical expedient regarding the likelihood of exercising a lessee purchase option or assessing any impairment of right-of-use assets for existing leases.
On March 5, 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-01, "Leases (ASC 842): Codification Improvements", effective for public companies for fiscal years beginning after December 15, 2019. The new ASU aligns the guidance in ASC 842 for determining fair value of the underlying asset by lessors that are not manufacturers or dealers, with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value (in ASC 820, "Fair Value Measurement") should be applied. More importantly, the ASU also exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. Early adoption permits public companies to adopt concurrent with the transition to ASC 842 on leases. We adopted ASU 2019-01 as of January 1, 2019.


Under ASU 2014-09, we are now deferring incremental contract acquisitionAdoption of the new standards resulted in the recording of operating lease assets and fulfillment costs and are recognizing (or amortizing) such costs over either the initial contract (plus anticipated renewal contracts to which the costs relate) or the average customer life. Deferred acquisition and fulfillment costs are amortized based on the transfer of services on a straight-line basis over the average customer lifeoperating lease liabilities of approximately 49 months for our business customers$126 million and 30 months for our consumer customers and are included in cost$133 million, respectively, as of services and products and selling, general and administrative expenses inJanuary 1, 2019. The standards did not materially impact our consolidated statement of operations. Thenet earnings and had no material impact on cash flows. Our financial position for reporting periods beginning on or after January 1, 2019 is presented under the new guidance, as discussed above, while prior period amounts of these deferred costs that are anticipatednot adjusted and continue to be amortizedreported in the next twelve months are included in other current assets on our consolidated balance sheetsaccordance with previous guidance.

See Note 3—Revenue Recognition for additional information.

Income Taxes

ASU 2016-16 eliminates the current prohibition on the recognition of the income tax effects on the transfer of assets among our subsidiaries. Prospectively, the income tax effects associated with these asset transfers, except for the transfer of inventory, will be recognized in the period the asset is transferred versus the current deferral and recognition upon either the sale of the asset to a third party or over the remaining useful life of the asset. The adoption of ASU 2016-16 did not have a material impact to our consolidated financial statements.


Recently Issued Accounting Pronouncements

Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the impairment testing for goodwill by changing the measurement for goodwill impairment. Under current rules, we are required to compute the implied fair value of goodwill to measure the impairment amount if the carrying value of a reporting unit exceeds its fair value. Under ASU 2017-04, the goodwill impairment charge will equal the excess of the reporting unit carrying value above its fair value, limited to the amount of goodwill assigned to the reporting unit.

We are required to adopt the provisions of ASU 2017-04 for any goodwill impairment tests, including our required annual test, occurring after January 1, 2020, but have the option to early adopt it for any impairment test that we are required to perform. We have not determined if we will elect to early adopt the provisions of ASU 2017-04. The provisions of ASU 2017-04 would not have affected our last goodwill impairment assessment, but no assurance can be provided that the simplified testing methodology will not affect our goodwill impairment assessment in the future.


Financial Instruments


In June 2016, the FASB issued ASU 2016-13, “"Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”)Instruments". The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires our management team to estimate the total credit losses expected on the portfolio of financial instruments. We are currently reviewingevaluating the requirementspotential impact ASU 2016-13 will have on our financial assets measured at amortized cost including, but not limited to, customer receivables and contract asset balances.

Over the fourth quarter, we will complete our evaluation of the standardimpact to our accounting and evaluating the impact on our consolidatedinternal controls over financial statements.

reporting as a result of ASU 2016-13. We are requiredexpect to adopt the provisions of ASU 2016-13 effectiveon January 1, 2020 but could elect to early adopt the provisions as of January 1, 2019. We expect toand recognize the impacts of adopting ASU 2016-13 through a cumulative adjustment to retained earningsaccumulated deficit as of the date of adoption. As of the date of this report, we have not yet determined the date we will adopt ASU 2016-13.


Leases

In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). The core principle of ASU 2016-02 will require lessees to present right-of-use assets and lease liabilities on their balance sheets for operating leases, which under GAAP are currently not required to be reflected on their balance sheets.

ASU 2016-02 is effective for annual and interim periods beginning January 1, 2019. Upon adoption of ASU 2016-02, we are required to recognize and measure leases at the beginning of the earliest period presented in our consolidated financial statements using a modified retrospective approach. The modified retrospective transition approach includes a number of optional practical expedients that we may elect to apply.

In January 2018, the FASB issued ASU 2018-01, “Leases: Land Easement Practical Expedient for Transition to ASU 2016-02" ("ASU 2018-01"). ASU 2018-01 permits reporting companies to elect to forego reassessments of land easements that exist or expire before the entity’s adoption of ASU 2016-02 and that were not previously accounted for as leases. We plan to adopt ASU 2018-01 at the same time we adopt ASU 2016-02.

In July 2018, the FASB issued ASU 2018-11, "Leases: Targeted Improvements" ("ASU 2018-11"). ASU 2018-11 provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We have not yet determined whether we will use ASU 2018-11's newly permitted adoption method.

We are in the process of implementing a new lease administration and accounting system. We plan to adopt ASU 2016-02 and ASU 2018-01 effective January 1, 2019. The adoption of ASU 2016-02 will result in our recognition of right of use assets and lease liabilities that we have not previously recorded. Although we believe it is premature as of the date of this report to provide any estimate of the impact of adopting ASU 2016-02, we do expect that it will have a material impact on our consolidated financial statements.

(2) Goodwill, Customer Relationships and Other Intangible Assets


Goodwill, customer relationships and other intangible assets consisted of the following:
 September 30, 2019 December 31, 2018
 (Dollars in millions)
Goodwill$9,360
 9,360
Customer relationships, less accumulated amortization of $5,129 and $4,806$570
 893
Other intangible assets, less accumulated amortization of $1,760 and $1,712$329
 311

 September 30, 2018 December 31, 2017
 (Dollars in millions)
Goodwill$9,360
 9,360
Customer relationships, less accumulated amortization of $4,693 and $4,337$1,006
 1,362
Other intangible assets, less accumulated amortization of $1,684 and $1,619$328
 379


As of September 30, 2018,2019, the gross carrying amount of goodwill, customer relationships and other intangible assets was $17.1 billion. The total amortization expense for intangible assets for the three months ended September 30, 2019 and 2018 totaled $133 million and $144 million, respectively, and for the nine months ended September 30, 2019 and 2018 totaled $144$404 million and $440 million, and for the three and nine months ended September 30, 2017 totaled $166 million and $507 million, respectively.


We estimate that total amortization expense for intangible assets for the years ending December 31, 20182019 through 20222023 will be as follows:
 (Dollars in millions)
2019 (remaining three months)$131
2020467
2021155
202252
202339

 (Dollars in millions)
2018 (remaining three months)$141
2019519
2020452
2021142
202238


(3) Revenue Recognition


We earn mostRefer to the Revenue Recognition section of Note 1—Background and Summary of Significant Accounting Policies and Note 3—Revenue Recognition in our consolidated revenue from contracts with customers, primarily throughannual report on Form 10-K for the provisionyear ended December 31, 2018 for further information regarding our application of telecommunications and other services. Revenue from contracts with customers is accounted for under Accounting Standards Codification ("ASC") 606, which we adopted on January 1, 2018 using the modified retrospective approach. We also earn revenues from leasing arrangements (primarily fiber capacity agreements) and governmental subsidy payments, neither of which are accounted for under ASC 606.

Under ASC 606, revenues are recognized when control of“Revenue from Contracts with Customers”, including practical expedients and judgments applied in determining the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled 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;amounts and
•Recognition of revenue when, or as, we satisfy a performance obligation.

We provide an array of communications services, including local voice, broadband, private line (including special access), network access, Ethernet, 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 as well as residential customers. Certain contracts also include the sale of equipment, which is not significant to our business.

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, installation 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. To the extent certain products or services are discounted as a part of a bundle arrangement, the bundle discounts are included in our calculation of the total transaction price with the customer which is allocated to the various services in the bundle offering based on the estimated selling price of services included in each bundle combination.

Under ASC 606, 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 until the service is provided. These advance payments include certain activation and certain installation charges. If the activation and installation charges are not separate performance obligations, we recognize as revenue over the actual or expected contract term using historical experience, which ranges from one year to seven 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. A performance obligation is a promise in a contract with a customer to provide a good or service to the customer. We recognize revenue for services when we satisfy our performance obligation.

Promotional or performance-based incentive payments are estimated at contract inception (and updated on a periodic basis as needed) and accounted for as variable consideration. In certain cases, customers may be permitted to modify their contracts without incurring a penalty. 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. The impact of contract modifications has not been significant to our results in 2018.

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. The portion of any advance payment allocated to the service based upon its relative selling price is recognized ratably over the contract term.

We periodically sell optical 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 10 to 20 years. In most cases, we account for the cash consideration received on transfers of optical capacity as ASC 606 revenue which we recognize ratably over the term of the agreement. 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 optical capacity assets for other optical 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. Based on our agreement with DIRECTV, we offer this service through a sales agency relationship which we report on a net basis.

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 revenues in the period that the service level commitment was not met.

Customer payments are made based on billing schedules included in our customer contracts, which is typically on a monthly basis. For certain products or services and customer types, payment is required before products or services are provided.

Comparative Results

During the three months ended September 30, 2018, we identified and corrected certain issues in the accounting system we utilize in calculating the effects of ASC 606. Our revenue for the three months ended September 30, 2018 includes an adjustment of $10 million that is attributable to the six months ended June 30, 2018.

The following tables present our reported results under ASC 606 and a reconciliation to results using the historical accounting method:
 Three Months Ended September 30, 2018
 Reported as of September 30, 2018 Impact of ASC 606 
ASC 605
Historical Adjusted Amount
 (Dollars in millions)
Operating revenues$2,149
 (13) 2,136
Cost of services and products (exclusive of depreciation and amortization)697
 3
 700
Selling, general and administrative172
 —
 172
Income tax expense111
 (4) 107
Net income453
 (12) 441
 Nine Months Ended September 30, 2018
 Reported as of September 30, 2018 Impact of ASC 606 
ASC 605
Historical Adjusted Amount
 (Dollars in millions)
Operating revenues$6,380
 (22) 6,358
Cost of services and products (exclusive of depreciation and amortization)2,106
 15
 2,121
Selling, general and administrative602
 (2) 600
Income tax expense322
 (9) 313
Net income1,260
 (26) 1,234
The following table presents a reconciliation of certain consolidated balance sheet captions under ASC 606 to the balance sheet results using the historical accounting method:
 As of September 30, 2018
 Reported Balances as of September 30, 2018 Impact of ASC 606 
ASC 605
Historical Adjusted Balances
 (Dollars in millions)
Other current assets$278
 (268) 10
Other long-term assets, net126
 (20) 106
Deferred revenue377
 (136) 241
Deferred income taxes, net1,062
 (59) 1,003
Other long-term liabilities448
 79
 527
Accumulated deficit(231) (172) (403)

Disaggregated Revenue by Service Offering

The following tables provide disaggregation timing of revenue from contracts with customers based on service offerings for the three and nine months ended September 30, 2018, respectively. It also showscustomers.

Reconciliation of Total Revenue to Revenue from Contracts with Customers

The following table provides the amount of revenue that is not subject to ASC 606, but is instead governed by other accounting standards. The adjustment of $10 million noted above was recorded to transport and infrastructure for the three months ended September 30, 2018.
 Three Months Ended September 30, 2018
 Total Revenue 
Adjustments for Non-ASC 606 Revenue (7)
 Total Revenue from Contracts with Customers
 (Dollars in millions)
IP and data services (1)
$155
 —
 155
Transport and infrastructure (2)
739
 (29) 710
Voice and collaboration (3)
448
 —
 448
IT and managed services (4)
2
 —
 2
Regulatory revenue (5)
53
 (53) —
Affiliate revenue (6)
752
 —
 752
Total revenues$2,149
 (82) 2,067
      
Timing of revenue     
Goods transferred at a point in time    $13
Services performed over time    2,054
Total revenues from contracts with customers    $2,067

standards:
 Nine Months Ended September 30, 2018
 Total Revenue 
Adjustments for Non-ASC 606 Revenue (7)
 Total Revenue from Contracts with Customers
 (Dollars in millions)
IP and data services (1)
$460
 —
 460
Transport and infrastructure (2)
2,216
 (83) 2,133
Voice and collaboration (3)
1,370
 —
 1,370
IT and managed services (4)
6
 —
 6
Regulatory revenues (5)
157
 (157) —
Affiliate revenues (6)
2,171
 —
 2,171
Total revenues$6,380
 (240) 6,140
      
Timing of revenue     
Goods transferred at a point in time    $35
Services performed over time    6,105
Total revenues from contracts with customers    $6,140
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
 (Dollars in millions)
Total revenue$2,039
 2,149
 6,145
 6,380
Adjustments for non-ASC 606 revenue (1)
(123) (82) (375) (240)
Total revenue from contracts with customers$1,916
 2,067
 5,770
 6,140
______________________________________________________________________ 
(1)Includes primarily VPN data networks, Ethernet, IP and other ancillary services
(2)Includes primarily broadband, private line (including business data services) and other ancillary services.
(3)Includes local voice, including wholesale voice, and other ancillary services.
(4)Includes IT services and managed services revenues.
(5)Includes CAF Phase I, CAF Phase 2 and federal and state USF support revenue.
(6)Includes telecommunications and data services we bill to our affiliates.
(7)
(1)
Includes regulatory revenues,revenue, lease revenue, sublease rental income and revenue from fiber capacity lease arrangements which are not within the scope of ASC 606.

Customer Receivables and Contract Balances


The following table provides balances of customer receivables, contract assets and contract liabilities as of September 30, 20182019 and January 1,December 31, 2018:
September 30, 2018 January 1, 2018September 30, 2019 December 31, 2018
(Dollars in millions)(Dollars in millions)
Customer receivables (1)
$573
 631
$493
 518
Contract liabilities125
 78
318
 207
Contract assets228
 93
75
 64
(1)Gross customer receivables of $619$528 million and $669$554 million, net of allowance for doubtful accounts of $46$35 million and $38$36 million, at September 30, 20182019 and January 1,December 31, 2018, respectively.
Contract liabilities areconsist of consideration we have received from our customers or billed in advance of providing goods andor 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 seven years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheet.sheets.



The following table provides information about revenue recognized for the three and nine months ended September 30, 2019 and 2018:
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
 (Dollars in millions)
Revenue recognized in the period from:       
Amounts included in contract liability at the beginning of the period (January 1, 2019 and 2018, respectively)$4
 11
 269
 291
Performance obligations satisfied in previous periods—
 —
 —
 —


Performance Obligations


As of September 30, 2019, our estimated revenue expected to be recognized in the future related to performance obligations associated with customer contracts that are partially or wholly unsatisfied is approximately $181 million. We expect to recognize approximately 98% of this revenue through 2021, with the balance recognized thereafter.

We do not disclose the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount to which we have athe right to invoice for services performed (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), or contracts that are classified as leasing arrangements that are not subject to ASC 606.606.

As of September 30, 2018, our estimated revenue expected to be recognized in the future related to performance obligations associated with customer contracts that are unsatisfied (or partially satisfied) is approximately $391 million. We expect to recognize approximately 98% of this revenue through 2020, with the balance recognized thereafter.

Contract Costs


The following table provides changes in our contract acquisition costs and fulfillment costs:
Three Months Ended 
 September 30, 2018		 Nine Months Ended 
 September 30, 2018		Three Months Ended September 30, 2019 Three Months Ended September 30, 2018
Acquisition Costs Fulfillment Costs Acquisition Costs Fulfillment CostsAcquisition Costs Fulfillment Costs Acquisition Costs Fulfillment Costs
(Dollars in millions)(Dollars in millions)
Beginning of period balance$89
 58
 91
 61
$87
 60
 89
 58
Costs incurred29
 13
 45
 20
15
 10
 29
 13
Amortization(29) (13) (47) (23)(15) (8) (29) (13)
End of period balance$89
 58
 89
 58
$87
 62
 89
 58


 Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018
 Acquisition Costs Fulfillment Costs Acquisition Costs Fulfillment Costs
 (Dollars in millions)
Beginning of period balance$90
 57
 91
 61
Costs incurred44
 29
 45
 20
Amortization(47) (24) (47) (23)
End of period balance$87
 62
 89
 58


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 telecommunicationscommunications 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 customer life of 30 months for consumer customers and up to 49 months for business customers andcustomers. 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 statementstatements of operations. The amountsamount of these deferred costs that are anticipated to be amortized in the next twelve months are included in other current assets on our consolidated balance sheets. We recognize incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets is less than one year. The amount of deferred costs expected to be amortized beyond the next twelve months is included in other non-current assets on our consolidated balance sheets. Deferred acquisition and fulfillment costs are assessed for impairment on an annual basis.

(4) Leases

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


We primarily lease various office facilities, switching and colocation facilities, equipment and dark fiber. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a quarterly basis. Duringstraight-line basis over the three months endedlease 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.

Some of our lease arrangements contain lease components (including fixed payments, such as, rent, real estate taxes and insurance costs) and non-lease components (including common-area maintenance costs). 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 it is determined that we are reasonably certain of renewing the lease at inception or when a triggering event occurs. 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 contain any material residual value guarantees or material restrictive covenants.
Lease expense consisted of the following:
 Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
 (Dollars in millions)
Operating and short-term lease cost$8
 24
Finance lease cost:   
Amortization of right-of-use assets2
 7
Interest on lease liability1
 1
Total finance lease cost3
 8
Total lease cost$11
 32



Supplemental unaudited consolidated balance sheet information and other information related to leases:
Leases (millions)Classification on the Balance Sheet September 30, 2019
Assets   
Operating lease assetsOperating lease assets $117
Finance lease assetsProperty, plant and equipment, net of accumulated depreciation 16
Total leased assets  $133
    
Liabilities   
Current   
OperatingOther current liabilities $29
FinanceCurrent portion of long-term debt 7
Noncurrent   
OperatingNoncurrent operating lease liabilities 90
FinanceLong-term debt 5
Total lease liabilities  $131
    
Weighted-average remaining lease term (years)  
Operating leases  5.4
Finance leases  4.9
Weighted-average discount rate  
Operating leases  6.71%
Finance leases  5.26%


Supplemental unaudited consolidated cash flow statement information related to leases:
Nine Months Ended September 30, 2019
(Dollars in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases27
Financing cash flows from finance leases8


As of September 30, 20182019, maturities of lease liabilities were as follows:
 Operating Leases Finance Leases
 (Dollars in millions)
2019 (remaining three months)$8
 2
202032
 5
202130
 1
202227
 1
202322
 1
Thereafter36
 4
Total lease payments155
 14
Less: interest(36) (2)
Total119
 12
Less: current portion(29) (7)
Long-term portion$90
 5


As of September 30, 2019, we made a $24 million adjustmenthad no material operating or finance leases that had not yet commenced.

Operating Lease Income

Qwest leases various data transmission capacity, office facilities, switching facilities and other network sites to the beginning balance of the fulfillment costs shownthird parties under operating leases. Lease and sublease income is included in operating revenue in the table above for additional fulfillment costs we identified that should have been considered in our adoption. The impact to our expenses was less than $1 million for bothconsolidated statements of operations.

For the three and nine months ended September 30, 2018.2019, our gross rental income was $79 million and $242 million, respectively, which represents 4% of our operating revenue for both periods. For the three and nine months ended September 30, 2018, our gross rental income was $83 million and $249 million, respectively which represents 4% of our operating revenue for both periods.

Disclosures under ASC 840

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

The future annual minimum payments under capital lease agreements as of December 31, 2018 were as follows:
 Capital Lease Obligations
 (Dollars in millions)
2019$10
20206
20212
20221
20231
2024 and thereafter4
Total minimum payments24
Less: amount representing interest and executory costs(5)
Present value of minimum payments19
Less: current portion(12)
Long-term portion$7


At December 31, 2018, our future rental commitments for operating leases were as follows:
 Operating Leases
 (Dollars in millions)
2019$35
202028
202127
202223
202319
2024 and thereafter32
Total future minimum payments(1)
$164


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



(4)(5) Long-Term Debt and Revolving Promissory Note


The following chart reflects (i) the consolidated long-term debt of Qwest Corporation and its subsidiaries, including unamortized discounts and premiums, unamortized debt issuance costs and (ii) note payable - affiliate:
 Interest Rates Maturities September 30, 2019 December 31, 2018
     (Dollars in millions)
Senior notes6.125% - 7.750% 2021 - 2057 $5,956
 5,956
Term loan4.050% 2025 100
 100
Finance lease and other obligationsVarious Various 12
 21
Unamortized (discounts) premiums, net    —
 (1)
Unamortized debt issuance costs    (115) (117)
Total long-term debt    5,953
 5,959
Less current maturities    (7) (11)
Long-term debt, excluding current maturities    $5,946
 5,948
Note payable - affiliate5.843% 2022 $1,069
 1,008
 Interest Rates Maturities September 30, 2018 December 31, 2017
     (Dollars in millions)
Senior notes6.125% - 7.750% 2021 - 2057 $5,955
 7,294
Term loan4.250% 2025 100
 100
Capital lease and other obligationsVarious Various 25
 36
Unamortized (discounts) premiums, net    (1) 1
Unamortized debt issuance costs    (116) (150)
Total long-term debt    5,963
 7,281
Less current maturities    (13) (17)
Long-term debt, excluding current maturities    $5,950
 7,264
Note payable - affiliate5.860% 2022 $1,008
 965

Note Payable - Affiliate


On September 30, 2017, Qwest Corporation entered into an amended and restated revolving promissory note in the amount of $965 million with an affiliate of our ultimate parent company, CenturyLink, Inc. This note replaced and amended the original $1.0 billion revolving promissory note Qwest Corporation entered into on April 18, 2012 with the same affiliate. The outstanding principal balance owed by Qwest Corporation under this revolving promissory note and the accrued interest thereon is due and payable on demand, but if no demand is made, then on June 30, 2022. Interest is accrued on the outstanding balance during an interest period using a weighted average per annum interest rate on the consolidated outstanding debt of CenturyLink and its subsidiaries. As of September 30, 2018,2019, the amended and restated revolving promissory note had an outstanding balance of $1.008$1.069 billion and bore interest at a weighted-average interest rate of 5.860%5.843%. As of September 30, 20182019 and December 31, 2017,2018, the amended and restated revolving promissory note is reflected on our consolidated balance sheets as a current liability under "Note payable - affiliate". In accordance with the terms of the amended and restated revolving promissory note, interest shall be assessed on June 30th and December 31st (an "Interest Period"). Any assessed interest for an Interest Period that remains unpaid on the last day of the subsequent Interest Period is to be capitalized on such date and is to begin accruing interest. Through September 30, 2019, $104 million of such interest has been capitalized. As of September 30, 2018, $152019, $16 million of accrued interest is reflected in other current liabilities on our consolidated balance sheet.

Repayments

During the three months ended September 2018, we retired approximately $1.3 billion in debt securities including approximately $164 million of Qwest Corporation 7.5% Notes due 2051, $925 million of Qwest Corporation 7.0% Notes due 2052, and $250 million of Qwest Corporation 7.25% Notes due 2035.


Aggregate Maturities of Long-Term Debt


Set forth below is the aggregate principal amount of our long-term debt (excluding unamortized premiums and discounts and unamortized debt issuance costs and other and excluding note payable-affiliate) maturing during the following years:
 (Dollars in millions)
2019 (remaining three months)$2
20205
2021951
2022—
20231
2024 and thereafter5,109
Total long-term debt$6,068
 (Dollars in millions)
2018 (remaining three months)$4
201911
20205
2021951
2022—
2023 and thereafter5,109
Total long-term debt$6,080


Compliance


As of September 30, 2018,2019, we believe we were in compliance with the provisions and financial covenants ofcontained in our material debt agreements.agreements in all material respects.


Other


For additional information on our long-term debt and credit facilities, see Note 3—4—Long-Term Debt and Revolving Promissory Note to our consolidated financial statements in Item 8 of Part II of our annual report on Form 10-K for the year ended December 31, 2017.2018.


(5)(6) Fair Value Disclosure


The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy based on the reliability of the inputs used to determine fair value. Input Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Input Level 2 refers to fair values estimated using significant other observable inputs and Input Level 3 includes fair values estimated using significant unobservable inputs.
Due to their short-term nature, the carrying amounts of our cash, cash equivalents and restricted cash, accounts receivable and accounts payable approximate their fair values.
The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding capitalfinance lease and other obligations, as well as the input level used to determine the fair values indicated below:
   September 30, 2019 December 31, 2018
 
Input
Level
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
   (Dollars in millions)
Liabilities—Long-term debt (excluding finance lease and other obligations)2 $5,941
 6,226
 5,938
 5,118

   September 30, 2018 December 31, 2017
 
Input
Level
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
   (Dollars in millions)
Liabilities—Long-term debt, excluding capital lease and other obligations2 $5,938
 5,867
 7,245
 7,080


(6)(7) Products and Services RevenuesRevenue


We are an integrated communications company engaged primarily in providing an array of communications services, including local voice, broadband, private line (including business data services), Ethernet, network access, information technology and other ancillary services. We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services.


We categorize our products, services and revenuesrevenue among the following six6 categories:
•
IP and Data Services, which include primarily VPN data networks, Ethernet, IP and other ancillary services;
•
Transport and Infrastructure, which include broadband, private line (including business data services) and other ancillary services;
•
Voice and Collaboration, which includes primarily local voice, including wholesale voice, and other ancillary services;
•
IT and Managed Services, which include information technology services and managed services, which may be purchased in conjunction with our other network services;
IP and data services, which include primarily VPN data networks, Ethernet, IP and other ancillary services;
Transport and infrastructure, which include broadband, private line (including business data services) and other ancillary services;
Voice and collaboration, which includes primarily local voice, including wholesale voice, and other ancillary services;
IT and managed services, which include information technology services and managed services, which may be purchased in conjunction with our other network services;
Regulatory revenues, which consist of Universal Service Fund ("USF") and Connect America Fund ("CAF") support payments and other operating revenues. We receive federal support payments from both federal and state USF programs and from the federal CAF program. These support payments are government subsidies designed to reimburse us for various costs related to certain telecommunications services including the costs of deploying, maintaining and operating voice and broadband infrastructure in high-cost rural areas where we are not able to fully recover our costs from our customers; and
Affiliates services, we provide to our affiliates, telecommunication services that we also provide to external customers. In addition, we provide to our affiliates computer system development and support services, network support and technical services.
•
Regulatory Revenue, which consist of Universal Service Fund ("USF") and Connect America Fund ("CAF") support payments and other operating revenue. We receive federal support payments from both federal and state USF programs and from the federal CAF program. These support payments are government subsidies designed to reimburse us for various costs related to certain telecommunications services including the costs of deploying, maintaining and operating voice and broadband infrastructure in high-cost rural areas where we are not able to fully recover our costs from our customers; and
•
Affiliate Services, we provide to our affiliates, telecommunication services that we also provide to external customers. In addition, we provide to our affiliates computer system development and support services, network support and technical services.
From time to time, we may change the categorization of our products and services.



Our operating revenuesrevenue for our products and services consisted of the following categories:
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
 (Dollars in millions)
IP and Data Services$169
 155
 467
 459
Transport and Infrastructure716
 739
 2,140
 2,215
Voice and Collaboration405
 449
 1,250
 1,369
IT and Managed Services—
 1
 2
 5
Regulatory Revenue48
 53
 143
 161
Affiliate Services701
 752
 2,143
 2,171
Total operating revenue$2,039
 2,149
 6,145
 6,380

 Three Months Ended September 30, Nine Months Ended September 30,
 2018 2017 2018 2017
 (Dollars in millions)
IP and data services$155
 161
 460
 475
Transport and infrastructure739
 751
 2,216
 2,268
Voice and collaboration448
 492
 1,370
 1,504
IT and managed services2
 —
 6
 —
Regulatory revenues53
 52
 157
 159
Affiliates services752
 685
 2,171
 2,030
Total operating revenues$2,149
 2,141
 6,380
 6,436


We recognize revenuesrevenue in our consolidated statements of operations for certain USF surcharges and transaction taxes that we bill to our customers. Our consolidated statements of operations also reflect the offsetting expense for the amounts we remit to the government agencies. The total amount of such surcharges and transaction taxes that we included in revenues aggregated $28 million and $33 million for the three months ended September 30, 2018 and 2017, respectively, and $93 million and $100 million for the nine months ended September 30, 2018 and 2017, respectively. These USF surcharges are assigned to the products and services categories based on the underlying revenues.revenue. We also act as a collection agent for certain other USF and transaction taxes that we are required by government agencies to bill our customers, for which we do not record any revenue or expense because we only act as a pass-through agent.


The following table provides the amount of USF surcharges and transaction taxes:
 Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018
 (Dollars in millions)
USF surcharges and transaction taxes$33
 28
 91
 93


(7)(8) Commitments, and 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 at September 30, 20182019 aggregated to approximately $9$23 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.


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


Switched Access Disputes


Subsidiaries of CenturyLink, Inc., including us, are among hundreds of companies involved in an industry-wide dispute, raised in nearly 100 federal lawsuits (filed between 2014 and 2016) that have been consolidated as In Re: IntraMTA Switched Access Charges Litigation, in the United States District Court for the Northern District of Texas for pretrial procedures. The disputes relate to switched access charges that local exchange carriers ("LECs") collect from interexchange carriers ("IXCs") for IXCs' use of LEC's access services. In the lawsuits, IXCs, including Sprint Communications Company L.P. ("Sprint") and various IXCsaffiliates of Verizon Communications Inc. ("Verizon"), assert that federal and state laws bar LECs are prohibited from collecting access charges when IXCs exchange certain types of calls between mobile and wireline devices.devices that are routed through an IXC. Some of these IXCs seekhave asserted claims seeking refunds of payments for access charges previously paid and declaratory relief from future access charges.



In November 2015, the federal court agreed with the LECs and rejected the IXCs' claims undercontention that federal law and entered final judgments against the IXCs on the LECs' claims for unpaidprohibits these particular access charges, and for late payment charges. The cases are now on appeal beforealso allowed the U.S. CourtIXCs to refile state-law claims. Since then, many of Appeals for the Fifth Circuit.LECs and IXCs have filed revised pleadings and additional motions, which remain pending. Separately, some of the defendants, including us, have petitioned the FCC to address these issues on an industry-wide basis.


As both an IXC and a LEC, we both pay and assess significant amounts of the charges in question. The outcome of these disputes and lawsuits, as well as any related regulatory proceedings that could ensue, could affect our financial results and are currently not predictable.


Billing Practices Suits


In June 2017, a former employee of CenturyLink filed an employment lawsuit against CenturyLink claiming that she was wrongfully terminated for alleging that CenturyLink charged some of ourits retail customers for products and services they did not authorize. Starting shortly thereafter and continuing since then, and based in part on the allegations made by the former employee, several legal proceedings have been filed.


In June 2017, McLeod v. CenturyLink, a putative consumer class action, was filed against CenturyLink in the U.S. District Court for the Central District of California alleging that CenturyLinkit charged some of its retail customers for products and services they did not authorize. A number of other complaints asserting similar claims have been filed in other federal and state courts, as well. The lawsuits assert claims including fraud, unfair competition, and unjust enrichment. Also, in June 2017, Craig. v. CenturyLink, Inc., et al., a putative securities investor class action, was filed in U.S. District Court for the Southern District of New York, alleging that CenturyLinkit failed to disclose material information regarding improper sales practices, and asserting federal securities law claims. A number of other cases asserting similar claims have also been filed. Both the putative consumer class actions and the putative securities investor class actions have been 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.


Beginning June 2017, CenturyLink also received several shareholder derivative demands addressing related topics. In August 2017, CenturyLink's Board of Directors formed a special litigation committee of outside directors to address the allegations of impropriety contained in the shareholder derivative demands. In April 2018, the special litigation committee concluded its review of the derivative demands and declined to take further action. Since then, another demand has been received, and six derivative cases were filed. TwoNaN of these cases, Castagna v. Post and Pinsly v. Post, were filed in Louisiana state court in the Fourth Judicial District Court for the Parish of Ouachita; four others, Ault v. Post, Barbree v. Post, Flanders v. Post, and Palkon v. Boulet,Ouachita. The remaining derivative cases were filed in Louisiana federal court in the Monroe Division of the Western District of Louisiana.Louisiana and Minnesota. These cases have been brought on behalf of CenturyLink against certain current and former officers and directors of the Company and seek damages for alleged breaches of fiduciary duties.


The consumer putative class actions, the securities investor putative class actions, and the federal derivative actions have been transferred to the U.S. District Court for the District of Minnesota for coordinated and consolidated pretrial proceedings as In Re: CenturyLink Sales Practices and Securities Litigation. Subject to confirmatory discovery and court approval, CenturyLink agreed to settle the consumer putative class actions for payments of $15.5 million to compensate class members and of up to $3.5 million for administrative costs. CenturyLink has accrued a contingent liability for those amounts.

In July 2017, the Minnesota state attorney general filed State of Minnesota v. CenturyTel Broadband Services LLC, et al. in the AsokaAnoka County Minnesota District Court, alleging claims of fraud and deceptive trade practices relating to improper consumer sales practices. The suit seeks an order of restitution on behalf of all CenturyLink customers, civil penalties, injunctive relief, and costs and fees. Additionally, we and other CenturyLink affiliates havehas received and responded to information requests and inquiries from other states.


Locate Service Investigations

In June 2019, Minnesota and Arizona initiated investigations related to the timeliness of responses by certain of our vendors to requests for marking the location of underground telecommunications facilities. We, along with CenturyLink and its other subsidiaries are cooperating with the investigations.

Other Proceedings, Disputes and Contingencies


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


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 one1 or more may go to trial in the coming 24 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 individually is reasonably expected to exceed $100,000 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 above in this Note do not reflect all of our contingencies. For additional information on our contingencies, see Note 1515—Commitments, Contingencies and Other Items to the financial statements included in Item 8 of Part II of our annual report on Form 10-K for the year ended December 31, 2017.2018. 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.


(8)(9) Dividends


From time to time we may declare and pay dividends to our direct parent company, Qwest Services Corporation ("QSC"),QSC, sometimes in excess of our earnings to the extent permitted by applicable law. Our debt covenants do not currently limit the amount of dividends we can pay to QSC.


During the nine months ended September 30, 20182019 and 2017,2018, we declared and paid dividends of $925 million$1.1 billion and $800$925 million, respectively, to QSC. Dividends paid are reflected on our consolidated statements of cash flows as financing activities.

On March 31, 2017, we distributed our equity interest valued at $12 million in a limited liability company to QSC. The limited liability company's sole asset was a building that was being utilized by an affiliate.


(9)(10) Other Financial Information


Other Current Assets


The following table presents details of other current assets reflected in our consolidated balance sheets:
 September 30, 2019 December 31, 2018
 (Dollars in millions)
Prepaid expenses$49
 37
Contract acquisition costs50
 52
Contract fulfillment costs28
 27
Other14
 31
Total other current assets$141
 147

 September 30, 2018 December 31, 2017
 (Dollars in millions)
Prepaid expenses$57
 42
Contract acquisition costs52
 —
Contract assets155
 49
Other14
 7
Total other current assets$278
 98


(10)(11) Labor Union Contracts
    
As of September 30, 2018,2019, approximately 47%,42% of our employees were members of various bargaining units represented by the Communication Workers of America and("CWA") or the International Brotherhood of Electrical Workers.Workers ("IBEW"). During the third quarter of 2019, we reached new agreements with the CWA and IBEW, which represented all of the above noted represented employees. Therefore, there are no collective bargaining agreements that are scheduled to expire over the next 12 months. We believe that relations with our employees continue to be generally good.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, references in this report to "QC" refer to Qwest Corporation, and references to "Qwest," "we," "us" and "our" refer to Qwest Corporation and its consolidated subsidiaries.
All references to "Notes" in this Item 2 of Part I refer to the Notes to Consolidated Financial Statements included in Item 1 of Part I of this report.
Certain statements in this report constitute forward-looking statements. See "Special Note Regarding Forward-Looking Statements" appearing at the beginning of this report and "Risk Factors" in Item 1A of Part I of our annual report on Form 10-K for the year endedDecember 31, 20172018 for a discussion of certain factors that could cause our actual results to differ from our anticipated results or otherwise impact our business, financial condition, results of operations, liquidity or prospects.
Overview


Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included herein should be read in conjunction with MD&A and the other information included in our annual report on Form 10-K for the year ended December 31, 2017,2018, and with the consolidated financial statements and related notes in Item 1 of Part I of this report. The results of operations for the first nine months of the year are not necessarily indicative of the results of operations that might be expected for the entire year.


We are an integrated communications company engaged primarily in providing an array of communications services to our residential and business customers. Our communicationsspecific products and services include local voice, broadband, private line (including special access), Ethernet, VPN data networks, network access, information technologyare detailed in Note 7—Products and other ancillary services. In certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers. We own or hold leasehold rights to mostServices Revenue of the equipment necessary to provide our services. We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services.this report.

We generate the majority of our total consolidated operating revenues 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.


Our ultimate parent company, CenturyLink, Inc. ("CenturyLink"), has cash management arrangements between certain of its subsidiaries that include lines of credit, affiliate obligations, capital contributions and dividends. As part of these cash management arrangements, 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 advanced on a daily basis for centralized management by CenturyLink. From time to time we may declare and pay dividends to Qwest Services Corporation ("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.


At September 30, 2019, we served 3.1 million broadband subscribers. Our methodology for counting broadband subscribers may not be comparable to those of other companies.

For the reasons noted in Note 1—Background to our consolidated financial statements in Item 1 of Part I of this report, we believe we have one reportable segment.


We categorize our products, services and revenuesrevenue among the following six categories:
IP and data services, which include primarily VPN data networks, Ethernet, IP and other ancillary services;
Transport and infrastructure, which include broadband, private line (including business data services) and other ancillary services;
Voice and collaboration, which includes primarily local voice, including wholesale voice, and other ancillary service;
IT and managed services, which include information technology services and managed services, which may be purchased in conjunction with our other network services;
•
IP and Data Services, which include primarily VPN data networks, Ethernet, IP and other ancillary services;
•
Transport and Infrastructure, which include broadband, private line (including business data services) and other ancillary services;
•
Voice and Collaboration, which includes primarily local voice, including wholesale voice, and other ancillary service;
•
IT and Managed Services, which include information technology services and managed services, which may be purchased in conjunction with our other network services;
•
Regulatory Revenue, which consist of Universal Service Fund ("USF") and Connect America Fund ("CAF") support payments and other operating revenue. We receive federal support payments from both federal and state USF programs and from the federal CAF program. These support payments are government subsidies designed to reimburse us for various costs related to certain telecommunications services, including the costs of deploying, maintaining and operating voice and broadband infrastructure in high-cost rural areas where we are not able to fully recover our costs from our customers; and

Regulatory revenues, which consist of Universal Service Fund ("USF") and Connect America Fund ("CAF") support payments and other operating revenues. We receive federal support payments from both federal and state USF programs and from the federal CAF program. These support payments are government subsidies designed to reimburse us for various costs related to certain telecommunications services, including the costs of deploying, maintaining and operating voice and broadband infrastructure in high-cost rural areas where we are not able to fully recover our costs from our customers; and
Affiliates services, we provide our affiliates, telecommunication services that we also provide to external customers. In addition, we provide to our affiliates, computer system development and support services, network support and technical services.
•
Affiliate Services, we provide our affiliates telecommunication services that we also provide to external customers. In addition, we provide to our affiliates, computer system development and support services, network support and technical services.
From time to time, we may change the categorization of our products and services.

At September 30, 2018, we served 3.2 million broadband subscribers. Our methodology for counting broadband subscribers, which is described further in the operational metrics table below under "Results of Operations", may not be comparable to those of other companies.


The following analysis is organized to provide the information we believe will be useful for understanding material trends affecting our business.


Results of Operations


The following table summarizes the results of our consolidated operations for the three and nine months ended September 30, 20182019 and 2017:2018:
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 20172019 2018 2019 2018
(Dollars in millions)(Dollars in millions)
Operating revenues$2,149
 2,141
 6,380
 6,436
Operating revenue$2,039
 2,149
 6,145
 6,380
Operating expenses1,432
 1,581
 4,405
 4,723
1,291
 1,432
 3,887
 4,405
Operating income717
 560
 1,975
 1,713
748
 717
 2,258
 1,975
Total other expense, net(153) (127) (393) (390)(105) (153) (313) (393)
Income tax expense111
 168
 322
 512
166
 111
 504
 322
Net income$453
 265
 1,260

811
$477
 453
 1,441

1,260
The following table summarizesFor a discussion of certain trends that impact our broadband subscribersbusiness, see the MD&A discussion of trends impacting CenturyLink's business included in CenturyLink's reports filed with the Securities and number of employees:
 September 30, 2018 September 30, 2017  Increase/
(Decrease)		 % Change
    
 (in thousands)  
Operational metrics:       
Total broadband subscribers (1)
3,173
 3,383
 (210) (6)%
Total employees18
 22
 (4) (18)%

(1) Broadband subscribers are customers that purchase broadband connection service through their existing copper telephone lines or fiber-optic cables. Our methodologyExchange Commission ("SEC"), including most recently its Quarterly Report on Form 10-Q for counting our broadband subscribers includes only those lines that we use to provide services to external customers and excludes lines used solely by us and our affiliates. It also excludes unbundled loops and includes stand-alone broadband subscribers.

the quarterly period ended September 30, 2019.
Operating RevenuesRevenue


The following tables summarize our consolidated operating revenuesrevenue recorded under each of our six above-described revenue categories:
 Three Months Ended September 30,  Increase/
(Decrease)		 % Change
 2018 2017  
 (Dollars in millions)  
IP and data services$155
 161
 (6) (4)%
Transport and infrastructure739
 751
 (12) (2)%
Voice and collaboration448
 492
 (44) (9)%
IT and managed services2
 —
 2
 nm
Regulatory services53
 52
 1
 2 %
Affiliates services752
 685
 67
 10 %
Total operating revenues$2,149
 2,141
 8
 — %
 Three Months Ended September 30,  Increase/
(Decrease)		 % Change
 2019 2018  
 (Dollars in millions)  
IP and Data Services$169
 155
 14
 9 %
Transport and Infrastructure716
 739
 (23) (3)%
Voice and Collaboration405
 449
 (44) (10)%
IT and Managed Services—
 1
 (1) (100)%
Regulatory Revenue48
 53
 (5) (9)%
Affiliate Services701
 752
 (51) (7)%
Total operating revenue$2,039
 2,149
 (110) (5)%

 Nine Months Ended September 30,  Increase/
(Decrease)		 % Change
 2018 2017  
 (Dollars in millions)  
IP and data services$460
 475
 (15) (3)%
Transport and infrastructure2,216
 2,268
 (52) (2)%
Voice and collaboration1,370
 1,504
 (134) (9)%
IT and managed services6
 —
 6
 nm
Regulatory services157
 159
 (2) (1)%
Affiliates services2,171
 2,030
 141

7 %
Total operating revenues$6,380
 6,436
 (56) (1)%

nm-Percentages greater than 200% and comparisons between positive and negative values or to/from zero values are considered not meaningful.
 Nine Months Ended September 30,  Increase/
(Decrease)		 % Change
 2019 2018  
 (Dollars in millions)  
IP and Data Services$467
 459
 8
 2 %
Transport and Infrastructure2,140
 2,215
 (75) (3)%
Voice and Collaboration1,250
 1,369
 (119) (9)%
IT and Managed Services2
 5
 (3) (60)%
Regulatory Revenue143
 161
 (18) (11)%
Affiliate Services2,143
 2,171
 (28)
(1)%
Total operating revenue$6,145
 6,380
 (235) (4)%
Total operating revenues increasedrevenue decreased by $8$110 million, or less than 1%5%, and $235 million, or 4%, for the three and nine months ended September 30, 20182019 as compared to the three months ended September 30, 2017. Total operating revenues decreased by $56 million, or 1%, for theand nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.2018. The change in operating revenue for both periods was primarily due to declinesdecreases in voice and collaboration, and transport and infrastructure asand affiliate services. The decrease in voice and collaboration was due to a result of lower volumecontinued decline in revenue services from our local voice services. The reduction in transport and partially offset by an increaseinfrastructure was attributable to a continued decline in affiliate services driven by new circuits.


private line (including business data services).
Operating Expenses
The following tables summarize our consolidated operating expenses:
Three Months Ended September 30,  Increase/
(Decrease)		 % ChangeThree Months Ended September 30,  Increase/
(Decrease)		 % Change
2018 2017 2019 2018 
(Dollars in millions)  (Dollars in millions)  
Cost of services and products (exclusive of depreciation and amortization)$697
 742
 (45) (6)%$630
 697
 (67) (10)%
Selling, general and administrative172
 231
 (59) (26)%131
 172
 (41) (24)%
Operating expenses - affiliates203
 211
 (8) (4)%186
 203
 (17) (8)%
Depreciation and amortization360
 397
 (37) (9)%344
 360
 (16) (4)%
Total operating expenses$1,432
 1,581
 (149) (9)%$1,291
 1,432
 (141) (10)%
Nine Months Ended September 30,  Increase/
(Decrease)		 % ChangeNine Months Ended September 30,  Increase/
(Decrease)		 % Change
2018 2017 2019 2018 
(Dollars in millions)  (Dollars in millions)  
Cost of services and products (exclusive of depreciation and amortization)$2,106
 2,185
 (79) (4)%$1,825
 2,106
 (281) (13)%
Selling, general and administrative602
 710
 (108) (15)%445
 602
 (157) (26)%
Operating expenses - affiliates616
 647
 (31) (5)%600
 616
 (16) (3)%
Depreciation and amortization1,081
 1,181
 (100) (8)%1,017
 1,081
 (64) (6)%
Total operating expenses$4,405
 4,723
 (318) (7)%$3,887
 4,405
 (518) (12)%
Cost of Services and Products (exclusive of depreciation and amortization)


Cost of services and products (exclusive of depreciation and amortization) decreased by $45$67 million, or 6%10%, and by $79$281 million, or 4%13%, respectively, for the three and nine months ended September 30, 2018, respectively,2019 as compared to the three and nine months ended September 30, 2017.2018. The decrease in our cost of services and products (exclusive of depreciation and amortization) for both periods iswas primarily due to a decrease in allocated corporate costs from affiliates and a reduction inlower salaries and wages resultingand employee related expenses from lower headcount, reduced customer premises equipment costs from lower sales, lower voice usage costs and a decreasedecline in headcount and overtime accruals. The decrease was partiallyprofessional services, which were offset by increases in propertyhigher right of way and other taxes and severance accruals.dark fiber expenses.


Selling, General and Administrative


Selling, general and administrative expenses decreased by $59$41 million, or 24%, and $157 million, or 26%, respectively, for the three and nine months ended September 30, 20182019 as compared to the three months ended September 30, 2017 and by $108 million, or 15%, for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.2018. The decrease in our selling, general and administrative expenses for both periods was primarily due to a reductionlower salaries and wages and employee related expenses from lower headcount, lower contract labor costs and declines in commissions, professional fees, marketing and advertising, expenses driven by fewer branding campaigns, media placementinsurance and marketing charges. In addition,fees, property, and other taxes decreased due to a policy review in third quarter 2017 conforming policies as a result of the Level 3 acquisition by CenturyLink. As a result of the policy review, beginningand bad debt expense and an increase in the third quarteramount of 2017, certain franchiselabor capitalized or deferred. These decreases were partially offset by higher building and receipt taxes are reported in cost of services and products.network maintenance costs.



Operating Expenses - Affiliates


Operating expenses - affiliates decreased by $8$17 million, or 4%8%, and $16 million, or 3%, respectively, for the three monthsand nine month ended September 30, 20182019 as compared to the three months ended September 30, 2017 and by $31 million, or 5%, for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.2018. The decreasechange in operating expenses - affiliates for both periods was primarily due to the decline in the level of services provided to us by our affiliates.


Depreciation and Amortization


The following tables provide details of our depreciation and amortization expense:
Three Months Ended September 30,  Increase/
(Decrease)		 % ChangeThree Months Ended September 30,  Increase/
(Decrease)		 % Change
2018 2017 2019 2018 
(Dollars in millions)  (Dollars in millions)  
Depreciation$216
 231
 (15) (6)%$211
 216
 (5) (2)%
Amortization144
 166
 (22) (13)%133
 144
 (11) (8)%
Total depreciation and amortization$360
 397
 (37) (9)%$344
 360
 (16) (4)%
Nine Months Ended September 30,  Increase/
(Decrease)		 % ChangeNine Months Ended September 30,  Increase/
(Decrease)		 % Change
2018 2017 2019 2018 
(Dollars in millions)  (Dollars in millions)  
Depreciation$641
 674
 (33) (5)%$613
 641
 (28) (4)%
Amortization440
 507
 (67) (13)%404
 440
 (36) (8)%
Total depreciation and amortization$1,081
 1,181
 (100) (8)%$1,017
 1,081
 (64) (6)%
Depreciation expense is impacted by several factors, including changes in our depreciable cost basis, changes in our estimates of the remaining economic life of certain network assets and the addition of new plant. Depreciation expense decreased by $15$5 million, or 6%2%, and by $33$28 million, or 5%4%, respectively, for the three and nine months ended September 30, 2018, respectively,2019 as compared to the three and nine months ended September 30, 2017.2018. The decline in depreciation expense relatedfor both periods was primarily due to our plantthe impact of annual rate depreciable life changes partially offset by a net increase in depreciable assets.

Amortization expense decreased by $11 million, or 8%, and $36 million, or 8%, respectively, for the three and nine months ended September 30, 2018 was lower than the depreciation expense for the three and nine months ended September 30, 2017 due to full depreciation of certain plant placed in service prior to 2018. This decrease was partially offset by an increase in depreciation expense attributable to new plant placed in service since September 30, 2017.

Amortization expense decreased by $22 million, or 13%, and by $67 million, or 13%, for the three and nine months ended September 30, 2018, respectively,2019 as compared to the three and nine months ended September 30, 2017.2018. The decrease in amortization expense for both periods was primarily due to the use of accelerated amortization for a portion of our customer relationship assets. The effect of using an accelerated amortization method resultsresulting in an incremental decline in expense each period as the intangible assets amortize. In addition, amortization of capitalized software was lower due to software becoming fully amortized faster than new software was acquired or developed.



Other Consolidated Results
The following tables summarize our total other expense, net and income tax expense:
 Three Months Ended September 30, Change % Change
 2018 2017  
 (Dollars in millions)  
Interest expense$(112) (117) (5) (4)%
Interest expense - affiliate(15) (16) (1) (6)%
Net loss on early retirement of debt(34) —
 34
 nm
Other income, net8
 6
 2
 33 %
Total other expense, net$(153) (127) 26
 20 %
Income tax expense$111
 168
 (57) (34)%
Nine Months Ended September 30, Change % ChangeThree Months Ended September 30, Change % Change
2018 2017 2019 2018 
(Dollars in millions)  (Dollars in millions)  
Interest expense$(350) (348) 2
 1 %$(95) (112) (17) (15)%
Interest expense - affiliate(42) (47) (5) (11)%
Net loss on early retirement of debt(34) (5) 29
 nm
Interest expense - affiliates, net(15) (15) —
 — %
Other income, net33
 10
 23
 nm
5
 (26) 31
 119 %
Total other expense, net$(393) (390) 3
 1 %$(105) (153) (48) (31)%
Income tax expense$322
 512
 (190) (37)%$166
 111
 55
 50 %
 Nine Months Ended September 30, Change % Change
 2019 2018  
 (Dollars in millions)  
Interest expense$(286) (350) (64) (18)%
Interest expense - affiliates, net(46) (42) 4
 10 %
Other income, net19
 (1) 20
 nm
Total other expense, net$(313) (393) (80) (20)%
Income tax expense$504
 322
 182
 57 %

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

Interest Expense


Interest expense decreased by $5$17 million, or 4%15%, and $64 million, or 18%, for the three and nine months ended September 30, 20182019 as compared to the three and nine months ended September 30, 2017.2018. The decline in interest expense isdecrease for both periods was primarily due to the redemption of approximately $1.3 billion of senior notes in the third quarter of 2018. Interest expense increased by $2 million, or 1%, for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 due to an increase in the LIBOR rate. See Note 4—5—Long-Term Debt and Revolving Promissory Note to our consolidated financial statements in Item 1 of Part I of this report and Liquidity and Capital Resources below for additional information about our debt.


Interest Expense - Affiliates, Net


Affiliate interest expense decreased by $1 million, or 6%,remained substantially unchanged for the three months ended September 30, 20182019 as compared to the three months ended September 30, 2017 and2018. Affiliated interest expense increased by $5$4 million, or 11%10%, for the nine months ended September 30, 20182019 as compared to the nine months ended September 30, 2017.2018. The decreaseincrease in affiliate interest expense was primarily due to a decreasean increase in the weighted averageprincipal balance of the note payable - affiliate resulting from the capitalization of interest ratein Q3 2019.

Other Income, Net

Other income, net reflects certain items not directly related to our core operations, including interest income, gains and losses from 6.710% in the third quarternon-operating asset dispositions and components of 2017 to 5.860% in the third quarter of 2018.

Net Loss on Early Retirement of Debt

Loss on early retirement of debtnet periodic pension and post-retirement benefit costs. Other income, net increased by $34$31 million and $20 million, for the three and nine months ended September 30, 20182019 as compared to the three months ended September 30, 2017 and by $29 million for the nine months ended months ended September 30, 2018 as compared to the nine months ended months ended September 30, 2017. The increase for both periods was due to the $34 million loss on redemption of notes payable during September 2018.


Other Income, Net

Other income, net increased by $2 million, or 33%, for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 and by $23 million, for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.2018. The increase in other income, net for both periods was primarily due to an increase in intercompany interest rate.the $34 million loss on debt redemption during the third quarter of 2018.

Income Tax Expense


Income tax expense for the three months ended September 30, 2018 was $111 million, or an effective tax rate of 19.7%, compared to $168 million, or an effective tax rate of 38.8%, for the three months ended September 30, 2017. Income tax expense for the nine months ended September 30, 2018 was $322 million, or an effective tax rate of 20.4%, compared to $512 million, or an effective tax rate of 38.7%, for the nine months ended September 30, 2017. The effective tax rate for the three and nine months ended September 30, 20182019 was significantly impacted by$166 million and $504 million, or effective tax rates of 25.8%and 25.9%, respectively, compared to $111 millionand $322 million, or effective tax rates of 19.7% and 20.4%, respectively, for the three and nine months ended September 30, 2018. The change in the effective tax reformrate for the nine months ended September 30, 2019 was primarily due to favorable accounting elections made in 2018. These positions created a favorable 5.1% impact of filing tax accounting method changes onto the 2017 Federal income tax return that significantly accelerated tax deductions into 2017. The rate was further impacted byfor the enactment of the Tax Cuts and Jobs Act legislation in December 2017. The 2018 and the 2017 rate include the effect of changes in state apportionment factors.nine months ended September 30, 2019.


Liquidity and Capital Resources


Overview of Sources ofand Uses of Cash


We are an indirectly wholly-owned subsidiary of CenturyLink. As such, factors relating to, or affecting, CenturyLink's liquidity and capital resources could have material impacts on us, including impacts on our credit ratings, our access to capital markets and changes in the financial market's perception of us.


CenturyLink has cash management arrangements between certain of its subsidiaries that include lines of credit, affiliate advances and 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 advanced on a daily basis tofor centralized management by CenturyLink. From time to time we may declare and pay dividends to our stockholder, QSC, sometimes in excess of our earnings to the extent permitted by applicable law, using cash owed to us under these advances, which has the net effect of reducing the amount of these advances. Our debt covenants do not currently limit the amount of dividends we can pay to QSC. Given our cash management arrangement with our ultimate parent, CenturyLink, and the resulting amounts due to us from CenturyLink, a significant component of our liquidity is dependent upon CenturyLink's ability to repay its obligation to us.


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


Capital Expenditures


We incur capital expenditures on an ongoing basis in order to enhance and modernize our networks, compete effectively in our markets and expand and improve our service offerings. CenturyLink evaluates capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and the expected return on investment. The amount of CenturyLink’s consolidated capital investment is influenced by, among other things, demand for CenturyLink’s services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations (such as CenturyLink's CAF Phase 2II infrastructure buildout requirements). Based on the type and volume of services we provide, approximately 32% to 43% of CenturyLink’s annual consolidated capital expenditures have been attributed over the last couple of years to us for use in our operations. For more information on CenturyLink’s total capital expenditures, please see its annual and quarterly reports filed with the SEC.


Our capital expenditures continue to be focused on keeping the network operating efficiently and supporting new service developments. For more information on our capital spending, see "Historical Information—Investing Activities" below and Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2017.2018.


Debt and Other Financing Arrangements


Subject to market conditions, and to the extent feasible, we expect to continue to issue debt instruments,securities, under Qwest Corporation, from time to time in the future to refinance a substantial portion of our maturing debt to the extent we deem appropriate and feasible.debt. The availability, interest rate and other terms of any new borrowings will depend on the ratings assigned to Qwest Corporation by credit rating agencies, among other factors. We have no debt maturities during 2018. Also subject to market conditions, we expect from time to time to retire debt securities prior to their maturity.due in 2019.


Following CenturyLink's acquisition of Level 3 in late 2017, Qwest Corporation's current unsecured senior debt rating of Ba1 was downgraded to Ba2 with a negative outlook by Moody's Investors Service, Inc., and its current unsecured senior debt rating of BBB- was downgraded to BB+ with a stable outlook by Fitch Ratings. The downgrade of Qwest Corporation's rating by Fitch Ratings resulted in Qwest Corporation no longer being viewed as an "investment grade" issuer under the prevailing definition of that term. Standard and Poor's reaffirmed its rating of BBB- with a stable outlook for Qwest Corporation's current unsecured senior debt.

As of the date of this report, the credit ratings for Qwest Corporation's senior unsecured debt were as follows:
AgencyCredit Ratings
Standard & Poor'sBBB-
Moody's Investors Service, Inc.Ba2
Fitch RatingsBB+


CenturyLink, Inc.'s and Qwest Corporation's credit ratings are reviewed and adjusted from time to time by the rating agencies. Any future downgrades of the senior unsecured or secured debt ratings of our subsidiaries could impact our access to debt capital or further raise our borrowing costs.

For additional information regarding CenturyLink, Inc.'sCenturyLink's and Qwest Corporation's funding arrangements, see "Risk Factors—Risks RelatingRisk Related to CenturyLink's Recently-Completed Acquisition of Level 3" and "Risks Affecting our Liquidity and Capital Resources" in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2017.2018.


Term Loan


In 2015, we entered into a term loan in the amount of $100 million with CoBank, ACB. The outstanding unpaid principal amount of this term loan plus any accrued and unpaid interest is due on February 20, 2025. Interest is paid monthly based upon either the London Interbank Offered Rate (“LIBOR”) or the base rate (as defined in the credit agreement) plus an applicable margin between 1.50% to 2.50% per annum for LIBOR loans and 0.50% to 1.50% per annum for base rate loans depending on our then current senior unsecured long-term debt rating. At both September 30, 20182019 and December 31, 2017,2018, the outstanding principal balance on this term loan was $100 million.


Revolving Promissory Note


On September 30, 2017, Qwest Corporation entered into an amended and restated revolving promissory note in the amount of $965 million with an affiliate of our ultimate parent company, CenturyLink, Inc. This note replaced and amended the original $1.0 billion revolving promissory note Qwest Corporation entered into on April 18, 2012 with the same affiliate. The outstanding principal balance owed by us under this revolving promissory note and the accrued interest thereon is due and payable on demand, but if no demand is made, then on June 30, 2022. Interest is accrued on the outstanding balance during an interest period using a weighted average per annum interest rate on the consolidated outstanding debt of CenturyLink and its subsidiaries. As of September 30, 2018,2019, the weighted average interest rate was 5.860%5.843%. As of September 30, 20182019 and December 31, 2017,2018, the amended and restated revolving promissory note and the original revolving promissory note, respectively, are reflected on our consolidated balance sheets as a current liability under note payable - affiliate. As of September 30, 2018, $152019, $16 million of accrued interest is reflected in other current liabilities on our consolidated balance sheets.


For additional information about our indebtedness, see Note 5—Long-Term Debt and Revolving Promissory Note.

Dividends


We periodically pay dividends to our direct parent company. See Note 8—9—Dividends and the discussion above under the heading "Overview".



Pension and Post-retirement Benefit Obligations


CenturyLink is subject to material obligations under its existing defined benefit pension plans and post-retirement benefit plans. At December 31, 2018, the accounting unfunded status of CenturyLink's qualified and non-qualified defined benefit pension plans and qualified post-retirement benefit plans was approximately $1.6 billion and approximately $3.0 billion, respectively. For additional information about CenturyLink's pension and post-retirement benefit arrangements, see "Critical Accounting Policies and Estimates—Pensions and Post-Retirement Benefits" in Item 7 of CenturyLink's annual report on Form 10-K for the year ended December 31, 2018 and see Note 10—Employee Benefits to the consolidated financial statements in Item 8 of Part II of the same report.

A substantial portion of our active and retired employees participate in CenturyLink's qualified pension plan and post-retirement benefit plans. On December 31, 2014, the Qwest Communications International Inc. ("QCII") pension plan and a pension plan of an affiliate were merged into the CenturyLink Retirement Plan, which was renamed the CenturyLink Combined Pension Plan. Our contributions are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other employees of our affiliates. Prior to the pension plan merger, the above-noted employees participated in the QCII pension plan.

CenturyLink is subject to material obligations under its existing defined benefit pension plans and post-retirement benefit plans. At December 31, 2017, the accounting unfunded status of CenturyLink's qualified and non-qualified defined benefit pension plans and qualified post-retirement benefit plans was approximately $2.1 billion and approximately $3.4 billion, respectively. For additional information about CenturyLink's pension and post-retirement benefit arrangements, see "Critical Accounting Policies and Estimates—Pensions and Post-Retirement Benefits" in Item 7 of CenturyLink's annual report on Form 10-K for the year ended December 31, 2017 and see Note 9—Employee Benefits to the consolidated financial statements in Item 8 of Part II of the same report.


Benefits paid by CenturyLink's qualified pension plan are paid through a trust that holds all of the plan's assets. Based on current laws and circumstances, CenturyLink does not expect any contributions to be required for their qualified pension plan during the remainder of 2018.2019. The amount of required contributions to CenturyLink's qualified pension plan in 20192020 and beyond will depend on a variety of factors, most of which are beyond their control, including earnings on plan investments, prevailing interest rates, demographic experience, changes in plan benefits and changes in funding laws and regulations. CenturyLink occasionally makes voluntary contributions in addition to required contributions. CenturyLink madedoes not currently expect to make a voluntary contribution of $100 million to the trust for its qualified pension plan in the second quarter of 2018 and made an additional contribution of $400 million during the third quarter of 2018.2019.


Substantially all of CenturyLink's post-retirement health care and life insurance benefits plans are unfunded. Several trusts hold assets that have been used to help cover the health care costs of certain retirees. As of December 31, 2017,2018, assets in the post-retirement trusts had been substantially depleted and had a fair value of $23$18 million (a portion of which was comprised of investments with restricted liquidity), which has significantly limited CenturyLink's ability to continue paying benefits from the trusts; however, CenturyLink will continue to pay certain benefits through the trusts. Benefits not paid from the trusts are expected to be paid directly by CenturyLink with available cash.


The affiliate obligations, net in current and noncurrent liabilities on our consolidated balance sheets primarily represents the cumulative allocation of expenses, net of payments, associated with QCII's pension plans and post-retirement benefits plans prior to the plan mergers. 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 nine months ended September 30, 2018,2019, we made settlement payments of $67$56 million to QCII in accordance with the plan. Changes in the affiliate obligations, net are reflected in operating activities on our consolidated statements of cash flows. For 2018,2019, we expect to make aggregate settlement payments of $82$79 million to QCII under the plan.


For 2018,2019, CenturyLink's estimated annual long-term rates of return, net of administrative costs, are 6.5% and 4.0% for the pension plan trust assets and post-retirement plans trust assets, respectively, based on the assets currently held. However, actual returns could be substantially different.


For additional information, see “Risk Factors—Risks Affecting Our Liquidity and Capital Resources—Adverse changes in the value of assets or obligations associated with CenturyLink’s qualified pension plan could negatively impact CenturyLink’s liquidity, which may in turn affect our business and liquidity” in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2017.2018.


Future Contractual Obligations


For information regarding our estimated future contractual obligations, see the MD&A discussion included in Item 7 of Part II of our annual report on Form 10-K for the year ended December 31, 2017.2018.

Connect America Fund


As a result of accepting CAF Phase 2II support payments, we must meet certain specified infrastructure buildout requirements in 13 states over the next several years. In order to meet these specified infrastructure buildout requirements, we anticipate making substantial capital expenditures. See "Capital Expenditures" above.


For additional information on the FCC's CAF order and the USF program, see "Business—Regulation" in Item 1 of Part I of our annual report on Form 10-K for the year ended December 31, 20172018 and see "Risk Factors—Risks Affecting our Liquidity and Capital Resources" in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2017.2018. The FCC released a Notice of Proposed Rulemaking on August 1, 2019 to begin the process of developing rules for the Rural Digital Opportunity Fund which is expected to ultimately succeed CAF Phase 2. The content, timing and final implementation rules and the impact on CenturyLink are not known at this time.


Historical Information


The following table summarizes our consolidated cash flow activities:
Nine Months Ended September 30, ChangeNine Months Ended September 30, Change
2018 2017 2019 2018 
(Dollars in millions)(Dollars in millions)
Net cash provided by operating activities$2,652
 1,815
 837
$2,317
 2,652
 (335)
Net cash used in investing activities(367) (1,025) (658)(1,209) (367) 842
Net cash used in financing activities(2,280) (791) 1,489
(1,110) (2,280) (1,170)


Operating Activities


Net cash provided by operating activities increaseddecreased by $837$335 million for the nine months ended September 30, 20182019 as compared to the nine months ended September 30, 20172018 primarily due to an increasea decrease in net income adjusted for non-cash itemsdeferred revenue and the positive variance in the change in other noncurrent assets and liabilities, net.long-term liabilities. Cash provided by operating activities is subject to variability period over period as a result of the timing of the collection of receivables and payments related to interest expense, accounts payable and bonuses.


Investing Activities


Net cash used in investing activities decreasedincreased by $658$842 million for the nine months ended September 30, 20182019 as compared to the nine months ended September 30, 20172018 primarily due to a decrease in capital expenditures and a positive variance in the changean increase in advances to affiliates.


Financing Activities


Net cash used in financing activities increaseddecreased by $1.5$1.2 billion for the nine months ended September 30, 20182019 as compared to the nine months ended September 30, 20172018 primarily due to the increase in dividends paid to affiliate and increasedecrease in payments of debt during the nine months ended September 30, 2018.2019. In the third quarter of 2018, Qwest Corporation redeemed $1.3 billion of notes payable during the three months ended September 30, 2018 which resulted in a total loss of $34 million. In the future, we may continue to retire debt, which could potentially result in the recognition of additional losses. These redemptions and repurchases were funded in part with borrowings under CenturyLink's revolving credit facility.payable.


See Note 4—5—Long-Term Debt and Revolving Promissory Note, for additional information on our outstanding debt securities and financing activities.


Other Matters


We are subject to various legal proceedings and other contingent liabilities that individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. See Note 7—8—Commitments, Contingencies and Other Items for additional information.



CenturyLink is involved in several legal proceedings to which we are not a party that, if resolved against it, could have a material adverse effect on its business and financial condition. As a wholly owned subsidiary of CenturyLink, our business and financial condition could be similarly affected. You can find descriptions of these legal proceedings in CenturyLink's quarterly and annual reports filed with the SEC. Because we are not a party to any of the matters, we have not accrued any liabilities for these matters.

Market Risk


As of September 30, 2018,2019, we were exposed to market risk from changes in interest rates on our variable rate long-term debt obligations, amended and restated revolving promissory note and fluctuations in certain foreign currencies. We seek to maintain a favorable mix of fixed and variable rate debt in an effort to limit interest costs and cash flow volatility resulting from changes in rates.


Management periodically reviews our exposure to interest rate fluctuations and periodically implements strategies to manage the exposure. From time to time, we have used derivative instruments to (i) lock-in or swap our exposure to changing or variable interest rates for fixed interest rates or (ii) to swap obligations to pay fixed interest rates for variable interest rates. As of September 30, 2018,2019, we had no such instruments outstanding nor held or issued derivative financial instruments for trading or speculative purposes.


We do not believe that there were any material changes to market risks arising from changes in interest rates for the nine months ended September 30, 2018,2019, when compared to the disclosures provided in our annual report on Form 10-K for the year ended December 31, 2017.2018.


Certain shortcomings are inherent in the method of analysis presented in the computation of exposures to market risks. Actual values may differ materially from those disclosed by us from time to time if market conditions vary from the assumptions used in the analyses performed. These analyses only incorporate the risk exposures that existed at September 30, 2018.2019.


Off-Balance Sheet Arrangements


As of September 30, 2018,2019, we had no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support, and we did not engage in leasing, hedging or other similar activities that expose us to any significant liabilities that are not (i) reflected on the face of the consolidated financial statements, (ii) disclosed in Note 15—Commitments, Contingencies and ContingenciesOther Items to our consolidated financial statements in Item 8 of Part II of our annual report on Form 10-K for the year ended December 31, 2017,2018, or in the Future Contractual Obligations table included in Item 7 of Part II of the same report, or (iii) discussed under the heading "Market Risk" above.


Other Information


CenturyLink's and our website is www.centurylink.com. We routinely post important investor information in the "Investor Relations" section of our website at ir.centurylink.com. The information contained on, or that may be accessed through, our website is not part of this quarterly report. You may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports in the "Investor Relations" section of our website (ir.centurylink.com) under the heading "SEC Filings." These reports are available on our website as soon as reasonably practicable after we electronically file them with the SEC.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


We have omitted this informationOmitted pursuant to General Instruction H(2).


ITEM 4. CONTROLS AND PROCEDURES


Disclosure Controls and Procedures


The Company maintainsWe maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submitsfurnishes under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of our Chief Executive Officer, Jeff K. Storey, and our Executive Vice President and Chief Financial Officer, Indraneel Dev, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2018.2019. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective, as of September 30, 2019, due to the material weakness in internal control over financial reporting that was disclosed in our Annual Report on Form 10-K for the fiscal year ended in December 31, 2018 related to the existence and accuracy of our revenue transactions.

Remediation Plans

As previously described in providing reasonable assurancePart II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, we began implementing remediation plans to address the material weakness mentioned above. The material weakness will not be considered remediated until we have designed and implemented sufficient process level controls and the applicable controls operate for a sufficient period of time such that management has concluded, through testing, that these controls are operating effectively. Based on our progress to date, we expect that the information required toremediation of the material weakness will be disclosed by uscompleted as of December 31, 2019.

Changes in this report was accumulated and communicatedInternal Control Over Financial Reporting

There have been no changes in the manner providedCompany’s internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the third quarter of 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. We currently expect, however, to implement changes in our internal control over financial reporting during the fourth quarter of 2019 in connection with the remediation efforts discussed above.


Inherent Limitations of Internal Controls
The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events and the inability to eliminate misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will detect all errors or fraud. By their nature, our or any system of disclosure controls and procedures can provide only reasonable assurance regarding management's control objectives.


Changes in Internal Control Over Financial Reporting


Beginning January 1, 2018, we adopted Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers. We implemented internal controls to ensure we adequately evaluated our contracts and properly assessed the new accounting standard related to revenue recognition on our consolidated financial statements. There were no other changes in our internal control over financial reporting during the third quarter of 2018 that materially affected, or that we believe are reasonably likely to materially affect, our internal control over financial reporting.

Our parent company, CenturyLink, Inc. is in the process of integrating the operations of its recent acquisition Level 3 Parent, LLC. As a result of this acquisition, the controls of CenturyLink will change as systems are integrated which may impact our controls as well.



PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS


The information contained in Note 7—8—Commitments, and Contingencies and Other Items included in Item 1 of Part I of this report is incorporated herein by reference. The ultimate outcome of the matters described in Note 78 may differ materially from the outcomes anticipated, estimated, projected or implied by us in certain of our statements appearing in such Note, and proceedings currently viewed as immaterial by us may ultimately materially impact us. For more information, see “Risk Factors—Risks Relating to Legal and Regulatory Matters—Our pending legal proceedings could have a material adverse impact on our financial condition and operating results, on the trading price of our securities and on our ability to access the capital markets” in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2017.2018.


ITEM 1A. RISK FACTORS


Our operations and financial results are subject to various risks and uncertainties, which could adversely affect our business, financial condition or future results. In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017.2018.



ITEM 6. EXHIBITS
Exhibits identified in parentheses below are on file with the SEC and are incorporated herein by reference. All other exhibits are provided as part of this electronic submission.
Exhibit
Number
 Description
31.1* 
Certification of the Chief Executive Officer of CenturyLink, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002.
31.2* 
Certification of the Chief Financial Officer of CenturyLink, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*32.1* 
Certification of the Chief Executive Officer and Chief Financial Officer of CenturyLink, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101* 
Financial statements from the Quarterly Report on Form 10-Q of Qwest Corporation for the period ended September 30, 2018,2019, formatted in Inline XBRL: (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Stockholder's Equity and (v) the Notes to the Consolidated Financial Statements.
104*
Cover page formatted as Inline XBRL and contained in Exhibit 101.

*Exhibit filed herewith.

SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 13, 2018.8, 2019.
 QWEST CORPORATION
 By:/s/ Eric J. Mortensen
 
Eric J. Mortensen
Senior Vice President - Controller
(Principal Accounting Officer)


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