UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, ~~2021~~2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-35134

LEVEL 3 PARENT, LLC

(Exact name of registrant as specified in its charter)



Delaware		47-0210602
(State of Incorporation)		(I.R.S. Employer Identification No.)
1025 Eldorado Blvd.,
Broomfield,	CO	80021-8869
(Address of principal executive offices)		(Zip Code)

(720) 888-1000

(Registrant’s telephone number,

including area code)

Securities registered pursuant to Section 12(b) of the Act:

~~Title of Each Class~~None

~~Trading Symbol(s)~~

~~Name of Each Exchange on Which Registered~~

—

THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF LUMEN TECHNOLOGIES, 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 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. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☐

Emerging growth company

☐

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.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

All of the limited liability company interest in the registrant is held by an affiliate of the registrant. ~~NaN~~None of the interest is publicly traded.

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TABLE OF CONTENTS



	Special Note Regarding Forward-Looking Statements	3
Part I	Financial Information
Item 1.	Financial Statements	6
	Consolidated Statements of Operations (Unaudited)	6
	Consolidated Statements of Comprehensive Income ~~(Loss)~~ (Unaudited)	7
	Consolidated Balance Sheets (Unaudited)	8
	Consolidated Statements of Cash Flows (Unaudited)	9
	Consolidated Statements of Member's Equity (Unaudited)	10
	Notes to Consolidated Financial Statements (Unaudited)*	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2426
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3437
Item 4.	Controls and Procedures	3438
Part II	Other Information
Item 1.	Legal Proceedings	3539
Item 1A.	Risk Factors	3539
~~Item 5~~	~~Other Information~~	35
Item 6.	Exhibits	3640
Signature		3741

* All references to "Notes" in this quarterly report refer to these Notes to Consolidated Financial Statements.

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Unless the context requires otherwise, references in this report to "Level 3," “we,” “us,” "its," the "Company" and "our" refer to Level 3 Parent, LLC and its predecessor Level 3 Communications, Inc., and their respective consolidated subsidiaries. References to "Lumen Technologies" or "Lumen" refer to our ultimate parent company, Lumen Technologies, Inc. and its consolidated subsidiaries.

Special Note Regarding Forward-Looking Statements

This report and other documents filed by us under the federal securities law include, and future oral or written statements or press releases by us and our management may include, forward-looking statements about our business, financial condition, operating results or prospects. These "forward-looking" statements are defined by, and are subject to the "safe harbor" protections under, the federal securities laws. 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, buildout plans, and other initiatives, including synergies or costs associated with these initiatives;

•statements about our liquidity, profitability, profit margins, tax position, tax assets, tax rates, asset values, contingent liabilities, growth opportunities, growth rates, acquisition and divestiture opportunities, business prospects, regulatory and competitive outlook, market share, product capabilities, investment and expenditure plans, business strategies, distribution and securities repurchase plans, leverage, capital allocation plans, financing alternatives and sources, and pricing plans;

•statements regarding how the health and economic challenges raised by the COVID-19 pandemic may impact our business, ~~operations, cash flows~~financial position, operating results or ~~financial position;~~prospects; 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 such as “may,” “will,” “would,” “could,” “should,” ~~“plan,~~“plans,” “believes,” “expects,” “anticipates,” “estimates,” "forecasts," “projects,” "proposes," "targets," “intends,” “likely,” “seeks,” “hopes,” or variations or similar expressions with respect to the future.

These forward-looking statements are based upon our judgment and assumptions as of the date such statements are made concerning future developments and events, many of which are beyond our control. These forward-looking statements, and the assumptions upon which they are based, (i) are not guarantees of future results, (ii) are inherently speculative and (iii) are subject to a 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 below to ~~our discussion of~~ factors that could cause our actual results to differ materially from those anticipated, estimated, projected or implied by us in those forward-looking statements. ~~Factors that could affect actual results~~These factors include but are not limited to:

•the effects of competition from a wide variety of competitive providers, including decreased demand for our more 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;

•our ability to successfully and timely attain our 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;

•our ability to safeguard our network, and to avoid the adverse impact of possible cyber-attacks, security breaches, service outages, system failures, or similar events impacting our network or the availability and quality of our services;

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•the effects of ongoing changes in the regulation of the communications industry, including the outcome of legislative, regulatory or judicial proceedings relating to content liability standards, intercarrier compensation, broadband deployment, data protection, privacy and net neutrality;

•our ability to effectively retain and hire key personnel;

•~~possible~~ changes in ~~the~~customer demand for our products and services, including increased demand for high-speed data transmission services;

•our ability to successfully maintain the quality and profitability of our existing product and service offerings 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 and distributions;

•our ability to successfully and timely implement our ~~operating plans and~~ corporate strategies, including our deleveraging strategy;

•our ability to successfully and timely consummate the pending divestiture of our Latin American business on the terms proposed, to realize the anticipated benefits therefrom and to operate our retained business successfully thereafter;

•changes in our operating plans, corporate strategies and capital allocation plans, whether based upon changes in our cash flows, cash requirements, financial performance, financial position, market or regulatory conditions, or otherwise;

•the impact of any future material acquisitions or divestitures that we may ~~engage in;~~transact;

•the negative impact of increases in the costs of Lumen’s pension, healthcare ~~for active~~ and ~~retired employees,~~ post-employment ~~or other~~ benefits, including those caused by changes in markets, interest rates, mortality rates, demographics or regulations;

•the potential negative impact of customer complaints, government investigations, security breaches or service outages impacting us or our industry;

•adverse changes in our access to credit markets on favorable terms, whether caused by changes in our financial position, lower credit ratings, unstable markets or otherwise;

•our ability to meet the terms and conditions of our debt obligations and covenants, including our ability to make transfers of cash in compliance therewith;

•our ability to maintain favorable relations with our security holders, key business partners, suppliers, vendors, landlords and financial institutions;

•Lumen's ability to meet evolving environmental, social and governance ("ESG") expectations and benchmarks, and effectively communicate its ESG strategies;

•our ability to collect our receivables from, or continue to do business with, financially-troubled customers;

•Lumen's ability to use its net operating loss carryforwards in the amounts projected;

•our ability to continue to use or renew intellectual property used to conduct our operations;

•any adverse developments in legal or regulatory proceedings involving us or our affiliates, including Lumen Technologies;

•changes in tax, pension, healthcare or other laws or regulations, or in general government funding levels, including those arising from ~~pending proposals of the Biden Administration to increase infrastructure spending and~~recently-enacted federal ~~income tax rates;~~legislation promoting increased broadband spending;

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•the effects of changes in accounting policies, practices or assumptions, including changes that could potentially require additional future impairment charges;

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•continuing uncertainties regarding the impact that COVID-19 ~~health and economic~~ disruptions ~~will continue to~~could have on our business, operations, cash flows and corporate initiatives;

•the effects of adverse weather, terrorism, epidemics, pandemics, rioting, societal unrest, or other natural or man-made disasters or disturbances;

•the potential adverse effects if our internal controls over financial reporting have weaknesses or deficiencies, or otherwise fail to operate as intended;

•the effects of changes in interest rates and inflation;

•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; and

•other risks referenced in the "Risk Factors" section or other portions of this report or other of our filings with the U.S. Securities and Exchange Commission (the "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 distribution or other capital allocation plans) at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.

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PART I-FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LEVEL 3 PARENT, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(Dollars in millions)
OPERATING REVENUE
Operating revenue $ 1,929 1,932 3,863 3,864
Operating revenue - affiliates 56 52 111 100
Total operating revenue 1,985 1,984 3,974 3,964
OPERATING EXPENSES
Cost of services and products (exclusive of depreciation and amortization) 868 890 1,746 1,766
Selling, general and administrative 273 312 567 622
Operating expenses - affiliates 131 80 238 173
Depreciation and amortization 436 405 873 821
Total operating expenses 1,708 1,687 3,424 3,382
OPERATING INCOME 277 297 550 582
OTHER (EXPENSE) INCOME
Interest income - affiliate 15 13 33 26
Interest expense (89) (96) (182) (202)
Other income (expense), net 6 22 10 (12)
Total other expense, net (68) (61) (139) (188)
INCOME BEFORE INCOME TAXES 209 236 411 394
Income tax expense 62 60 113 105
NET INCOME $ 147 176 298 289


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022		2021
	(Dollars in millions)
OPERATING REVENUE
Operating revenue	$	1,896	1,929	$	3,786	3,863
Operating revenue - affiliates	57		56	113		111
Total operating revenue	1,953		1,985	3,899		3,974
OPERATING EXPENSES
Cost of services and products (exclusive of depreciation and amortization)	836		868	1,687		1,746
Selling, general and administrative	318		273	632		567
Operating expenses - affiliates	162		131	308		238
Depreciation and amortization	405		436	801		873
Total operating expenses	1,721		1,708	3,428		3,424
OPERATING INCOME	232		277	471		550
OTHER (EXPENSE) INCOME
Interest income - affiliate	15		15	31		33
Interest expense	(95)		(89)	(185)		(182)
Other (expense) income, net	(14)		6	(21)		10
Total other expense, net	(94)		(68)	(175)		(139)
INCOME BEFORE INCOME TAXES	138		209	296		411
Income tax expense	41		62	85		113
NET INCOME	$	97	147	$	211	298

See accompanying notes to consolidated financial statements.

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LEVEL 3 PARENT, LLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)

Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(Dollars in millions)
NET INCOME $ 147 176 298 289
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments, net of $(4), $(4), $3 and $19 tax 80 8 (8) (220)
Other comprehensive income (loss), net of tax 80 8 (8) (220)
COMPREHENSIVE INCOME $ 227 184 290 69


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022		2021
	(Dollars in millions)
NET INCOME	$	97	147	$	211	298
OTHER COMPREHENSIVE (LOSS) INCOME
Foreign currency translation adjustments, net of $32, $(4), $42, and $3 tax	(184)		80	(115)		(8)
Other comprehensive (loss) income, net of tax	(184)		80	(115)		(8)
COMPREHENSIVE (LOSS) INCOME	$	(87)	227	$	96	290

See accompanying notes to consolidated financial statements.

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LEVEL 3 PARENT, LLC

CONSOLIDATED BALANCE SHEETS

June 30, 2021 (unaudited) December 31, 2020
(Dollars in millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 233 190
Accounts receivable, less allowance of $42 and $45 705 683
Note receivable - affiliate 1,468 1,468
Other 322 297
Total current assets 2,728 2,638
Property, plant and equipment, net of accumulated depreciation of $3,258 and $2,818 10,608 10,518
GOODWILL AND OTHER ASSETS
Goodwill 7,406 7,405
Other intangible assets, net 6,228 6,605
Other, net 1,517 1,410
Total goodwill and other assets 15,151 15,420
TOTAL ASSETS $ 28,487 28,576
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 17 14
Accounts payable 507 495
Accounts payable - affiliates 370 869
Accrued expenses and other liabilities
Salaries and benefits 189 220
Income and other taxes 119 111
Current operating lease liabilities 275 241
Other 157 159
Current portion of deferred revenue 319 315
Total current liabilities 1,953 2,424
LONG-TERM DEBT 10,336 10,373
DEFERRED REVENUE AND OTHER LIABILITIES
Deferred revenue 1,416 1,396
Operating lease liabilities 986 903
Other 626 575
Total deferred revenue and other liabilities 3,028 2,874
COMMITMENTS AND CONTINGENCIES (Note 7) 0 0
MEMBER'S EQUITY
Member's equity 13,412 13,139
Accumulated other comprehensive loss (242) (234)
Total member's equity 13,170 12,905
TOTAL LIABILITIES AND MEMBER'S EQUITY $ 28,487 28,576
(UNAUDITED)


	June 30, 2022		December 31, 2021
	(Dollars in millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	154	146
Accounts receivable, less allowance of $37 and $39	580		642
Note receivable - affiliate	1,468		1,468
Assets held for sale	2,865		2,708
Other	263		239
Total current assets	5,330		5,203
Property, plant and equipment, net of accumulated depreciation of $3,547 and $3,202	8,936		9,042
GOODWILL AND OTHER ASSETS
Goodwill	6,627		6,666
Other intangible assets, net	5,387		5,725
Other, net	1,681		1,459
Total goodwill and other assets	13,695		13,850
TOTAL ASSETS	$	27,961	28,095
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt	$	28	26
Accounts payable	428		381
Accounts payable - affiliates	77		18
Accrued expenses and other liabilities
Salaries and benefits	126		176
Income and other taxes	92		83
Current operating lease liabilities	353		299
Other	117		150
Liabilities held for sale	479		435
Current portion of deferred revenue	298		291
Total current liabilities	1,998		1,859
LONG-TERM DEBT	10,383		10,396
DEFERRED REVENUE AND OTHER LIABILITIES
Deferred revenue	1,442		1,404
Operating lease liabilities	1,134		953
Other	452		474
Total deferred revenue and other liabilities	3,028		2,831
COMMITMENTS AND CONTINGENCIES (Note 8)	0		0
MEMBER'S EQUITY
Member's equity	13,018		13,360
Accumulated other comprehensive loss	(466)		(351)
Total member's equity	12,552		13,009
TOTAL LIABILITIES AND MEMBER'S EQUITY	$	27,961	28,095

See accompanying notes to consolidated financial statements.

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LEVEL 3 PARENT, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Six Months Ended June 30,
2021 2020
(Dollars in millions)
OPERATING ACTIVITIES
Net income $ 298 289
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 873 821
Deferred income taxes 92 88
Changes in current assets and liabilities:
Accounts receivable (26) (149)
Accounts payable (9) 5
Other assets and liabilities, net (74) (82)
Other assets and liabilities, affiliate (499) 194
Changes in other noncurrent assets and liabilities, net 13 25
Other, net (35) (34)
Net cash provided by operating activities 633 1,157
INVESTING ACTIVITIES
Capital expenditures (591) (726)
Collections on note receivable - affiliate 0 122
Proceeds from sale of property, plant and equipment and other assets 52 80
Net cash used in investing activities (539) (524)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt 891 1,188
Distributions (25) (675)
Payments of long-term debt (925) (5)
Other (1) (2)
Net cash (used in) provided by financing activities (60) 506
Net increase in cash, cash equivalents and restricted cash 34 1,139
Cash, cash equivalents and restricted cash at beginning of period 205 338
Cash, cash equivalents and restricted cash at end of period $ 239 1,477
Supplemental cash flow information:
Income taxes paid, net $ (16) (12)
Interest paid (net of capitalized interest of $8 and $13) $ (190) (199)
Cash, cash equivalents and restricted cash:
Cash and cash equivalents $ 233 1,462
Restricted cash included in Other current assets 2 3
Restricted cash included in Other, net noncurrent assets 4 12
Total $ 239 1,477


	Six Months Ended June 30,
	2022		2021
	(Dollars in millions)
OPERATING ACTIVITIES
Net income	$	211	298
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	801		873
Deferred income taxes	54		92
Changes in current assets and liabilities:
Accounts receivable	33		(26)
Accounts payable	(29)		(9)
Other assets and liabilities, net	(113)		(74)
Other assets and liabilities, affiliate	85		(499)
Changes in other noncurrent assets and liabilities, net	64		13
Other, net	78		(35)
Net cash provided by operating activities	1,184		633
INVESTING ACTIVITIES
Capital expenditures	(554)		(591)
Proceeds from sale of property, plant and equipment and other assets	1		52
Net cash used in investing activities	(553)		(539)
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt	—		891
Distributions	(553)		(25)
Payments of long-term debt	(64)		(925)
Other	—		(1)
Net cash used in financing activities	(617)		(60)
Net increase in cash, cash equivalents and restricted cash	14		34
Cash, cash equivalents and restricted cash at beginning of period	191		205
Cash, cash equivalents and restricted cash at end of period	$	205	239
Supplemental cash flow information:
Income taxes paid, net	$	(23)	(16)
Interest paid (net of capitalized interest of $8 and $8)	$	(182)	(190)

Cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	154	233
Cash and cash equivalents included in assets held for sale	48		—
Restricted cash included in Other current assets	1		2
Restricted cash included in Other, net noncurrent assets	2		4
Total	$	205	239

See accompanying notes to consolidated financial statements.

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LEVEL 3 PARENT, LLC

CONSOLIDATED STATEMENTS OF MEMBER'S EQUITY

(UNAUDITED)

Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(Dollars in millions)
MEMBER'S EQUITY
Balance at beginning of period $ 13,290 13,524 13,139 13,724
Cumulative effect of adoption of ASU 2016-13, Measurement of Credit Losses, net of $2 tax
— — — (3)
Net income 147 176 298 289
Distributions (25) (400) (25) (718)
Other 0 1 0 9
Balance at end of period 13,412 13,301 13,412 13,301
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of period (322) (407) (234) (179)
Other comprehensive income (loss) 80 8 (8) (220)
Balance at end of period (242) (399) (242) (399)
TOTAL MEMBER'S EQUITY $ 13,170 12,902 13,170 12,902


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022		2021
	(Dollars in millions)
MEMBER'S EQUITY
Balance at beginning of period	$	13,264	13,290	13,360		13,139
Net income	97		147	211		298
Distributions	(343)		(25)	(553)		(25)
Balance at end of period	13,018		13,412	13,018		13,412
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of period	(282)		(322)	(351)		(234)
Other comprehensive (loss) income	(184)		80	(115)		(8)
Balance at end of period	(466)		(242)	(466)		(242)
TOTAL MEMBER'S EQUITY	$	12,552	13,170	$	12,552	13,170

See accompanying notes to consolidated financial statements.

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LEVEL 3 PARENT, LLC

Notes To Consolidated Financial Statements

(UNAUDITED)

Unless the context requires otherwise, references in this report to "Level 3," “we,” “us,” "its," the “Company” and “our”, refer to Level 3 Parent, LLC and its predecessor, Level 3 Communications, Inc. and their respective subsidiaries. References to "Lumen Technologies" or "Lumen" refer to our ultimate parent company, Lumen Technologies, Inc. and its consolidated subsidiaries.

(1) Background

General

We are an international facilities-based technology communications provider (that is, a provider that owns or leases a substantial portion of the property, plant and equipment necessary to provide our services) of a broad range of integrated communications services. We created our communications network by constructing our own assets and through a combination of purchasing other companies and purchasing or leasing facilities from others. We designed our network to provide communications services that employ and take advantage of rapidly improving underlying optical, Internet Protocol, computing and storage technologies.

Basis of Presentation

Our consolidated balance sheet as of December 31, ~~2020,~~2021, 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~~note 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 U.S. Securities and Exchange Commission ("SEC"). However, in our opinion, the disclosures made therein are adequate to make the information presented not misleading. We believe 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 six 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, ~~2020.~~2021.

The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries in which we have a controlling interest. Intercompany amounts and transactions with our consolidated subsidiaries have been eliminated. Transactions with our non-consolidated affiliates (Lumen Technologies and its other subsidiaries, referred to herein as affiliates) have not been eliminated. Due to exchange restrictions and other conditions, effective at the end of the third quarter of 2015 we deconsolidated our Venezuelan subsidiary and began accounting for our investment in our Venezuelan subsidiary using the cost method of accounting. The factors that led to our conclusions at the end of the third quarter of 2015 continued to exist through the second quarter of 2021.

We reclassified certain prior period amounts to conform to the current period presentation, including our revenue by product and service categories. See Note 3—Revenue Recognition for additional information. These changes had no impact on total operating revenue, total operating expenses or net income for any period.

Operating lease assets are included in other, net under goodwill and other assets on our consolidated balance sheets. Other, net included affiliate operating lease assets of ~~$248~~$418 million and ~~$83~~$294 million as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Additionally, current operating lease liabilities included the current portion of affiliate operating lease liabilities of ~~$60~~$112 million and ~~$31~~$82 million as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, and operating lease liabilities included the noncurrent portion of affiliate operating lease liabilities of ~~$194~~$317 million and ~~$65~~$224 million as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

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Segments

Our operations are integrated into and reported as part of Lumen Technologies. Lumen's chief operating decision maker ("CODM") is our CODM, but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the SEC. Consequently, we do not provide our discrete financial information to the CODM on a regular basis. As such, we have 1 reportable segment.

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Summary of Significant Accounting Policies

Refer to the significant accounting policies described in Note 1 — Background and Summary of Significant Accounting Policies to the consolidated financial statements and accompanying notes in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Recently Adopted Accounting Pronouncements

Government Assistance

On January 1, 2022, we adopted Accounting Standards Update ("ASU") 2021-10, "Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance” (“ASU 2020-10”). This ASU increases transparency in financial reporting by requiring business entities to disclose information about certain types of government assistance they receive. The ASU only impacts annual financial statement note disclosures. Therefore, the adoption of ASU 2021-10 did not have a material impact to our consolidated financial statements.

Leases

On January 1, 2022, we adopted ASU 2021-05, “Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments” (“ASU 2021-05”). This ASU (i) amends the lease classification requirements for lessors to align them with practice under ASC Topic 840, (ii) provides criteria for lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease; and (iii) provides guidance with respect to net investments by lessors under operating leases and other related topics. The adoption of ASU 2021-05 did not have a material impact to our consolidated financial statements.

Debt

On January 1, 2021, we adopted ASU 2020-09, "“Debt (Topic 470) Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762~~" ("~~” (“ASU ~~2020-09"~~2020-09”). This ASU amends and supersedes various SEC ~~paragraphs~~guidance to reflect SEC Release No. 33-10762, which includes amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees. The adoption of ASU 2020-09 did not have a material impact to our consolidated financial statements.

Investments

On January 1, 2021, we adopted ASU 2020-01, "“~~Investments -~~ Investments—Equity Securities (Topic 321), ~~Investments -~~ Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) ~~- Clarifying the Interactions between Topic 321, Topic 323, and Topic 815)~~"” ("ASU ~~2020-01"~~2020-01”). This ASU, among other things, clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments - Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. As of June 30, ~~2021,~~2022, we determined there was no application or discontinuation of the equity method during the reporting ~~periods.~~periods covered by this report. The adoption of ASU 2020-01 did not have ana material impact to our consolidated financial statements.

Income ~~taxes~~Taxes

On January 1, 2021, we adopted ASU 2019-12, "“Income Taxes (Topic 740): Simplifying the Accounting for Income ~~Taxes (Topic 740)~~Taxes”~~" ("~~ (“ASU ~~2019-12"~~2019-12”)~~. This~~.This ASU removes certain exceptions for investments, intra-period allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. The adoption of ASU 2019-12 did not have a material impact to our consolidated financial statements.

~~Measurement of Credit Losses on Financial Instruments~~Recently Issued Accounting Pronouncements

~~We adopted~~In March 2022, the Financial Accounting Standards Board ("FASB") issued ASU ~~2016-13, "~~2022-02, “~~Measurement~~Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings (“TDR”) and Vintage Disclosures” (“ASU 2022-02”). These amendments eliminate the TDR recognition and measurement guidance, enhance existing disclosure requirements and introduce new requirements related to certain modifications of ~~Credit Losses on Financial Instruments" ("~~receivables made to borrowers experiencing financial difficulty. ASU ~~2016-13") on January 1, 2020~~2020-02 will become effective for us in the first quarter of fiscal 2023 and ~~recognized a cumulative adjustment~~early adoption is permitted. As of June 30, 2022, we do not expect ASU 2022-02 to have an impact to our ~~accumulated deficit as of the date of adoption of $3 million, net of tax effect of $2 million. Please refer to Note 4—Credit Losses on Financial Instruments for more information.~~

consolidated financial statements.

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~~Recently Issued Accounting Pronouncements~~In March 2022, the FASB issued ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method” (ASU 2022-01). The ASU expands the current single-layer method to allow multiple hedged layers of a single closed portfolio under the method. ASU 2020-01 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of June 30, 2022, we do not expect ASU 2022-01 to have an impact to our consolidated financial statements.

In ~~March 2020,~~October 2021, the FASB issued ASU ~~2020-04,~~2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”), which requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. ASU 2021-08 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of June 30, 2022, we do not expect ASU 2021-08 to have an impact to our consolidated financial statements.

In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): ~~Facilitation of the Effects of Reference Rate Reform on Financial Reporting~~Scope"" ("ASU ~~2020-04" or "Reference Rate Reform"~~2021-01"), ~~designed to ease the burden of accounting~~which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications ~~related~~and hedge accounting apply to derivatives that are affected by the ~~global market-wide reference rate transition period. Subject to certain criteria,~~discounting transition. ASU ~~2020-04 provides qualifying entities~~2021-01 also amends the ~~option to apply~~ expedients and exceptions in Topic 848 to ~~contract modifications~~capture the incremental consequences of the scope clarification and ~~hedging accounting relationships made until December 31, 2022.~~to tailor the existing guidance to derivative instruments affected by the discounting transition. These amendments ~~are effective immediately and~~ may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. ASU ~~2020-04~~2021-01 provides ~~optional~~option guidance for a limited time to ease the potential burden in accounting for reference rate reform. Based on our review of our key material contracts through June 30, ~~2021,~~2022, we do not expect ASU ~~2020-04~~2021-01 to have ~~any~~a material impact ~~on the~~to our consolidated financial statements.

(2) Recently Completed Divestiture of the Latin American Business

On August 1, 2022, affiliates of Level 3 Parent, LLC, an indirect wholly-owned subsidiary of Lumen Technologies, Inc., closed the sale of Lumen's Latin American business pursuant to a definitive agreement dated July 25, 2021. See Note 11—Subsequent Events for additional information regarding this divestiture.

We do not believe this divestiture represents a strategic shift for Level 3. Therefore, the Latin American business does not meet the criteria to be classified as a discontinued operation. As a result, we continue to report our operating results for the Latin American business in our consolidated operating results through the disposal date. The pre-tax net income of the Latin American business is estimated to be as follows in the table below:


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021
	(Dollars in millions)
Pre-tax net income	$	95	47	178	75

As of June 30, 2022 in the accompanying consolidated balance sheets, the assets and liabilities of our Latin American business (the "disposal group") are classified as held for sale and are measured at the lower of (i) the carrying value of the disposal group and (ii) the fair value of the disposal group less costs to sell. Effective with the designation of the disposal group as held for sale on July 25, 2021, we suspended recording depreciation of property, plant and equipment and amortization of finite-lived intangible assets and right-of-use assets while these assets are classified as held for sale. We estimate that we would have recorded an additional $48 million and $97 million of depreciation, intangible amortization, and amortization of right-of use assets for the three and six months ended June 30, 2022, respectively if the Latin American business did not meet the held for sale criteria.

As a result of our evaluation of the recoverability of the carrying value of the assets and liabilities held for sale relative to the agreed upon sales price, adjusted for costs to sell, we did not record any estimated loss on disposal during the six months endedJune 30, 2022. We re-evaluate the recoverability of the disposal group each reporting period through the disposal date. For information on the August 1, 2022 disposal of the Latin American business, see Note 11—Subsequent Events.

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The principal components of the held for sale assets and liabilities as of the dates below are as follows:


	June 30, 2022		December 31, 2021
	(Dollars in millions)
Assets held for sale
Cash and cash equivalents	$	48	39
Accounts receivable, less allowance of $2 and $3	94		83
Other current assets	79		81
Property, plant and equipment, net accumulated depreciation of $431 and $434	1,714		1,591
Goodwill (1)	720		713
Customer relationships and other intangibles, net	130		126
Other non-current assets	80		75
Total assets held for sale	$	2,865	2,708

Liabilities held for sale
Accounts payable	$	110	101
Salaries and benefits	21		23
Income and other taxes	37		27
Current portion of deferred revenue	27		26
Other current liabilities	7		7
Deferred income taxes, net	149		129
Other non-current liabilities	128		122
Total liabilities held for sale	$	479	435

(1) The assignment of goodwill was based on the relative fair value of the disposal group and the portion of the remaining reporting unit.

(3) Goodwill, Customer Relationships and Other Intangible Assets

Goodwill, customer relationships and other intangible assets consisted of the following:

June 30, 2021 December 31, 2020
(Dollars in millions)
Goodwill $ 7,406 7,405
Customer relationships, less accumulated amortization of $2,599 and $2,246 $ 5,800 6,156
Capitalized software, less accumulated amortization of $292 and $256 393 401
Trade names, less accumulated amortization of $96 and $83 35 48
Total other intangible assets, net $ 6,228 6,605


	June 30, 2022		December 31, 2021
	(Dollars in millions)
Goodwill	$	6,627	6,666
Customer relationships, less accumulated amortization of $3,096 and $2,779	$	4,977	5,325
Capitalized software, less accumulated amortization of $368 and $349	401		378
Trade names, less accumulated amortization of $122 and $109	9		22
Total other intangible assets, net	$	5,387	5,725

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

We assess our goodwill for impairment annually, or under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be impairment. We are required to write down the value of goodwill only when our assessment determines the carrying value of equity of our reporting unit exceeds its fair value. Our annual impairment assessment date for goodwill is October 31, at which date we assess goodwill at our reporting unit. In reviewing the criteria for reporting units, we have determined that we are 1 reporting unit.

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The following table shows the rollforward of goodwill from December 31, ~~2020~~2021 through June 30, ~~2021:~~2022:


	(Dollars in millions)
As of December 31, ~~2020~~2021 (1)	$	~~7,405~~6,666
Effect of foreign currency exchange rate changes	1 (39)
As of June 30, ~~2021~~2022 (1)	$	~~7,406~~6,627

(1)Goodwill at June 30, ~~2021~~2022 and December 31, ~~2020~~2021 is net of accumulated impairment loss of ~~$3.7~~$3.6 billion.

Total amortization expense for finite-lived intangible assets for the three months ended June 30, 2022 and 2021 ~~and 2020~~ totaled ~~$216~~$186 million and ~~$208~~$216 million, respectively, and for the six months ended June 30, 2022 and 2021, ~~and 2020~~ totaled ~~$427~~$378 million and ~~$416~~$427 million, respectively. As of June 30, ~~2021,~~2022, the gross carrying amount of goodwill, customer relationships, capitalized software, indefinite-life and other intangible assets was ~~$16.6~~$15.6 billion.

~~Table of Contents~~

We estimate that total amortization expense for intangible assets for the years ending December 31, ~~2021~~2022 through ~~2025~~2026 will be as ~~follows:~~provided in the table below. As a result of reclassifying our Latin American business as being held for sale on our June 30, 2022 consolidated balance sheet, the amounts presented below do not include the future amortization of the intangible assets for the business to be divested. See Note 2—Recently Completed Divestiture of the Latin American Business for more information.


		(Dollars in millions)			(Dollars in millions)
2021 (remaining six months)		$	421
2022		784
2022 (remaining six months)				2022 (remaining six months)	$	367
2023	2023	756		2023	716
2024	2024	745		2024	712
2025	2025	681		2025	687
2026				2026	643

~~(3)~~(4) Revenue Recognition

~~Beginning in the first quarter of 2021, we~~We categorize our products and services and related revenue among the following 5 categories:

•Compute and Application Services, which include our Edge Cloud services, IT solutions, Unified Communications and Collaboration ("UC&C"), data center, content delivery network ("CDN") and ~~Managed Security~~managed security services;

•IP and Data Services, which include Ethernet, IP, and VPN data networks, including software-defined wide area networks ("SD WAN") based services, Dynamic Connections and Hyper WAN;

•Fiber Infrastructure Services, which include dark fiber, optical services and equipment;

•Voice and Other, which include Time Division Multiplexing ("TDM") voice, private line and other legacy services; and

•Affiliate Services, which include communications services provided to our affiliates that we also provide to our external customers.

Disaggregated Revenue by Service Offering

The following ~~tables provide~~table provides disaggregation of revenue from contracts with customers based on service offering for the ~~three and~~ six months ended June 30, ~~2021~~2022 and ~~2020.~~2021. It also shows the amount of revenue that is not subject to ASC 606, "~~Revenue from Contracts with Customers" ("ASC 606"),~~ but is instead governed by other accounting standards:


		Three Months Ended June 30, 2021				Three Months Ended June 30, 2020				Three Months Ended June 30, 2022				Three Months Ended June 30, 2021
		Total Revenue		Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers	Total Revenue	Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers		Total Revenue		Adjustments for Non-ASC 606 Revenue(1)	Total Revenue from Contracts with Customers	Total Revenue	Adjustments for Non-ASC 606 Revenue(1)	Total Revenue from Contracts with Customers
		(Dollars in millions)								(Dollars in millions)
Compute and Application Services	Compute and Application Services	$	283	(127)	156	265	(122)	143	Compute and Application Services	$	283	(126)	157	283	(127)	156
IP and Data Services	IP and Data Services	888		0	888	880	0	880	IP and Data Services	883		—	883	888	—	888
Fiber Infrastructure Services	Fiber Infrastructure Services	401		(55)	346	368	(52)	316	Fiber Infrastructure Services	403		(57)	346	401	(55)	346
Voice and Other	Voice and Other	357		(3)	354	419	(2)	417	Voice and Other	327		(4)	323	357	(3)	354
Affiliate Services	Affiliate Services	56		(56)	0	52	(52)	0	Affiliate Services	57		(57)	—	56	(56)	—
Total revenue	Total revenue	$	1,985	(241)	1,744	1,984	(228)	1,756	Total revenue	$	1,953	(244)	1,709	1,985	(241)	1,744


		Six Months Ended June 30, 2021				Six Months Ended June 30, 2020				Six Months Ended June 30, 2022				Six Months Ended June 30, 2021
		Total Revenue		Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers	Total Revenue	Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers		Total Revenue		Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers	Total Revenue	Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers
		(Dollars in millions)								(Dollars in millions)
Compute and Application Services	Compute and Application Services	$	563	(254)	309	540	(247)	293	Compute and Application Services	$	560	(254)	306	563	(254)	309
IP and Data Services	IP and Data Services	1,769		0	1,769	1,761	0	1,761	IP and Data Services	1,769		—	1,769	1,769	—	1,769
Fiber Infrastructure Services	Fiber Infrastructure Services	798		(108)	690	737	(102)	635	Fiber Infrastructure Services	794		(111)	683	798	(108)	690
Voice and Other	Voice and Other	733		(5)	728	826	(4)	822	Voice and Other	663		(8)	655	733	(5)	728
Affiliate Services	Affiliate Services	111		(111)	0	100	(100)	0	Affiliate Services	113		(113)	—	111	(111)	—
Total revenue	Total revenue	$	3,974	(478)	3,496	3,964	(453)	3,511	Total revenue	$	3,899	(486)	3,413	3,974	(478)	3,496

(1) Includes lease revenue which is not within the scope of ASC 606.

Operating Lease Income

We lease various dark fiber, office facilities, colocation facilities, switching facilities, other network sites and service equipment to third parties under operating leases. Lease and sublease revenue are included in operating revenue in our consolidated statements of operations.

For the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, our gross rental income was ~~$202~~$203 million and ~~$192~~$202 million, ~~respectively,~~ which represents approximately 10% of our operating revenue for both ~~the three months ended June 30, 2021 and 2020.~~periods. For the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, our gross rental income was $406 million and $399 million, ~~and $368 million, respectively,~~ which represents approximately 10% ~~and 9%, respectively,~~ of our operating revenue for ~~the six months ended June 30, 2021 and 2020.~~both periods.

Customer Receivables and Contract Balances

The following table provides balances of customer receivables, contract assets and contract liabilities, net of amounts reclassified as held for sale as of June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:


		June 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
		(Dollars in millions)				(Dollars in millions)
Customer receivables (1)	Customer receivables (1)	$	704	683	Customer receivables (1)	$	577	640
Contract assets(2)	Contract assets(2)	32		38	Contract assets(2)	33		35
Contract liabilities(3)	Contract liabilities(3)	325		385	Contract liabilities(3)	254		247

(1)Reflects gross customer receivables of ~~$746~~$614 million and ~~$728~~$679 million, net of allowance for credit losses of ~~$42~~$37 million and ~~$45~~$39 million, at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. As of June 30, 2022 and December 31, 2021, these amounts exclude customer receivables reclassified as held for sale of $94 million and $83 million respectively.

(2)As of June 30, 2022 and December 31, 2021, no amounts have been reclassified as held for sale.

(3)As of June 30, 2022 and December 31, 2021, amounts exclude contract liabilities reclassified as held for sale of $59 million and $58 million respectively.

Contract liabilities are consideration we have received from our customers or billed in advance of providing the goods or services promised in the future. We defer recognizing this consideration 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 typically ranges from one to five years depending on the service. Contract liabilities are included within deferred revenue and liabilities held for sale in our consolidated balance sheets. During the three and six months ended June 30, 2022, we recognized $23 million and $108 million, respectively, of revenue that was included in contract liabilities of $305 million as of January 1, 2022, including contract liabilities that were classified as held for sale. During the three and six months ended June 30, 2021, we recognized $28 million and $121 million, respectively, of revenue that was included in contract liabilities of $385 million as of January 1, 2021. ~~During the three and six months ended June 30, 2020, we recognized $30 million and $129 million, respectively, of revenue that was included in contract liabilities as of January 1, 2020.~~

Performance Obligations

As of June 30, ~~2021, our estimated~~2022, we expect to recognize approximately $3.7 billion of revenue ~~expected to be recognized~~ in the future related to performance obligations associated with existing customer contracts that are partially or wholly ~~unsatisfied is approximately $3.8 billion.~~unsatisfied. We expect to recognize approximately ~~88%~~84% of this revenue through ~~2023,~~2024, with the balance recognized thereafter.

These amounts exclude (i) the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), ~~and~~ (ii) contracts that are classified as leasing arrangements that are not subject to ASC ~~606.~~606 and (iii) the value of unsatisfied performance obligations for contracts which relate to our recently completed divestiture.

Contract Costs

The following ~~tables provide~~table provides changes in our contract acquisition costs and fulfillment costs:


		Three Months Ended June 30,
		2021			2020			Three Months Ended June 30, 2022			Three Months Ended June 30, 2021
		(Dollars in millions)						Acquisition Costs		Fulfillment Costs (1)	Acquisition Costs	Fulfillment Costs
		Acquisition Costs		Fulfillment Costs	Acquisition Costs	Fulfillment Costs		(Dollars in millions)
Beginning of period balance	Beginning of period balance	$	75	123	86	122	Beginning of period balance	$	77	100	75	123
Costs incurred	Costs incurred	15		23	7	21	Costs incurred	14		22	15	23
Amortization	Amortization	(15)		(22)	(16)	(21)	Amortization	(13)		(20)	(15)	(22)
Change in contract costs held for sale (1)							Change in contract costs held for sale (1)	—		(1)	—	—
End of period balance	End of period balance	$	75	124	77	122	End of period balance	$	78	101	75	124


		Six Months Ended June 30,
		2021			2020			Six Months Ended June 30, 2022			Six Months Ended June 30, 2021
		(Dollars in millions)						Acquisition Costs		Fulfillment Costs (1)	Acquisition Costs	Fulfillment Costs
		Acquisition Costs		Fulfillment Costs	Acquisition Costs	Fulfillment Costs		(Dollars in millions)
Beginning of period balance	Beginning of period balance	$	78	122	79	121	Beginning of period balance	$	76	99	78	122
Costs incurred	Costs incurred	29		46	30	44	Costs incurred	29		43	29	46
Amortization	Amortization	(32)		(44)	(32)	(43)	Amortization	(27)		(40)	(32)	(44)
Change in contract costs held for sale (1)							Change in contract costs held for sale (1)	—		(1)	—	—
End of period balance	End of period balance	$	75	124	77	122	End of period balance	$	78	101	75	124

(1)The beginning balance for both the three and six months ended June 30, 2022 excluded fulfillment costs reclassified as held for sale of $27 million, respectively. The ending balance for June 30, 2022 excluded fulfillment costs reclassified as held for sale of $28 million.

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 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 expected ~~customer~~contract life of approximately 3034 months for our business customers. Amortized fulfillment costs are included in cost of services and products, and amortized acquisition costs are included in selling, general and administrative expenses in our consolidated statements of operations. The amount of these deferred costs that are anticipated to be amortized in the next 12 months are included in other current assets on our consolidated balance sheets. The amount of deferred costs expected to be amortized beyond 12 months is included in other non-current assets on our consolidated balance sheets. Deferred acquisition and fulfillment costs are assessed for impairment on an annual basis.

1618

~~(4)~~(5) Credit Losses on Financial Instruments

In accordance with ASC 326, "Financial Instruments - Credit Losses," we aggregate financial assets with similar risk characteristics to align our expected credit losses with the credit quality or deterioration over the life of such assets. We periodically monitor certain risk characteristics within our aggregated financial assets and revise their composition accordingly, to the extent internal and external risk factors ~~change each reporting period. Financial~~change. We separately evaluate financial assets that do not share risk characteristics with other financial ~~assets are evaluated separately.~~assets. Our financial assets measured at amortized cost primarily consist of accounts receivable.

We use a loss rate method to estimate our allowance for credit losses. Our determination of the current expected credit loss rate begins with our ~~use~~review of historical loss experience as a percentage of accounts receivable. We measure our historical loss period based on the average days to recognize accounts receivable as credit losses. When asset specific characteristics and current conditions change from those in the historical period, due to changes in our credit and collections strategy, certain classes of aged balances, or credit loss and recovery policies, we perform a qualitative and quantitative assessment to adjust our historical loss rate. We use regression analysis to develop an expected loss rate using historical experience and economic data over a forecast period. We measure our forecast period based on the average days to collect payment on billed accounts receivable. To determine our current allowance for credit losses, we combine the historical and expected credit loss rates and apply them to our period end accounts receivable.

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

The assessment of the correlation between historical observed default rates, current conditions and forecasted economic conditions requires judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding the allowance for credit losses. The amount of credit loss is sensitive to changes in circumstances and forecasted economic conditions. Our historical credit loss experience, current conditions and forecast of economic conditions may also not be representative of the customers' actual default experience in the ~~future.~~future and we may use methodologies that differ from those used by other companies.

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


	(Dollars in millions)
Beginning balance at December 31, ~~2020~~2021	$	4539
Provision for expected losses	47
Write-offs charged against the allowance	~~(10)~~(12)
Recoveries collected	32
Change in allowance in assets held for sale (1)	1
Ending balance at June 30, ~~2021~~2022	$	4237

(1)

As of June 30, 2022 and December 31, 2021, amount excludes allowance for credit losses classified as held for sale of $2 million and $3 million, respectively. See Note 2—Recently Completed Divestiture of the Latin American Business.

1719

~~(5)~~(6) Long-Term Debt

The following chart reflects our consolidated long-term debt, including finance leases and other obligations, unamortized discounts and premiums, net and unamortized debt issuance costs, but excluding intercompany debt:


		Interest Rates (1)	Maturities (1)	June 30, 2021		December 31, 2020		Interest Rates (1)	Maturities (1)	June 30, 2022		December 31, 2021
				(Dollars in millions)						(Dollars in millions)
Level 3 Financing, Inc.	Level 3 Financing, Inc.						Level 3 Financing, Inc.
Senior Secured Debt: (2)	Senior Secured Debt: (2)						Senior Secured Debt: (2)
Senior notes	Senior notes	3.400% - 3.875%	2027 - 2029	$	1,500	1,500	Senior notes	3.400% - 3.875%	2027 - 2029	$	1,500	1,500
Tranche B 2027 Term Loan (3) (5)		LIBOR + 1.75%	2027	3,111		3,111
Tranche B 2027 Term Loan (3)							Tranche B 2027 Term Loan (3)	LIBOR + 1.75%	2027	3,111		3,111
Senior Notes and other debt:	Senior Notes and other debt:						Senior Notes and other debt:
Senior notes (4)	Senior notes (4)	3.625% - 5.375%	2025 - 2029	5,515		5,515	Senior notes (4)	3.625% - 5.375%	2025 - 2029	5,515		5,515
Finance leases		Various	Various	250		255
Finance leases and other obligations							Finance leases and other obligations	Various	Various	308		319
Unamortized premiums, net	Unamortized premiums, net			38		60	Unamortized premiums, net			30		34
Unamortized debt issuance costs	Unamortized debt issuance costs			(61)		(54)	Unamortized debt issuance costs			(53)		(57)
Total long-term debt	Total long-term debt			10,353		10,387	Total long-term debt			10,411		10,422
Less current maturities	Less current maturities			(17)		(14)	Less current maturities			(28)		(26)
Long-term debt, excluding current maturities	Long-term debt, excluding current maturities			$	10,336	10,373	Long-term debt, excluding current maturities			$	10,383	10,396

(1)As of June 30, ~~2021.~~2022.

(2)See Note 6—7—Long-Term Debt in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 for a description of certain parent or subsidiary guarantees and liens securing this debt.

(3)The Tranche B 2027 Term Loan had an interest rate of 3.416% and 1.854% atas of June 30, ~~2021~~2022 and ~~1.897% at~~ December 31, ~~2020.~~2021, respectively.

(4)This debt is fully and unconditionally guaranteed by certain affiliates of Level 3 Financing, Inc., including Level 3 Parent, LLC and Level 3 Communications, LLC.

~~(5)See Note 1— Background for our considerations of the impact of Reference Rate Reform on our debt subject to rate reference changes from LIBOR.~~

~~New Issuances~~

On January 13, 2021, Level 3 Financing, Inc. issued $900 million aggregate principal amounts of its 3.750% Sustainability-Linked Senior Notes due 2029 (the "Sustainability-Linked Notes"). The net proceeds were used, together with cash on hand, to redeem certain of its outstanding senior note indebtedness. See "—Redemption of Senior Notes" below. The Sustainability-Linked Notes are guaranteed by Level 3 Parent, LLC and Level 3 Communications, LLC.

~~Redemption of Senior Notes~~

On February 12, 2021, Level 3 Financing, Inc. redeemed all $900 million aggregate principal amount of its outstanding 5.375% Senior Notes due 2024. This transaction resulted in a gain of $16 million.

Long-Term Debt Maturities

Set forth below is the aggregate principal amount of our long-term debt as of June 30, ~~2021~~2022 (excluding unamortized premiums, net, ~~and~~ unamortized debt issuance ~~costs)~~costs, and intercompany debt), maturing during the following years:

(Dollars in millions)
2021 (remaining six months) $ 11
2022 13
2023 15
2024 16
2025 817
2026 and thereafter 9,504
Total long-term debt $ 10,376


	(Dollars in millions)
2022 (remaining six months)	$	17
2023	27
2024	32
2025	838
2026	811
2027 and thereafter	8,709
Total long-term debt	$	10,434

Covenants

The term loan and senior notes of Level 3 Financing, Inc. contain extensive affirmative and negative covenants. Such covenants include, among other things and subject to certain significant exceptions, restrictions on their ability to declare or pay dividends, repay certain other indebtedness, create liens, incur additional indebtedness, make investments, engage in transactions with their affiliates including Lumen Technologies and its other subsidiaries, dispose of assets and merge or consolidate with any other person. Also, in connection with a "change of control" of Level 3 Parent, LLC, or Level 3 Financing, Inc., Level 3 Financing will be required to offer to repurchase or repay certain of its long-term debt at a price of 101% of the principal amount of debt repurchased or repaid, plus accrued and unpaid interest.

Certain of Lumen's and our debt instruments contain ~~cross-payment default or~~ cross-acceleration provisions.

Compliance

As of June 30, ~~2021,~~2022, we believe we were in compliance with the provisions and financial covenants contained in our debt agreements in all material respects.

~~(6)~~(7) Fair Value of Financial Instruments

Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, note receivable-affiliate and long-term debt, excluding finance ~~lease~~leases and other obligations. Due to their short-term nature, the carrying amounts of our cash and cash equivalents, restricted cash, accounts receivable, note receivable-affiliate and accounts payable approximate their fair values.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy.

~~Table~~We determined the fair values of ~~Contents~~our long-term debt, including the current portion, based primarily on inputs other than quoted market prices in active markets that are either directly or indirectly observable such as discounted future cash flows using current market interest rates.

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


Input Level						Description of Input
Level 1						Observable inputs such as quoted market prices in active markets.
Level 2						Inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3						Unobservable inputs in which little or no market data exists.

The following table presents the carrying amounts and estimated fair values of our ~~long-term debt, excluding finance leases,~~financial liabilities as of June 30, 2022 and December 31, 2021, as well as the input level used to determine the fair values indicated below:

June 30, 2021 December 31, 2020
Input Level Carrying Amount Fair Value Carrying Amount Fair Value
(Dollars in millions)
Liabilities-Long-term debt, excluding finance leases 2 $ 10,103 10,217 10,132 10,340


		June 30, 2022			December 31, 2021
	Input Level	Carrying Amount		Fair Value	Carrying Amount	Fair Value
		(Dollars in millions)
Liabilities-Long-term debt, excluding finance leases	2	$	10,103	8,867	10,103	10,090

~~(7)~~

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(8) Commitments, Contingencies and Other Items

We are subject to various claims, legal proceedings and other contingent liabilities, including the matters described below, which individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. As a matter of course, we are prepared to both litigate these matters to judgment as needed, as well as to evaluate and consider reasonable settlement opportunities.

Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and could cause significant expenditure and diversion of management attention. We review our litigation accrual liabilities on a quarterly basis, but in accordance with applicable accounting guidelines only establish accrual liabilities when losses are deemed probable and reasonably estimable and only revise ~~previously-established~~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 June 30, ~~2021~~2022 aggregated to approximately ~~$46~~$44 million and are included in other current liabilities, ~~and~~ other liabilities, or liabilities held for sale 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.

Telephone Consumer Protection Act Litigation

In December 2020, Lumen was named as a defendant in Diana Mey v. CenturyLink Communications, LLC, et al., an action pending in the US District Court for the Northern District of West Virginia alleging violations of the Telephone Consumer Protection Act for delivering unsolicited calls to her mobile phone. She asserts claims on behalf of herself and a putative class of similarly situated persons. The complaint seeks damages, statutory awards, costs and fees, and other relief. We are defending the claims asserted.

Peruvian Tax Litigation

In 2005, the Peruvian tax authorities ("SUNAT") issued tax assessments against 1 of our Peruvian subsidiaries asserting $26 million of additional income tax withholding and value-added taxes ("VAT"), penalties and interest for calendar years 2001 and 2002 on the basis that the Peruvian subsidiary incorrectly documented its importations. In May 2021, the Company paid the remaining amount on the fractioning regimes entered into by the Company to pay the amount assessed while it was appealed.

We challenged the assessments via administrative and then judicial review processes. In October 2011, the highest administrative review tribunal (the Tribunal) decided the central issue underlying the 2002 assessments in SUNAT's favor. We appealed the Tribunal's decision to the first judicial level, which decided the central issue in favor of Level 3. SUNAT and ~~the Company~~we filed cross-appeals with the court of appeal. In May 2017, the court of appeal issued a decision reversing the first judicial level. In June 2017, we filed an appeal of the decision to the Supreme Court of Justice, the final judicial level. Oral argument was held before the Supreme Court of Justice in October 2018. A decision on this case is pending.

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In October 2013, the Tribunal decided the central issue underlying the 2001 assessments in SUNAT’s favor. We appealed that decision to the first judicial level in Peru, which decided the central issue in favor of SUNAT. In June 2017, we filed an appeal with the court of ~~appeal.~~appeals. In November 2017, the court of appeals issued a decision affirming the first judicial level and we filed an appeal of ~~the~~that decision to the Supreme Court of Justice. ~~Oral argument was held before~~In May 2021, the Supreme Court of Justice issued its final decision in favor of the Company. The Company provided additional information to SUNAT regarding 2001 tax payments and, in June ~~2019. In May 2021,~~2022, SUNAT notified the Company ~~was served with a favorable and final~~of its decision ~~from~~regarding the ~~Supreme Court of Justice.~~2001 refund amount. In July 2022, the Company appealed that decision to the Tax Court. The appeal is pending.

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Brazilian Tax Claims

The São Paulo and Rio de Janeiro state tax authorities have issued tax assessments against our Brazilian subsidiaries for the Tax on Distribution of Goods and Services (“ICMS”), mainly with respect to revenue from leasing certain assets and revenue from the provision of Internet access services by treating such activities as the provision of communications services, to which the ICMS tax applies. We filed objections to these assessments in both states, arguing, among other things that neither the lease of assets nor the provision of Internet access qualifies as “communication services” subject to ICMS.

We have appealed to the respective state judicial courts the decisions by the respective state administrative courts that rejected our objections to these assessments. In cases in which state lower courts ruled partially in our favor finding that the lease assets are not subject to ICMS, ~~in connection,~~ the State appealed those rulings. In other cases, the assessment was affirmed at the first administrative level and we have appealed to the second administrative level. Other assessments are still pending state judicial decisions.

We are vigorously contesting all such assessments in both states and view the assessment of ICMS on revenue from equipment leasing and Internet access to be without merit. ~~These~~We believe these assessments, if upheld, could result in a loss of up to ~~$53~~$51 million as of June 30, ~~2021,~~2022, in excess of the reserved accruals established for these matters.

~~Qui Tam Action~~

We were notified in late 2017 of a qui tam action pending against Level 3 Communications, Inc. and others in the U.S. District Court for the Eastern District of Virginia, captioned United States of America ex rel., Stephen Bishop v. Level 3 Communications, Inc. et al. The original qui tam complaint and an amended complaint were filed under seal on November 26, 2013 and June 16, 2014, respectively. The court unsealed the complaints on October 26, 2017.

The amended complaint alleged that we, principally through 2 former employees, submitted false claims and made false statements to the government in connection with 2 government contracts. The relator sought damages in this lawsuit of approximately $50 million. The case was settled in the second quarter of 2021 for an immaterial amount.

Other Proceedings, Disputes and Contingencies

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

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 1 or more may go to trial ~~during 2021~~within the next twelve months if they are not otherwise resolved. Where applicable, we are seeking full or partial indemnification from our vendors and suppliers. As with all litigation, we are vigorously defending these actions and, as a matter of course, are prepared to litigate these matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities.

We are subject to various foreign, 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 $300,000 in fines and penalties.

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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 16—Commitments, Contingencies and Other Items to the consolidated financial statements included in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. 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)~~

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(9) Accumulated Other Comprehensive Loss

The table below summarizes changes in accumulated other comprehensive loss recorded on our consolidated balance sheets by component for the six months ended June 30, ~~2021:~~2022:


		Pension Plans		Foreign Currency Translation Adjustment and Other	Total		Pension Plans		Foreign Currency Translation Adjustment and Other	Total
		(Dollars in millions)					(Dollars in millions)
Balance at December 31, 2020		$	(13)	(221)	(234)
Balance at December 31, 2021						Balance at December 31, 2021	$	3	(354)	(351)
Other comprehensive loss, net of tax	Other comprehensive loss, net of tax	0		(8)	(8)	Other comprehensive loss, net of tax	—		(115)	(115)
Net other comprehensive loss	Net other comprehensive loss	0		(8)	(8)	Net other comprehensive loss	—		(115)	(115)
Balance at June 30, 2021		$	(13)	(229)	(242)
Balance at June 30, 2022						Balance at June 30, 2022	$	3	(469)	(466)

The table below summarizes changes in accumulated other comprehensive loss recorded on our consolidated balance sheets by component for the six months ended June 30, ~~2020:~~2021:

Pension Plans Foreign Currency Translation Adjustment and Other Total
(Dollars in millions)
Balance at December 31, 2019 $ 2 (181) (179)
Other comprehensive loss, net of tax 0 (220) (220)
Net other comprehensive loss 0 (220) (220)
Balance at June 30, 2020 $ 2 (401) (399)

~~During the three and six month periods ended June 30, 2021 and 2020, there were no reclassifications out of accumulated other comprehensive income (loss) in our statements of operations.~~


	Pension Plans		Foreign Currency Translation Adjustment and Other	Total
	(Dollars in millions)
Balance at December 31, 2020	$	(13)	(221)	(234)
Other comprehensive loss, net of tax	—		(8)	(8)
Net other comprehensive loss	—		(8)	(8)
Balance at June 30, 2021	$	(13)	(229)	(242)

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~~(9)~~(10) Other Financial Information

Other Current Assets

The following table presents details of other current assets reflected in our consolidated balance sheets:


		June 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
		(Dollars in millions)				(Dollars in millions)
Prepaid expenses	Prepaid expenses	$	133	106	Prepaid expenses	$	132	109
Contract fulfillment costs	Contract fulfillment costs	61		63	Contract fulfillment costs	49		48
Contract acquisition costs	Contract acquisition costs	44		47	Contract acquisition costs	46		45
Contract assets	Contract assets	28		34	Contract assets	26		28
Other	Other	56		47	Other	10		9
Total other current assets	Total other current assets	$	322	297	Total other current assets	$	263	239

_______________________________________________________________________________

(1)As of June 30, 2022 and December 31, 2021, other current assets excludes $79 million and $81 million respectively, that have been reclassified as held for sale.

~~(10)~~

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(11) Subsequent ~~Event~~Events

Divestiture of the Latin American Business

On ~~July 25, 2021, affiliates~~August 1, 2022, we completed the sale of ~~Level 3 Parent, LLC entered into a definitive agreement to divest~~ our Latin American business to an affiliate of a fund advised by Stonepeak Partners LP in exchange for ~~$2.735~~cash proceeds of approximately $2.7 billion ~~cash,~~ subject to certain ~~working capital and other purchase price~~post-closing adjustments. We expect to ~~close~~recognize a gain on the transaction in operating income during the ~~first half~~third quarter of ~~2022, upon receipt~~2022. In connection with the sale, Lumen has entered into a transition services agreement under which it will provide to the purchaser various support services and certain long-term agreements under which Lumen and the purchaser will provide to each other various network and other commercial services.

Distributions to Parent

As of ~~all requisite regulatory approvals~~the date of this report, $75 million of distributions were made to our parent in the ~~U.S.~~third quarter of 2022.

Tender Offer and Consent Solicitation

On July 25, 2022, Lumen initiated a tender offer to repurchase (i) any and all of $1.575 billion aggregate principal amount of certain ~~countries where~~of our outstanding Level 3 Financing, Inc. senior notes and (ii) certain other Lumen Technologies, Inc. and affiliated subsidiary senior notes, subject to certain repurchase caps and sublimits and various other terms and conditions. This offer, which was made pursuant to an Offer to Purchase and Consent Solicitation Statement dated July 25, 2022, has an early tender date of August 5, 2022, and will expire on August 19, 2022, unless extended. In addition, we announced a consent solicitation to eliminate substantially all of the ~~Latin American business operates, as well as~~restrictive covenants, eliminate certain events of default, and modify certain redemption notice requirements contained in the ~~satisfaction~~respective indentures for Level 3 senior notes subject to the tender offer.

Debt Repayment

On August 3, 2022, we repaid approximately $700 million aggregate principal amount of other customary conditions. We have not yet determined the final pre-tax gain or loss on the transaction as a result of various allocations which will be required in connection with consummating the transaction and related restructuring transactions. The purchase agreement contains various customary covenants for transactions of this type, including various indemnities.our Tranche B 2027 Term Loan.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” "its," the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries. References to "Lumen Technologies" or "Lumen" refer to our ultimate parent company, Lumen Technologies, Inc. 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" referenced in Item 1A of Part II of this report or other of our filings with the SEC 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, ~~2020,~~2021, and with the consolidated financial statements and related notes in Item 1 of Part I of this report. The results of operations and cash flows for the first six months of the year are not necessarily indicative of the results of operations and cash flows that might be expected for the entire year.

We are an international facilities-based technology and communications company engaged in providing a broad array of integrated communication services to our business customers. We created our communications network by constructing our own assets and through a combination of purchasing other companies and purchasing or leasing facilities from others. We designed our network to provide communications services that employ and take advantage of rapidly improving underlying optical, Internet Protocol, computing and storage technologies.

On ~~July 25, 2021,~~August 1, 2022, affiliates of Level 3 Parent, LLC ~~entered into a definitive agreement to divest~~sold our Latin American business to an affiliate of a fund advised by Stonepeak Partners LP in exchange for ~~$2.735~~cash proceeds of approximately $2.7 billion, ~~cash,~~ subject to certain ~~working capital and other purchase price~~post-closing adjustments. ~~For more information, see (i)~~See Note ~~10—~~11—Subsequent ~~Event to our consolidated financial statements in Item 1 of Part I of this report and (ii) the risk factors included in Item 1A of Part II of this report.~~Events for additional details.

Impact of COVID-19 Pandemic

As previously ~~outlined~~described in greater detail in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, in response to the safety and economic challenges arising out of the COVID-19 pandemic and in a continued attempt to mitigate the negative impact on our stakeholders, we have taken a variety of steps to ensure the availability of our network infrastructure, to promote the safety of our employees and customers, to enable us to continue to adapt and provide our products and services worldwide to our customers, and to strengthen our communities. We expect to continue revising our responses to the pandemic or take additional steps necessary to adjust to changed circumstances.

AsSocial distancing, business and school closures, travel restrictions, and other actions taken in response to the pandemic have impacted us, our customers and our business since March 2020. Additionally, as discussed in further detail in our prior reports, the pandemic resulted in (i) increases in certain revenue streams and decreases in others, (ii) increases in ~~allowances for credit losses through the end~~overtime expenses, (iii) operational challenges resulting from shortages of ~~2020, (iii) increases~~certain components and other supplies that we use in ~~overtime expenses,~~our business, and (iv) delays in our cost transformation ~~initiatives and (v) an acceleration~~initiatives. We also experienced delayed decision-making by certain of our ~~real estate rationalization efforts and the incurrence of related costs. These~~customers during 2021. Thus far, these changes ~~did~~have not materially ~~impact~~impacted our financial performance or financial ~~position during 2020,~~position. However, we continue to monitor global disruptions and ~~barring any substantial deterioration in prevailing health or economic conditions, are not expected~~work with our vendors to ~~materially impact us during 2021.~~mitigate supply chain risks.

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

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Products, Services and Revenue

~~Beginning in the first quarter of 2021, we~~We categorize our products and services and related revenue among the following ~~five~~ categories:

•IP and Data Services, which include Ethernet, IP, and VPN data networks, including software-defined wide area networks ("SD WAN") based services, Dynamic Connections and Hyper WAN;

•Fiber Infrastructure Services, which include dark fiber, optical services and equipment;

•Voice and Other, which include Time Division Multiplexing ("TDM") voice, private line and other legacy services; and

•Affiliate Services, which include communications services provided to our affiliates that we also provide to our external customers.

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

Results of Operations

The following table summarizes the results of our consolidated operations for the three and six months ended June 30, ~~2021~~2022 and June 30, ~~2020:~~2021:


		Three Months Ended June 30,			Six Months Ended June 30,			Three Months Ended June 30,			Six Months Ended June 30,
		2021		2020	2021	2020		2022		2021	2022	2021
		(Dollars in millions)						(Dollars in millions)
Operating revenue	Operating revenue	$	1,985	1,984	3,974	3,964	Operating revenue	$	1,953	1,985	3,899	3,974
Operating expenses	Operating expenses	1,708		1,687	3,424	3,382	Operating expenses	1,721		1,708	3,428	3,424
Operating income	Operating income	277		297	550	582	Operating income	232		277	471	550
Other expense, net	Other expense, net	(68)		(61)	(139)	(188)	Other expense, net	(94)		(68)	(175)	(139)
Income before income taxes	Income before income taxes	209		236	411	394	Income before income taxes	138		209	296	411
Income tax expense	Income tax expense	62		60	113	105	Income tax expense	41		62	85	113
Net income	Net income	$	147	176	298	289	Net income	$	97	147	211	298

For a discussion of certain trends that impact our business, see the MD&A discussion of trends impacting Lumen’s non-mass markets business included in Lumen’s reports filed with the SEC, including its Quarterly Report on Form 10-Q for the quarterly period ended June 30, ~~2021.~~2022.

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Operating Revenue

The following ~~tables summarize~~table summarizes our consolidated operating revenue recorded under our ~~five above-described~~ revenue ~~categories:~~categories described above:


		Three Months Ended June 30,						Three Months Ended June 30,
		2021		2020	% Change			2022		2021	% Change
		(Dollars in millions)						(Dollars in millions)
Compute and Application Services	Compute and Application Services	$	283	265	7	%	Compute and Application Services	$	283	283	—	%
IP and Data Services	IP and Data Services	888		880	1	%	IP and Data Services	883		888	(1)	%
Fiber Infrastructure Services	Fiber Infrastructure Services	401		368	9	%	Fiber Infrastructure Services	403		401	—	%
Voice and Other	Voice and Other	357		419	(15)	%	Voice and Other	327		357	(8)	%
Affiliate Services	Affiliate Services	56		52	8	%	Affiliate Services	57		56	2	%
Total operating revenue	Total operating revenue	$	1,985	1,984	—	%	Total operating revenue	$	1,953	1,985	(2)	%


		Six Months Ended June 30,						Six Months Ended June 30,
		2021		2020	% Change			2022		2021	% Change
		(Dollars in millions)						(Dollars in millions)
Compute and Application Services	Compute and Application Services	$	563	540	4	%	Compute and Application Services	$	560	563	(1)	%
IP and Data Services	IP and Data Services	1,769		1,761	—	%	IP and Data Services	1,769		1,769	—	%
Fiber Infrastructure Services	Fiber Infrastructure Services	798		737	8	%	Fiber Infrastructure Services	794		798	(1)	%
Voice and Other	Voice and Other	733		826	(11)	%	Voice and Other	663		733	(10)	%
Affiliate Services	Affiliate Services	111		100	11	%	Affiliate Services	113		111	2	%
Total operating revenue	Total operating revenue	$	3,974	3,964	—	%	Total operating revenue	$	3,899	3,974	(2)	%

Our total operating revenue ~~increased~~decreased by $1$32 million and ~~$10~~$75 million, respectively, for the three and six months ended June 30, ~~2021,~~2022, as compared to the three and six months ended June 30, ~~2020~~2021 primarily due to ~~increases~~decreases in ~~IP, dark fiber~~IT Solutions, Ethernet services, VPN data networks, voice and ~~wavelength services,~~private line and ~~managed security,~~ready access revenue, which were partially offset ~~by declines~~growth in ~~voice~~IP, cloud services, wavelengths and ~~other, CDN services, VPN data network, and ethernet services.~~managed security revenue.

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Operating Expenses

The following ~~tables summarize~~table summarizes our consolidated operating expenses:


		Three Months Ended June 30,						Three Months Ended June 30,
		2021		2020	% Change			2022		2021	% Change
		(Dollars in millions)						(Dollars in millions)
Cost of services and products (exclusive of depreciation and amortization)	Cost of services and products (exclusive of depreciation and amortization)	$	868	890	(2)	%	Cost of services and products (exclusive of depreciation and amortization)	$	836	868	(4)	%
Selling, general and administrative	Selling, general and administrative	273		312	(13)	%	Selling, general and administrative	318		273	16	%
Operating expenses - affiliates	Operating expenses - affiliates	131		80	64	%	Operating expenses - affiliates	162		131	24	%
Depreciation and amortization	Depreciation and amortization	436		405	8	%	Depreciation and amortization	405		436	(7)	%
Total operating expenses	Total operating expenses	$	1,708	1,687	1	%	Total operating expenses	$	1,721	1,708	1	%


		Six Months Ended June 30,						Six Months Ended June 30,
		2021		2020	% Change			2022		2021	% Change
		(Dollars in millions)						(Dollars in millions)
Cost of services and products (exclusive of depreciation and amortization)	Cost of services and products (exclusive of depreciation and amortization)	$	1,746	1,766	(1)	%	Cost of services and products (exclusive of depreciation and amortization)	$	1,687	1,746	(3)	%
Selling, general and administrative	Selling, general and administrative	567		622	(9)	%	Selling, general and administrative	632		567	11	%
Operating expenses - affiliates	Operating expenses - affiliates	238		173	38	%	Operating expenses - affiliates	308		238	29	%
Depreciation and amortization	Depreciation and amortization	873		821	6	%	Depreciation and amortization	801		873	(8)	%
Total operating expenses	Total operating expenses	$	3,424	3,382	1	%	Total operating expenses	$	3,428	3,424	—	%

Cost of Services and Products (Exclusive of depreciation and amortization)

Cost of services and products (exclusive of depreciation and amortization) decreased by ~~$22~~$32 million and ~~$20~~$59 million, respectively, for the three and six months ended June 30, ~~2021,~~2022, as compared to the three and six months ended June 30, ~~2020,~~2021, primarily due to ~~lower employee-related expenses resulting from lower headcount~~decreases in facility costs and lower ~~facility costs due to lower voice usage. These decreases were partially offset by higher customer premise equipment expenses~~real estate and ~~higher network expenses.~~power costs.

Selling, General and Administrative

Selling, general and administrative ~~decreased~~increased by ~~$39~~$45 million and ~~$55~~$65 million, respectively, for the three and six months ended June 30, ~~2021,~~2022, as compared to the three and six months ended June 30, ~~2020,~~2021 primarily due to ~~lower salary~~higher employee related expenses in both the three and employee-related benefits, insurance expenses, professional fees, marketing and advertising expenses and bad debt expenses. These decreases were partially offset by higher external commissions and property and other taxes.six months ended June 30, 2022 as well as a gain on sale of assets in the six months ended June 30, 2021.

Operating Expenses - Affiliates

Operating expenses - affiliates increased by ~~$51~~$31 million and ~~$65~~$70 million, respectively, for the three and six months ended June 30, ~~2021,~~2022, as compared to the three and six months ended June 30, ~~2020,~~2021, primarily due to ~~transferring certain employees to other affiliates, which results in expenses being allocated back to us through operating expenses - affiliates rather than included in selling, general~~higher affiliate lease expense for circuits and ~~administrative expenses.~~colocation facilities.

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Depreciation and Amortization

The following ~~tables provide~~table provides detail regarding depreciation and amortization expense:


		Three Months Ended June 30,						Three Months Ended June 30,
		2021		2020	% Change			2022		2021	% Change
		(Dollars in millions)						(Dollars in millions)
Depreciation	Depreciation	$	220	197	12	%	Depreciation	$	219	220	—	%
Amortization	Amortization	216		208	4	%	Amortization	186		216	(14)	%
Total depreciation and amortization	Total depreciation and amortization	$	436	405	8	%	Total depreciation and amortization	$	405	436	(7)	%


		Six Months Ended June 30,						Six Months Ended June 30,
		2021		2020	% Change			2022		2021	% Change
		(Dollars in millions)						(Dollars in millions)
Depreciation	Depreciation	$	446	405	10	%	Depreciation	$	423	446	(5)	%
Amortization	Amortization	427		416	3	%	Amortization	378		427	(11)	%
Total depreciation and amortization	Total depreciation and amortization	$	873	821	6	%	Total depreciation and amortization	$	801	873	(8)	%

Depreciation expense ~~increased~~decreased by ~~$23~~$1 million and ~~$41~~$23 million, respectively, for the three and six months ended June 30, ~~2021,~~2022, as compared to the three and six months ended June 30, ~~2020. The increases were~~2021 primarily due to ~~increases~~discontinuing the depreciation of ~~$23~~the tangible assets reclassified as held for sale of our Latin American business upon entering into our divestiture agreement. We estimate we would have recorded an additional $37 million and ~~$37~~$74 million, respectively, of depreciation expense during the three and six months ended June 30, 2022 if we had not agreed to sell this business. This was partially offset by an increase of $34 million and $52 million, respectively, resulting from the net growth in depreciable ~~assets.~~assets during the three and six months ended June 30, 2022.

Amortization expense ~~increased~~decreased by $8$30 million and ~~$11~~$49 million, respectively, for the three and six months ended June 30, ~~2021,~~2022, as compared to the three and six months ended June 30, ~~2020. Respectively, the increase for~~2021. For the three and six months ended June 30, ~~2021 was due primarily to a $4 million increase in~~2022, amortization expense ~~from the accelerated amortization for decommissioned applications for both periods and a $3~~decreased by $14 million and $5$23 million, ~~increase~~respectively, associated with the net ~~growth~~reduction in amortizable ~~assets.~~

assets and by $10 million and $20 million, respectively, due to discontinuing the amortization of the intangible assets reclassified as held for sale of our Latin American business upon entering into our divestiture agreement.

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Other Consolidated Results

The following ~~tables summarize~~table summarizes other expense, net and income tax expense:


		Three Months Ended June 30,						Three Months Ended June 30,
		2021		2020	% Change			2022		2021	% Change
		(Dollars in millions)						(Dollars in millions)
Interest income - affiliate	Interest income - affiliate	$	15	13	15	%	Interest income - affiliate	$	15	15	—	%
Interest expense	Interest expense	(89)		(96)	(7)	%	Interest expense	(95)		(89)	7	%
Other income, net		6		22	(73)	%
Other (expense) income, net							Other (expense) income, net	(14)		6	nm
Total other expense, net	Total other expense, net	$	(68)	(61)	11	%	Total other expense, net	$	(94)	(68)	38	%
Income tax expense	Income tax expense	$	62	60	3	%	Income tax expense	$	41	62	(34)	%


		Six Months Ended June 30,						Six Months Ended June 30,
		2021		2020	% Change			2022		2021	% Change
		(Dollars in millions)						(Dollars in millions)
Interest income - affiliate	Interest income - affiliate	$	33	26	27	%	Interest income - affiliate	$	31	33	(6)	%
Interest expense	Interest expense	(182)		(202)	(10)	%	Interest expense	(185)		(182)	2	%
Other income (expense), net		10		(12)	nm
Other (expense) income, net							Other (expense) income, net	(21)		10	nm
Total other expense, net	Total other expense, net	$	(139)	(188)	(26)	%	Total other expense, net	$	(175)	(139)	26	%
Income tax expense	Income tax expense	$	113	105	8	%	Income tax expense	$	85	113	(25)	%

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

Interest Income - Affiliate

Interest income - affiliate ~~increased~~remained flat for the three months ended June 30, 2022 and decreased by $2 million ~~and $7 million, respectively,~~ for the ~~three and~~ six months ended June 30, ~~2021,~~2022 as compared to the three and six months ended June 30, ~~2020 primarily due to an increase in the average interest rate associated with our note receivable - affiliate balance.~~2021.

Interest Expense

Interest expense ~~decreased~~increased by $7$6 million and ~~$20~~$3 million ~~respectively,~~ for the three and six months ended June 30, ~~2021,~~2022, as compared to the three and six months ended June 30, ~~2020~~2021. The increase was primarily due to ~~(i) a decrease~~an increase in ~~our average long-term debt from $11.0 billion to $10.4 billion and a decrease in the~~ average interest ~~rate~~rates from ~~4.11%~~(i) 3.53% to ~~3.53%~~3.82% for the three months ended June 30, ~~2021~~2022 as compared to the three months ended June 30, ~~2020,~~2021, and (ii) ~~a decrease in our average long-term debt~~ from ~~$11.0 billion~~3.61% to ~~$10.4 billion and a decrease in the average interest rate from 4.23% to 3.61%~~3.77% for the six months ended June 30, ~~2021~~2022 as compared to the six months ended June 30, ~~2020.~~2021.

~~Other Income (Expense), Net~~

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

Three Months Ended June 30, % Change
2021 2020
(Dollars in millions)
Foreign currency gain $ 8 18 (56) %
Other (2) 4 nm
Total other income, net $ 6 22 (73) %

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Other (Expense) Income, Net

Six Months Ended June 30, % Change
2021 2020
(Dollars in millions)
Gain on extinguishment of debt $ 16 — nm
Foreign currency loss (3) (8) (63) %
Interest income — 1 nm
Other (3) (5) (40) %
Total other income (expense), net $ 10 (12) nm
The following table summarizes our total other (expense) income, net:


	Three Months Ended June 30,			% Change
	2022		2021
	(Dollars in millions)

Foreign currency (loss) gain	(11)		8	nm
Other	(3)		(2)	50	%
Total other (expense) income, net	$	(14)	6	nm


	Six Months Ended June 30,			% Change
	2022		2021
	(Dollars in millions)
Gain on extinguishment of debt	$	—	16	nm
Foreign currency gain	(20)		(3)	nm

Other	(1)		(3)	(67)	%
Total other income, net	$	(21)	10	nm

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

Income Tax Expense

For both the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, our effective income tax rate was 29.7% ~~and 25.4%, respectively.~~. For the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, our effective income tax rate was ~~27.5%~~28.7% and ~~26.6%~~27.5%, respectively.

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Liquidity and Capital Resources

Overview

As of June 30, ~~2021,~~2022, we held cash and cash equivalents, including cash and cash equivalents classified as held for sale, of ~~$233~~$202 million, of which ~~$80~~$94 million were held in foreign bank accounts for funding our foreign operations. Due to various factors, our access to foreign cash is generally more restricted than our access to domestic cash.

We anticipate that any future liquidity needs will be met through (i) our cash provided by operating activities (ii) amounts due to us from Lumen Technologies (iii) proceeds from the recently completed divestiture of our Latin American business, (iv) our ability to refinance our debt obligations and ~~(iv)~~(v) capital contributions, advances or loans from Lumen Technologies or its affiliates if and to the extent they have available funds or access to funds that they are willing and able to contribute, advance or loan.

Impact of Recently Completed Divestiture of our Latin American Business

As discussed inNote 2—Recently Completed Divestiture of the Latin American Business, we sold our Latin American business on August 1, 2022. As further described elsewhere herein, this transaction provided us with a substantial amount of cash proceeds, but ultimately will reduce our base of income-generating assets that generate our recurring cash from operating activities.

Debt and Other Financing Arrangements

As of ~~both~~ June 30, ~~2021 and December 31, 2020,~~2022, our long-term debt (including current maturities and finance leases) outstanding totaled $10.4 billion. See Note 5—6—Long-Term Debt.

Subject to market conditions, from time to time we expect to continue to issue term debt or senior notes to refinance our maturing debt. The availability, interest rate and other terms of any new borrowings will be impacted by the ratings assigned us by the three major credit rating agencies, among other factors. As of the date of this report, the credit ratings for the senior secured and unsecured debt of Level 3 Financing, Inc. were as follows:

Borrower

Moody's Investor Services, Inc.

Standard & Poor's

Fitch Ratings

Level 3 Financing, Inc.

Unsecured

Ba3

Secured

Ba1

BBB-

Our credit ratings are reviewed and adjusted from time to time by the rating agencies. Any future changes in the senior unsecured or secured debt ratings of Level 3 Financing, Inc. could impact our access to debt capital or adjust our borrowing costs. See "Risk Factors—Financial Risks" in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

See Note 5—6—Long-Term Debt for additional information about our long-term debt.

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Letters of Credit

It is customary for us to use various financial instruments in the normal course of business. These instruments include letters of credit. Letters of credit are conditional commitments issued on our behalf in accordance with specified terms and conditions. As of June 30, ~~2021 and December 31, 2020,~~2022, we had outstanding letters of credit or other similar obligations of approximately $9$8 million, ~~and $18 million, respectively,~~ of which $4$3 million ~~and $11 million, respectively, were~~was collateralized by restricted cash. ~~We do not believe exposure to loss related to our letters of credit is material.~~

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, ~~2020.~~2021.

~~Historical Information~~

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Cash Flow Activities

The following table summarizes our consolidated cash flow activities:


		Six Months Ended June 30,					Six Months Ended June 30,
		2021		2020	$ Change		2022		2021	$ Change
		(Dollars in millions)					(Dollars in millions)
Net cash provided by operating activities	Net cash provided by operating activities	$	633	1,157	(524)	Net cash provided by operating activities	$	1,184	633	551
Net cash used in investing activities	Net cash used in investing activities	$	(539)	(524)	15	Net cash used in investing activities	$	(553)	(539)	14
Net cash (used in) provided by financing activities		$	(60)	506	566
Net cash used in financing activities						Net cash used in financing activities	$	(617)	(60)	557

Operating Activities

Net cash provided by operating activities ~~decreased~~increased by ~~$524~~$551 million for the six months ended June 30, ~~2021,~~2022, as compared to the six months ended June 30, ~~2020,~~2021, primarily due ~~to a decrease in the contribution from working capital primarily due to a reduction in~~payments on accounts payable ~~from affiliates, which was partially offset by an increase in net income adjusted~~- affiliate during the six months ended June 30, 2021, as well as higher collections on accounts receivable for ~~non-cash items.~~the six months ended June 30, 2022. Cash provided by operating activities is subject to variability period over period as a result of timing, including the collection of receivables and payments of interest, accounts payable, and bonuses.

Investing Activities

Net cash used in investing activities increased by ~~$15~~$14 million for the six months ended June 30, ~~2021,~~2022, as compared to the six months ended June 30, ~~2020~~2021. The decrease was primarily due to ~~a decrease in collections on affiliate notes receivable and~~ a decrease in proceeds from the sale of property, plant and equipment, which was ~~partially~~slightly offset by a decrease in capital expenditures.

Financing Activities

Net cash ~~(used in) provided by~~used in financing activities ~~changed~~increased by ~~$566~~$557 million for the six months ended June 30, ~~2021,~~2022, as compared to the six months ended June 30, ~~2020~~2021 primarily due to an increase in distributions paid to our parent and a decrease in net proceeds from issuance of long-term ~~debt and an increase in repayments of long-term debt, which~~debt. This was partially offset by a decrease in ~~distributions paid.~~repayments of long-term debt.

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.

~~Table of Contents~~

Lumen Technologies 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 Lumen Technologies, our business and financial condition could be similarly affected. You can find descriptions of these legal proceedings in Lumen'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.

~~As part of its~~Federal officials have proposed ~~infrastructure plan, the Biden Administration has proposed investing substantial sums~~changes to ~~expand internet access in the United States. The Administration seeks several other changes~~current programs and laws that could impact ~~Lumen or~~ us, including proposals designed to increase broadband access, increase competition among broadband providers, lower broadband costs and re-adopt "net neutrality" rules similar to those adopted under the Obama Administration. ~~Currently, we believe~~In November 2021, the U.S. Congress enacted legislation that appropriated $65 billion to improve broadband affordability and access, primarily through federally funded state grants. As of the date of this report, various state and federal agencies are continuing to take steps in anticipation of making grants to eligible applicants, so it is premature to speculate on the potential impact of ~~these proposals~~this legislation on ~~Lumen or~~ us.

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Summarized Financial Information

Level 3 Financing, Inc., our wholly owned subsidiary, has registered two series of currently outstanding Senior Notes that are fully and unconditionally and jointly and severally guaranteed on an unsubordinated unsecured basis by Level 3 Parent, LLC and Level 3 Communications, LLC. Level 3 Financing, Inc., Level 3 Parent, LLC and Level 3 Communications, LLC are collectively referred to as the “Obligor Group.”

In conjunction with the registration of those Level 3 Financing, Inc. Senior Notes under the Securities Act of 1933, we have presented below the accompanying summarized financial information pursuant to SEC Regulation S-X Rule 13-01 "Guarantors and issuers of guaranteed securities registered or being registered."

The summarized financial information set forth below excludes subsidiaries that are not within the Obligor Group and presents transactions between the Obligor Group and the subsidiaries that do not guarantee the Senior Notes (the “Non-Guarantor Subsidiaries”). Investment in and equity in earnings of subsidiaries have been excluded from the summarized financial information.

The following ~~tables present~~table presents summarized financial information specified in Rule 1-02(bb)(1) of Regulation S-X for the six months ended June 30, ~~2021:~~2022:


		Six Months Ended June 30, 2021					Six Months Ended June 30, 2022
		Level 3 Parent, LLC		Level 3 Financing, Inc.	Level 3 Communications, LLC		Level 3 Parent, LLC		Level 3 Financing, Inc.	Level 3 Communications, LLC
		(Dollars in millions)					(Dollars in millions)
Operating revenue	Operating revenue	$	—	—	2,047	Operating revenue	$	—	—	2,101
Operating revenue-affiliates		—		—	106
Operating revenue - affiliates						Operating revenue - affiliates	—		—	120
Operating expenses	Operating expenses	(50)		1	1,946	Operating expenses	—		1	1,965
Operating expenses-affiliates		—		—	192
Operating income (loss)		50		(1)	15
Operating expenses - affiliates						Operating expenses - affiliates	—		—	256
Operating loss						Operating loss	—		(1)	—
Net income (loss)	Net income (loss)	2,214		1	(2,269)	Net income (loss)	2,373		266	(2,738)

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The following tables present summarized financial information reflected in our consolidated balance sheet as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively:

June 30, 2021
Level 3 Parent, LLC Level 3 Financing, Inc. Level 3 Communications, LLC
(Dollars in millions)
Advances to affiliates $ 22,174 29,980 —
Note receivable-affiliate 1,468 — —
Other current assets 19 — 502
Operating lease assets - affiliates — — 680
Other noncurrent assets 268 1,639 8,809
Accounts payable-affiliates 76 20 598
Current operating lease liabilities-affiliates — — 153
Due to affiliates — — 58,270
Other current liabilities 1 90 763
Non-current operating lease liabilities-affiliates — — 531
Other noncurrent liabilities 90 10,104 2,645


		December 31, 2020					June 30, 2022
		Level 3 Parent, LLC		Level 3 Financing, Inc.	Level 3 Communications, LLC		Level 3 Parent, LLC		Level 3 Financing, Inc.	Level 3 Communications, LLC
		(Dollars in millions)					(Dollars in millions)
Advances to affiliates	Advances to affiliates	$	19,985	30,062	—	Advances to affiliates	$	25,980	30,695	247
Note receivable-affiliate		1,468		—	—
Note receivable - affiliate						Note receivable - affiliate	1,468		—	—
Other current assets	Other current assets	18		—	432	Other current assets	2		—	478
Operating lease assets - affiliates	Operating lease assets - affiliates	—		—	472	Operating lease assets - affiliates	—		—	891
Other noncurrent assets	Other noncurrent assets	271		1,595	8,811	Other noncurrent assets	271		1,731	8,814
Accounts payable-affiliates		85		21	773
Current operating lease liabilities-affiliates		—		—	107
Accounts payable - affiliates						Accounts payable - affiliates	68		67	290
Current operating lease liabilities - affiliates						Current operating lease liabilities - affiliates	—		—	245
Due to affiliates	Due to affiliates	—		—	55,114	Due to affiliates	—		—	64,440
Other current liabilities	Other current liabilities	1		101	774	Other current liabilities	2		88	606
Non-current operating lease liabilities-affiliates		—		—	377
Non-current operating lease liabilities - affiliates						Non-current operating lease liabilities - affiliates	—		—	657
Other noncurrent liabilities	Other noncurrent liabilities	83		10,131	2,636	Other noncurrent liabilities	81		10,105	2,819


	December 31, 2021
	Level 3 Parent, LLC		Level 3 Financing, Inc.	Level 3 Communications, LLC
	(Dollars in millions)
Advances to affiliates	$	24,161	30,473	174
Note receivable - affiliate	1,468		—	—
Other current assets	4		—	509
Operating lease assets - affiliates	—		—	737
Other noncurrent assets	271		1,687	8,701
Accounts payable - affiliates	73		64	174
Current operating lease liabilities - affiliates	—		—	189
Due to affiliates	—		—	61,657
Other current liabilities	1		89	747
Non-current operating lease liabilities - affiliates	—		—	560
Other noncurrent liabilities	88		10,106	2,872

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Market Risk

At June 30, ~~2021,~~2022, we were exposed to market risk from changes in interest rates on our variable rate long-term debt obligations. ~~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.~~

As of June 30, ~~2021,~~2022, we had approximately $10.1 billion (excluding unamortized premiums, net, unamortized debt issuance costs and finance leases) of long-term debt outstanding, 69% of which bears interest at fixed rates and is therefore not exposed to interest rate risk. We also held approximately $3.1 billion of floating rate debt exposed to changes in the ~~LIBOR.~~London InterBank Offered Rate ("LIBOR"). A hypothetical increase of 100 basis points in LIBOR relative to this debt would decrease our annual pre-tax earnings by $31 million. Additionally, our credit agreements contain language about a possible change from LIBOR to an alternative index.

~~Table of Contents~~

By operating internationally, we are exposed to the risk of fluctuations in the foreign currencies used by our international subsidiaries, including the British Pound, the Euro, the Brazilian Real and the Argentinian Peso. Although the percentages of our consolidated revenue and costs that are denominated in these currencies are immaterial, our consolidated results of operations could be adversely impacted by volatility in exchange rates or an increase in the number of foreign currency transactions.

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 presented above if market conditions vary from the assumptions used in the analyses performed. These analyses only incorporate the risk exposures that existed at June 30, ~~2021.~~2022.

Other Information

Lumen's and our website is www.lumen.com. We routinely post important investor information in the "Investor Relations" section of our website at ir.lumen.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 annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed by us or our ultimate controlling member Lumen Technologies, Inc., and all amendments to those reports, in the "Investor Relations" section of our website (ir.lumen.com) under the heading "SEC Filings." These reports are available on our website as soon as reasonably practicable after they are electronically filed with the SEC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Omitted pursuant to General Instruction H(2).

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ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We 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 us in the reports we file or furnish 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 this information is accumulated and communicated to our senior management, including our 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,~~Chris Stansbury, evaluated the effectiveness of our disclosure controls and procedures as of June 30, ~~2021.~~2022. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures were effective, as of June 30, ~~2021,~~2022, in providing reasonable assurance the information required to be disclosed by us in this report was accumulated and communicated in the manner provided above.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in ~~Rules~~Rule 13a-15(f) ~~and 15d-15(f)~~ of the Exchange Act) that occurred during the second quarter of ~~2021~~2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.

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PART II-OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information contained in Note 7—8—Commitments, Contingencies and Other Items, included in Item 1 of Part I of this quarterly report on Form 10-Q 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—Legal and Regulatory Risks—Our pending legal proceedings could have a material adverse impact on us” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

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. We urge you to carefully consider (i) the other information set forth in this report and (ii) the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2020, as supplemented by the following additional risk factor.~~

~~We may not be able to complete our pending divestiture of our Latin American business or realize the benefits of this transaction.~~

On July 25, 2021, certain of our affiliates agreed to sell our Latin American business and enter into various post-closing commercial agreements with the purchaser designed to ensure the continuity of services to customers. The completion of this divestiture is subject to receipt of several regulatory approvals and other customary closing conditions, the satisfaction of which is not assured. The pendency of this divestiture could impact us in several ways, including impacting relationships with our customers, vendors and employees, restricting our operations and diverting management’s attention from operating our business in the ordinary course. Even if we successfully complete the divestiture, we may (i) incur greater tax or costs or realize fewer benefits than anticipated under the purchase agreement and the post-closing commercial agreements that we plan to enter into with the purchaser and (ii) experience operational difficulties segregating the divested assets from our retained assets. Moreover, the divestiture will reduce our future cash flows.

~~ITEM 5. OTHER INFORMATION~~

~~The following disclosure is being made under Section 13(r) of the Exchange Act out of an abundance of caution:~~

We are required to engage on a regular basis with the Russian Federal Security Service (“FSB”) in the FSB’s official capacity of regulating our use of technology in Russia in connection with providing commercial services therein through our local subsidiary. On March 2, 2021, the U.S. Secretary of State designated the FSB as a party subject to the provisions of U.S. Executive Order No. 13382 issued in 2005. We do not derive any gross revenues or net profits directly associated with any such dealings by us with the FSB and all such dealings are explicitly authorized by General License 1B issued by the U.S. Department of the Treasury’s Office of Foreign Assets Control. We plan to continue these activities as required to continue to provide commercial services in Russia.2021.

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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
22.1*			Guaranteed Securities
31.1*			Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*			Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*			Certification of the Chief Executive Officer 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*			The following materials from the Quarterly Report on Form 10-Q of Level 3 Parent, LLC for the quarter ended June 30, ~~2021,~~2022, formatted in Inline XBRL (eXtensible Business Reporting Language); (i) Consolidated Statements of Operations, (ii) Consolidated Statements ofOf Comprehensive (Loss) Income, ~~(Loss),~~ (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Member's Equity and (vi) Notes to Consolidated Financial Statements.
104*			Cover page formatted as Inline XBRL and contained in Exhibit 101.

* Exhibit filed herewith.

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Table of Contents

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 August ~~5, 2021.~~4, 2022.


			LEVEL 3 PARENT, LLC
			By:			/s/ Andrea Genschaw
						Andrea Genschaw Senior Vice President, - Controller (Principal Accounting Officer)

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	June 30, 2021 (unaudited)		December 31, 2020
	(Dollars in millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	233	190
Accounts receivable, less allowance of $42 and $45	705		683
Note receivable - affiliate	1,468		1,468
Other	322		297
Total current assets	2,728		2,638
Property, plant and equipment, net of accumulated depreciation of $3,258 and $2,818	10,608		10,518
GOODWILL AND OTHER ASSETS
Goodwill	7,406		7,405
Other intangible assets, net	6,228		6,605
Other, net	1,517		1,410
Total goodwill and other assets	15,151		15,420
TOTAL ASSETS	$	28,487	28,576
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt	$	17	14
Accounts payable	507		495
Accounts payable - affiliates	370		869
Accrued expenses and other liabilities
Salaries and benefits	189		220
Income and other taxes	119		111
Current operating lease liabilities	275		241
Other	157		159
Current portion of deferred revenue	319		315
Total current liabilities	1,953		2,424
LONG-TERM DEBT	10,336		10,373
DEFERRED REVENUE AND OTHER LIABILITIES
Deferred revenue	1,416		1,396
Operating lease liabilities	986		903
Other	626		575
Total deferred revenue and other liabilities	3,028		2,874
COMMITMENTS AND CONTINGENCIES (Note 7)	0		0
MEMBER'S EQUITY
Member's equity	13,412		13,139
Accumulated other comprehensive loss	(242)		(234)
Total member's equity	13,170		12,905
TOTAL LIABILITIES AND MEMBER'S EQUITY	$	28,487	28,576