Document and Entity Information
Document and Entity Information - shares | 6 Months Ended | |
Jun. 30, 2016 | Aug. 05, 2016 | |
Document and Entity Information | ||
Entity Registrant Name | QWEST CORP | |
Entity Central Index Key | 68,622 | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Non-accelerated Filer | |
Entity Current Reporting Status | Yes | |
Document Type | 10-Q | |
Document Period End Date | Jun. 30, 2016 | |
Document Fiscal Year Focus | 2,016 | |
Document Fiscal Period Focus | Q2 | |
Amendment Flag | false | |
Entity Common Stock, Shares Outstanding | 1 |
CONSOLIDATED STATEMENTS OF OPER
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) $ in Millions | 3 Months Ended | 6 Months Ended | ||
Jun. 30, 2016 | Jun. 30, 2015 | Jun. 30, 2016 | Jun. 30, 2015 | |
OPERATING REVENUES | ||||
Operating revenues | $ 1,573 | $ 1,618 | $ 3,172 | $ 3,254 |
Operating revenues - affiliates | 650 | 604 | 1,304 | 1,185 |
Total operating revenues | 2,223 | 2,222 | 4,476 | 4,439 |
OPERATING EXPENSES | ||||
Cost of services and products (exclusive of depreciation and amortization) | 731 | 743 | 1,439 | 1,435 |
Selling, general and administrative | 235 | 256 | 485 | 526 |
Operating expenses - affiliates | 231 | 238 | 482 | 486 |
Depreciation and amortization | 424 | 464 | 843 | 926 |
Total operating expenses | 1,621 | 1,701 | 3,249 | 3,373 |
OPERATING INCOME | 602 | 521 | 1,227 | 1,066 |
OTHER (EXPENSE) INCOME | ||||
Interest expense | (120) | (119) | (241) | (237) |
Interest expense - affiliates, net | (15) | (13) | (29) | (26) |
Other income, net | 0 | 1 | 2 | 1 |
Total other expense, net | (135) | (131) | (268) | (262) |
Income before income tax expense | 467 | 390 | 959 | 804 |
Income tax expense | 179 | 152 | 367 | 319 |
NET INCOME | $ 288 | $ 238 | $ 592 | $ 485 |
CONSOLIDATED STATEMENTS OF COMP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Millions | 3 Months Ended | 6 Months Ended | ||
Jun. 30, 2016 | Jun. 30, 2015 | Jun. 30, 2016 | Jun. 30, 2015 | |
Statement of Comprehensive Income [Abstract] | ||||
NET INCOME | $ 288 | $ 238 | $ 592 | $ 485 |
OTHER COMPREHENSIVE LOSS: | ||||
Foreign currency translation adjustment, net of $-, $-, $- and $- tax | 3 | 0 | 0 | 0 |
Other comprehensive income | 3 | 0 | 0 | 0 |
COMPREHENSIVE INCOME | $ 291 | $ 238 | $ 592 | $ 485 |
CONSOLIDATED STATEMENTS OF COM4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) - USD ($) $ in Millions | 3 Months Ended | 6 Months Ended | ||
Jun. 30, 2016 | Jun. 30, 2015 | Jun. 30, 2016 | Jun. 30, 2015 | |
Statement of Comprehensive Income [Abstract] | ||||
Foreign currency translation adjustment, tax | $ 0 | $ 0 | $ 0 | $ 0 |
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS - USD ($) $ in Millions | Jun. 30, 2016 | Dec. 31, 2015 |
CURRENT ASSETS | ||
Cash and cash equivalents | $ 4 | $ 3 |
Accounts receivable, less allowance of $48 and $47 | 688 | 688 |
Advances to affiliates | 811 | 788 |
Other | 148 | 123 |
Total current assets | 1,651 | 1,602 |
NET PROPERTY, PLANT AND EQUIPMENT | ||
Property, plant and equipment | 12,619 | 12,182 |
Accumulated depreciation | (5,182) | (4,808) |
Net property, plant and equipment | 7,437 | 7,374 |
GOODWILL AND OTHER ASSETS | ||
Goodwill | 9,354 | 9,354 |
Other intangible assets, less accumulated amortization of $1,435 and $1,383 | 539 | 613 |
Other, net | 98 | 92 |
Total goodwill and other assets | 12,141 | 12,494 |
TOTAL ASSETS | 21,229 | 21,470 |
CURRENT LIABILITIES | ||
Current maturities of long-term debt | 509 | 242 |
Accounts payable | 350 | 369 |
Note payable - affiliate | 884 | 855 |
Accrued expenses and other liabilities | ||
Salaries and benefits | 186 | 211 |
Income and other taxes | 165 | 189 |
Other | 146 | 135 |
Current affiliate obligations, net | 94 | 97 |
Advance billings and customer deposits | 322 | 324 |
Total current liabilities | 2,656 | 2,422 |
LONG-TERM DEBT | 6,726 | 6,997 |
DEFERRED CREDITS AND OTHER LIABILITIES | ||
Deferred revenues | 123 | 137 |
Deferred income taxes, net | 1,861 | 1,896 |
Affiliate obligations, net | 1,003 | 1,051 |
Other | 61 | 60 |
Total deferred credits and other liabilities | 3,048 | 3,144 |
COMMITMENTS AND CONTINGENCIES (Note 5) | ||
STOCKHOLDER'S EQUITY | ||
Common stock - one share without par value, owned by Qwest Services Corporation | 10,050 | 10,050 |
Accumulated deficit | (1,251) | (1,143) |
Total stockholder's equity | 8,799 | 8,907 |
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | 21,229 | 21,470 |
Customer relationships | ||
Customer relationships, less accumulated amortization of $3,549 and $3,264 | $ 2,150 | $ 2,435 |
CONSOLIDATED BALANCE SHEETS (Pa
CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Millions | Jun. 30, 2016 | Dec. 31, 2015 |
Accounts receivable, allowance (dollars) | $ 48 | $ 47 |
Other intangible assets, accumulated amortization | $ 1,435 | $ 1,383 |
Common stock, shares, issued (in shares) | 1 | 1 |
Common stock, share outstanding (in shares) | 1 | 1 |
Common stock, value outstanding | $ 10,050 | $ 10,050 |
Customer relationships | ||
Customer relationships, accumulated amortization | $ 3,549 | $ 3,264 |
CONSOLIDATED STATEMENTS OF CASH
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Millions | 6 Months Ended | |
Jun. 30, 2016 | Jun. 30, 2015 | |
OPERATING ACTIVITIES | ||
Net income | $ 592 | $ 485 |
Adjustments to reconcile net income to net cash provided by operating activities: | ||
Depreciation and amortization | 843 | 926 |
Deferred income taxes | (35) | (180) |
Provision for uncollectible accounts | 40 | 39 |
Net long-term debt issuance costs and premium amortization | (7) | (11) |
Accrued interest on affiliate note | 29 | 31 |
Changes in current assets and liabilities: | ||
Accounts receivable | (40) | 8 |
Accounts payable | (20) | 30 |
Accrued income and other taxes | (24) | (14) |
Other current assets and liabilities, net | (40) | (34) |
Other current assets and liabilities - affiliates, net | 0 | (4) |
Changes in other noncurrent assets and liabilities, net | (11) | (23) |
Change in affiliates obligations, net | (51) | (4) |
Other, net | 8 | 5 |
Net cash provided by operating activities | 1,284 | 1,254 |
INVESTING ACTIVITIES | ||
Payments for property, plant and equipment and capitalized software | (546) | (564) |
Changes in advances to affiliates | (23) | (383) |
Net cash used in investing activities | (569) | (947) |
FINANCING ACTIVITIES | ||
Net proceeds from issuance of long-term debt | 227 | 99 |
Payments of long-term debt | (241) | (106) |
Dividends paid to Qwest Services Corporation | (700) | (300) |
Net cash used in financing activities | (714) | (307) |
Net increase in cash and cash equivalents | 1 | 0 |
Cash and cash equivalents at beginning of period | 3 | 6 |
Cash and cash equivalents at end of period | 4 | 6 |
Supplemental cash flow information: | ||
Income taxes paid, net | (401) | (379) |
Interest paid (net of capitalized interest of $8 and $9) | $ (249) | $ (247) |
CONSOLIDATED STATEMENTS OF CAS8
CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) - USD ($) $ in Millions | 6 Months Ended | |
Jun. 30, 2016 | Jun. 30, 2015 | |
Statement of Cash Flows [Abstract] | ||
Interest paid, capitalized interest | $ 8 | $ 9 |
CONSOLIDATED STATEMENTS OF STOC
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY - USD ($) $ in Millions | Total | COMMON STOCK | ACCUMULATED DEFICIT |
Balance at beginning of period at Dec. 31, 2014 | $ 10,050 | $ (867) | |
Increase (Decrease) in Stockholder's Equity | |||
Net income | $ 485 | 485 | |
Dividends declared to Qwest Services Corporation | (300) | ||
Balance at end of period at Jun. 30, 2015 | 9,368 | 10,050 | (682) |
Balance at beginning of period at Dec. 31, 2015 | 8,907 | 10,050 | (1,143) |
Increase (Decrease) in Stockholder's Equity | |||
Net income | 592 | 592 | |
Dividends declared to Qwest Services Corporation | (700) | (700) | |
Balance at end of period at Jun. 30, 2016 | $ 8,799 | $ 10,050 | $ (1,251) |
Basis of Presentation
Basis of Presentation | 6 Months Ended |
Jun. 30, 2016 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Basis of Presentation | Basis of Presentation General We are an integrated communications company engaged primarily in providing an array of services to our residential and business customers. Our communications services include local voice, broadband, private line (including special access), network access, Ethernet, information technology, video and other ancillary services. In certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers. We generate the majority of our total consolidated operating revenues from services provided in the 14 -state region of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming . We refer to this region as our local service area. Our consolidated balance sheet as of December 31, 2015 , which was derived from our audited consolidated financial statements, and our unaudited interim consolidated financial statements provided herein have been prepared in accordance with the instructions for Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission ("SEC"); however, in our opinion, the disclosures made are adequate to make the information presented not misleading. We believe that these consolidated financial statements include all normal recurring adjustments necessary to fairly present the results for the interim periods. The consolidated results of operations for the first six months of the year are not necessarily indicative of the consolidated results of operations that might be expected for the entire year. These consolidated financial statements 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, 2015 . The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries. Intercompany amounts and transactions with our consolidated subsidiaries have been eliminated. Transactions with our non-consolidated affiliates (referred to herein as affiliates) have not been eliminated. We reclassified certain prior period amounts to conform to the current period presentation, including the categorization of our revenues. See Note 4—Products and Services Revenues for additional information. These changes had no impact on total operating revenues, total operating expenses or net income for any period. Connect America Fund In 2015, CenturyLink accepted funding from the Federal Communications Commission's ("FCC") Connect America Fund ("CAF") of approximately $500 million per year for six years to fund the deployment of voice and broadband capable infrastructure for approximately 1.2 million rural households and businesses in 33 states under the CAF Phase 2 high-cost support program. The funding from the CAF Phase 2 support program in these 33 states will substantially supplant funding from the interstate Universal Service Fund ("USF") high-cost program that we previously utilized to support voice services in high-cost rural markets. Of these amounts, approximately $150 million per year is attributable to our service area, to provide service to approximately 0.3 million rural households and businesses in 13 states. In late 2015, we began receiving these support payments from the FCC under the new CAF Phase 2 support program, which included monthly support payments at a higher rate than under the interstate USF support program. We recorded $24 million and $48 million more in revenue for the three and six months ended June 30, 2016 , respectively, than in the comparable periods for 2015 with respect to our 13 states. We received a substantial one-time cumulative catch-up payment related to the first half of 2015 from the FCC in the third quarter of 2015, and, as a result, we do not expect funding from the CAF Phase 2 support program to materially change our "affiliate and other services" revenues for the full year 2016 when compared to the full year 2015. Recent Accounting Pronouncements Financial Instruments On June 16, 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred to an expected loss model, which requires our management team to estimate the total credit losses expected on the portfolio of financial instruments. We are currently reviewing the requirements of the standard and evaluating the impact on our consolidated financial statements. We are required to adopt the provisions of ASU 2016-13 effective January 1, 2020, but could elect to early adopt the provisions as of January 1, 2019. We expect to recognize the impacts of adopting ASU 2016-13 through a cumulative adjustment to retained earnings as of the date of adoption. Share-based Compensation On March 30, 2016, the FASB issued ASU 2016-09, “Improvement to Employee Share-Based Payment Accounting" (“ASU 2016-09”). ASU 2016-09 modifies the accounting and associated income tax accounting for share-based compensation in order to reduce the cost and complexity associated with current generally accepted accounting principles. ASU 2016-09 is effective for us as of January 1, 2017, but early adoption may be elected. ASU 2016-09 includes different transition requirements for the different changes implemented, including some provisions which allow retrospective application. We have not determined when we will implement this standard or if we will retrospectively apply the requirements when allowed. The primary provisions of ASU 2016-09 that we expect will affect our financial statements are: 1) a reclassification of the tax effect associated with the difference between the expense recognized for share-based payments and the associated tax deduction from additional paid-in capital to income tax expense; 2) a reclassification of the tax effect associated with the difference between compensation expense and associated deduction from financing cash flow to operating cash flow; and 3) an optional accounting policy election to account for forfeitures of share-based payment grants as they occur as opposed to our current policy of estimating the forfeitures on the grant date. These provisions would not have had a material impact on our previously issued financial statements; however, this is not necessarily representative of future impacts. Adoption of ASU 2016-09 may increase the volatility of income tax expense and cash flow from operating activities. Leases On February 25, 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). The core principle of ASU 2016-02 will require lessees to present right-of-use assets and lease liabilities on their balance sheets for operating leases, which are currently not reflected on their balance sheets. ASU 2016-02 is effective for annual and interim periods beginning January 1, 2019. Early adoption of ASU 2016-02 is permitted. Upon adoption of ASU 2016-02, we are required to recognize and measure leases at the beginning of the earliest period presented in our consolidated financial statements using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that we may elect to apply. We have not yet decided when we will adopt ASU 2016-02 or which practical expedient options we will elect. We are currently evaluating and assessing the impact ASU 2016-02 will have on us and our consolidated financial statements. As of the date of this report, we cannot provide any estimate of the impact of adopting ASU 2016-02. Revenue Recognition On May 28, 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU 2014-09 replaces virtually all existing generally accepted accounting principles (“GAAP”) on revenue recognition and replaces them with a principles-based approach for determining revenue recognition using a new five step model. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes new accounting principles related to the deferral and amortization of contract acquisition and fulfillment costs. We currently do not defer any contract acquisition costs and we defer contract fulfillment costs only up to the extent of any revenue deferred. On July 9, 2015, the FASB approved the deferral of the effective date of ASU 2014-09 by one year until January 1, 2018, which is the date we plan to adopt this standard. ASU 2014-09 may be adopted by applying the provisions of this standard on a retrospective basis to the periods included in the financial statements or on a modified retrospective basis which would result in the recognition of a cumulative effect of adopting ASU 2014-09 in the first quarter of 2018. We have not yet decided which implementation method we will adopt. We are studying ASU 2014-09 and are assessing the impact this standard will have on us and our consolidated financial statements. We cannot at this time, however, provide any estimate of the impact of adopting ASU 2014-09. |
Long-Term Debt and Revolving Pr
Long-Term Debt and Revolving Promissory Note | 6 Months Ended |
Jun. 30, 2016 | |
Debt Disclosure [Abstract] | |
Long-Term Debt and Revolving Promissory Note | Long-Term Debt and Revolving Promissory Note Long-term debt, including unamortized discounts and premiums, unamortized debt issuance costs and note payable - affiliate, were as follows: Interest Rates Maturities As of As of (Dollars in millions) Senior notes 6.125% - 7.750% 2017 - 2056 $ 7,229 7,229 Term loan 2.220% 2025 100 100 Capital lease and other obligations Various Various 28 17 Unamortized premiums, net 8 16 Unamortized debt issuance costs (130 ) (123 ) Total long-term debt 7,235 7,239 Less current maturities (509 ) (242 ) Long-term debt, excluding current maturities $ 6,726 6,997 Note payable - affiliate 6.795% 2022 $ 884 855 New Issuance In January 2016, QC issued $235 million aggregate principal amount of 7% Notes due 2056, in exchange for net proceeds, after deducting underwriting discounts and other expenses, of approximately $227 million . All of the 7% Notes are unsecured obligations and may be redeemed by QC, in whole or in part, on or after February 1, 2021, at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date. Repayment On May 2, 2016, QC paid at maturity the $235 million principal amount and accrued and unpaid interest due under its 8.375% Notes. Revolving Promissory Note We are currently indebted to an affiliate of our ultimate parent company, CenturyLink, under a revolving promissory note that provides us with a funding commitment of up to $1.0 billion aggregate principal amount through June 30, 2022, of which $884 million was outstanding as of June 30, 2016 . As of June 30, 2016 , the weighted average interest rate was 6.795% . As of June 30, 2016 and December 31, 2015 , this revolving promissory note is reflected on our consolidated balance sheets as a current liability under note payable - affiliate. As of June 30, 2016 , $5 million of accrued interest is reflected in other current liabilities on our consolidated balance sheet. In accordance with the note agreement, all accrued interest and unpaid interest is capitalized to the unpaid principal balance on June 1 and December 1 of each year. Covenants The indentures governing our notes contain certain covenants including, but not limited to: (i) a prohibition on certain liens on our assets; and (ii) a limitation on mergers or sales of all, or substantially all, of our assets, which limitation requires that a successor assume the obligation with regard to these notes. These indentures do not contain any cross-default provisions. Our senior notes were issued under indentures dated April 15, 1990 and October 15, 1999. These indentures do not contain any financial covenants, but do include restrictions that limit our ability to (i) incur, issue or create liens upon our property and (ii) consolidate with or merge into, transfer or lease all or substantially all of our assets to any other party. As of June 30, 2016 , we believe we were in compliance with the provisions and covenants of our debt agreements. |
Fair Value Disclosure
Fair Value Disclosure | 6 Months Ended |
Jun. 30, 2016 | |
Fair Value Disclosures [Abstract] | |
Fair Value Disclosure | Fair Value Disclosure Our financial instruments consist of cash and cash equivalents, accounts receivable, advances to affiliates, accounts payable, note payable - affiliate and long-term debt, excluding capital lease and other obligations. Due to their short-term nature, the carrying amounts of our cash and cash equivalents, accounts receivable, advances to affiliates, accounts payable, and note payable - affiliate approximate their fair values. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB. We determined the fair values of our long-term debt, including the current portion, based on quoted market prices where available or, if not available, based on discounted future cash flows using current market interest rates. The three input levels in the hierarchy of fair value measurements are defined by the FASB generally as follows: Input Level Description of Input Level 1 Observable inputs such as quoted market prices in active markets. Level 2 Inputs other than quoted prices in active markets that are either directly or indirectly observable. Level 3 Unobservable inputs in which little or no market data exists. The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding capital lease and other obligations, as well as the input level used to determine the fair values indicated below: As of June 30, 2016 As of December 31, 2015 Input Level Carrying Amount Fair Value Carrying Amount Fair Value (Dollars in millions) Liabilities—Long-term debt, excluding capital lease and other obligations 2 $ 7,207 7,579 7,222 7,456 |
Products and Services Revenues
Products and Services Revenues | 6 Months Ended |
Jun. 30, 2016 | |
Segment Reporting [Abstract] | |
Products and Services Revenues | Products and Services Revenues We are an integrated communications company engaged primarily in providing an array of services, including local voice, broadband, private line (including special access), network access, Ethernet, information technology, video and other ancillary services. We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services. From time to time, we may change the categorization of our products and services. During the second quarter of 2016, we determined that because of declines due to customer migration to other strategic products and services, certain of our services, specifically our private line (including special access) services, are now more closely aligned with our legacy services than with our strategic services. As a result, we now reflect these operating revenues as legacy services, and we have reclassified certain prior period amounts to conform to this change. The revision resulted in a reduction of revenue from strategic services and a corresponding increase in revenue from legacy services of $209 million and $426 million (net of $1 million and $2 million of deferred revenue included in affiliate and other services) for the three and six months ended June 30, 2015 , respectively. We now categorize our products, services and revenues among the following three categories: • Strategic services , which include primarily broadband, Ethernet, video and other ancillary services; • Legacy services , which include primarily local voice, private line (including special access), Integrated Services Digital Network ("ISDN") (which use regular telephone lines to support voice, video and data applications), switched access, traditional wide area network ("WAN") (which allow a local communications network to link to networks in remote locations) and other ancillary services; and • Affiliates and other services , which consist primarily of CAF support payments, USF support payments, USF surcharges and services we provide to our affiliates. We receive federal support payments from both CAF Phase 1 and CAF Phase 2 programs, and support payments from both federal and state USF programs. These support payments are government subsidies designed to reimburse us for various costs related to certain telecommunications services, including the costs of deploying, maintaining and operating voice and broadband infrastructure in high-cost rural areas where we are not able to fully recover our costs from our customers. USF surcharges are the amounts we collect based on specific items we list on our customers' invoices to fund the FCC's universal service programs. We provide to our affiliates, telecommunication services that we also provide to external customers. In addition, we provide to our affiliates, computer system development and support services, network support and technical services. Our operating revenues for our products and services consisted of the following categories: Three Months Ended June 30, Six Months Ended June 30, 2016 2015 2016 2015 (Dollars in millions) Strategic services $ 674 650 1,345 1,291 Legacy services 814 904 1,658 1,833 Affiliates and other services 735 668 1,473 1,315 Total operating revenues $ 2,223 2,222 4,476 4,439 We do not have any single external customer that provides more than 10% of our total consolidated operating revenues. Substantially all of our consolidated revenues come from customers located in the United States. We recognize revenues in our consolidated statements of operations for certain USF surcharges and transaction taxes that we bill to our customers. Our consolidated statements of operations also reflect the related expense for the amounts we remit to the government agencies. The total amount of such surcharges and transaction taxes that we included in revenues aggregated approximately $38 million for each of the three months ended June 30, 2016 and 2015 , respectively, and approximately $76 million and $75 million for the six months ended June 30, 2016 and 2015 , respectively. These USF surcharges, where we record revenue, are included in "affiliate and other services" revenues and these transaction taxes are included in "legacy services" revenues. We also act as a collection agent for certain other USF and transaction taxes that we are required by government agencies to bill our customers, for which we do not record any revenue or expense because we only act as a pass-through agent. Our operations are integrated into and reported as part of the consolidated segment data of CenturyLink. CenturyLink's chief operating decision maker ("CODM") is our CODM, but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the Securities and Exchange Commission. Consequently, we do not provide our discrete financial information to the CODM on a regular basis. As such, we believe we have one reportable segment. |
Commitments and Contingencies
Commitments and Contingencies | 6 Months Ended |
Jun. 30, 2016 | |
Commitments and Contingencies Disclosure [Abstract] | |
Commitments and Contingencies | Commitments and Contingencies Pending Matters Subsidiaries of CenturyLink, Inc., including us, are among hundreds of companies in an industry-wide dispute, raised in nearly 100 federal lawsuits (filed between 2014 and 2016) that have been consolidated in the United States District Court for the District of Northern Texas for pretrial procedures. The disputes relate to switched access charges that local exchange carriers ("LECs") collect from interexchange carriers ("IXCs") for IXCs' use of LEC's access services. In the lawsuits, three IXCs, Sprint Communications Company L.P. ("Sprint"), affiliates of Verizon Communications Inc. ("Verizon") and affiliates of Level 3 Communications LLC ("Level 3"), assert that federal and state laws bar LECs from collecting access charges when IXCs exchange certain types of calls between mobile and wireline devices that are routed through an IXC. Some of these IXCs have asserted claims seeking refunds of payments for access charges previously paid and relief from future access charges. In addition, Level 3 has ceased paying switched access charges on these calls. In November 2015, the federal court agreed with the LECs and rejected the IXCs' contention that federal law prohibits these particular access charges, and also allowed the IXCs to refile state-law claims. Since then, many of the LECs and IXCs have filed revised pleadings and additional motions, which remain pending. Separately, some of the defendants, including us, have petitioned the Federal Communications Commission to address these issues on an industry-wide basis. The outcome of these disputes and lawsuits, as well as any related regulatory proceedings that could ensue, are currently not predictable. If we are required to stop assessing these charges or to pay refunds of any such charges, our financial results could be negatively affected. Other Proceedings and Disputes From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, administrative hearings of state public utility commissions relating primarily to our rates or services, actions relating to employee claims, various tax issues, environmental law issues, grievance hearings before labor regulatory agencies and miscellaneous third party tort actions. We are currently defending several patent infringement lawsuits asserted against us by non-practicing entities, many of whom are seeking substantial recoveries. These cases have progressed to various stages and one or more may go to trial in the coming 24 months if they are not otherwise resolved. Where applicable, we are seeking full or partial indemnification from our vendors and suppliers. As with all litigation, we are vigorously defending these actions and, as a matter of course, are prepared to litigate these matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities. We are subject to various federal, state and local environmental protection and health and safety laws. From time to time, we are subject to judicial and administrative proceedings brought by various governmental authorities under these laws. Several such proceedings are currently pending, but none is reasonably expected to exceed $100,000 in fines and penalties. The outcome of these other proceedings 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 our financial position, results of operations or cash flows. CenturyLink, Inc. and its affiliates are involved in several legal proceedings to which we are not a party that, if resolved against them, could have a material adverse effect on their business and financial condition. As an indirect wholly-owned subsidiary of CenturyLink, Inc., our business and financial condition could be similarly affected. You can find descriptions of these legal proceedings in CenturyLink, Inc.'s quarterly and annual reports filed with the Securities and Exchange Commission. Because we are not a party to any of the matters, we have not accrued any liabilities for the matters. |
Dividends
Dividends | 6 Months Ended |
Jun. 30, 2016 | |
Dividends [Abstract] | |
Dividends | Dividends During the six months ended June 30, 2016 , we declared and paid dividends of $700 million to our direct parent company, Qwest Services Corporation. Dividends paid are reflected on our consolidated statements of cash flows as financing activities. |
Other Financial Information
Other Financial Information | 6 Months Ended |
Jun. 30, 2016 | |
Additional Financial Information Disclosure [Abstract] | |
Other Financial Information | Other Financial Information Other Current Assets The following table presents details of other current assets in our consolidated balance sheets: As of As of (Dollars in millions) Prepaid expenses $ 70 46 Other 78 77 Total other current assets $ 148 123 Selected Current Liabilities Current liabilities reflected in our consolidated balance sheets include accounts payable: As of As of (Dollars in millions) Accounts payable $ 350 369 Included in accounts payable at both June 30, 2016 and December 31, 2015 , was $29 million associated with capital expenditures. |
Basis of Presentation Basis of
Basis of Presentation Basis of Presentation (Policies) | 6 Months Ended |
Jun. 30, 2016 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Consolidation policy | The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries. Intercompany amounts and transactions with our consolidated subsidiaries have been eliminated. Transactions with our non-consolidated affiliates (referred to herein as affiliates) have not been eliminated. |
Recent accounting pronouncements | Recent Accounting Pronouncements Financial Instruments On June 16, 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred to an expected loss model, which requires our management team to estimate the total credit losses expected on the portfolio of financial instruments. We are currently reviewing the requirements of the standard and evaluating the impact on our consolidated financial statements. We are required to adopt the provisions of ASU 2016-13 effective January 1, 2020, but could elect to early adopt the provisions as of January 1, 2019. We expect to recognize the impacts of adopting ASU 2016-13 through a cumulative adjustment to retained earnings as of the date of adoption. Share-based Compensation On March 30, 2016, the FASB issued ASU 2016-09, “Improvement to Employee Share-Based Payment Accounting" (“ASU 2016-09”). ASU 2016-09 modifies the accounting and associated income tax accounting for share-based compensation in order to reduce the cost and complexity associated with current generally accepted accounting principles. ASU 2016-09 is effective for us as of January 1, 2017, but early adoption may be elected. ASU 2016-09 includes different transition requirements for the different changes implemented, including some provisions which allow retrospective application. We have not determined when we will implement this standard or if we will retrospectively apply the requirements when allowed. The primary provisions of ASU 2016-09 that we expect will affect our financial statements are: 1) a reclassification of the tax effect associated with the difference between the expense recognized for share-based payments and the associated tax deduction from additional paid-in capital to income tax expense; 2) a reclassification of the tax effect associated with the difference between compensation expense and associated deduction from financing cash flow to operating cash flow; and 3) an optional accounting policy election to account for forfeitures of share-based payment grants as they occur as opposed to our current policy of estimating the forfeitures on the grant date. These provisions would not have had a material impact on our previously issued financial statements; however, this is not necessarily representative of future impacts. Adoption of ASU 2016-09 may increase the volatility of income tax expense and cash flow from operating activities. Leases On February 25, 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). The core principle of ASU 2016-02 will require lessees to present right-of-use assets and lease liabilities on their balance sheets for operating leases, which are currently not reflected on their balance sheets. ASU 2016-02 is effective for annual and interim periods beginning January 1, 2019. Early adoption of ASU 2016-02 is permitted. Upon adoption of ASU 2016-02, we are required to recognize and measure leases at the beginning of the earliest period presented in our consolidated financial statements using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that we may elect to apply. We have not yet decided when we will adopt ASU 2016-02 or which practical expedient options we will elect. We are currently evaluating and assessing the impact ASU 2016-02 will have on us and our consolidated financial statements. As of the date of this report, we cannot provide any estimate of the impact of adopting ASU 2016-02. Revenue Recognition On May 28, 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU 2014-09 replaces virtually all existing generally accepted accounting principles (“GAAP”) on revenue recognition and replaces them with a principles-based approach for determining revenue recognition using a new five step model. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes new accounting principles related to the deferral and amortization of contract acquisition and fulfillment costs. We currently do not defer any contract acquisition costs and we defer contract fulfillment costs only up to the extent of any revenue deferred. On July 9, 2015, the FASB approved the deferral of the effective date of ASU 2014-09 by one year until January 1, 2018, which is the date we plan to adopt this standard. ASU 2014-09 may be adopted by applying the provisions of this standard on a retrospective basis to the periods included in the financial statements or on a modified retrospective basis which would result in the recognition of a cumulative effect of adopting ASU 2014-09 in the first quarter of 2018. We have not yet decided which implementation method we will adopt. We are studying ASU 2014-09 and are assessing the impact this standard will have on us and our consolidated financial statements. We cannot at this time, however, provide any estimate of the impact of adopting ASU 2014-09. |
Reclassification, Policy [Policy Text Block] | We reclassified certain prior period amounts to conform to the current period presentation, including the categorization of our revenues. See Note 4—Products and Services Revenues for additional information. These changes had no impact on total operating revenues, total operating expenses or net income for any period. |
Long-Term Debt and Revolving 18
Long-Term Debt and Revolving Promissory Note (Tables) | 6 Months Ended |
Jun. 30, 2016 | |
Debt Disclosure [Abstract] | |
Schedule of long-term debt | Long-term debt, including unamortized discounts and premiums, unamortized debt issuance costs and note payable - affiliate, were as follows: Interest Rates Maturities As of As of (Dollars in millions) Senior notes 6.125% - 7.750% 2017 - 2056 $ 7,229 7,229 Term loan 2.220% 2025 100 100 Capital lease and other obligations Various Various 28 17 Unamortized premiums, net 8 16 Unamortized debt issuance costs (130 ) (123 ) Total long-term debt 7,235 7,239 Less current maturities (509 ) (242 ) Long-term debt, excluding current maturities $ 6,726 6,997 Note payable - affiliate 6.795% 2022 $ 884 855 |
Fair Value Disclosure (Tables)
Fair Value Disclosure (Tables) | 6 Months Ended |
Jun. 30, 2016 | |
Fair Value Disclosures [Abstract] | |
Schedule of the three input levels in the hierarchy of fair value measurements | The three input levels in the hierarchy of fair value measurements are defined by the FASB generally as follows: Input Level Description of Input Level 1 Observable inputs such as quoted market prices in active markets. Level 2 Inputs other than quoted prices in active markets that are either directly or indirectly observable. Level 3 Unobservable inputs in which little or no market data exists. |
Schedule of carrying amounts and estimated fair values of long-term debt, excluding capital lease obligations, and input level to determine fair values | The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding capital lease and other obligations, as well as the input level used to determine the fair values indicated below: As of June 30, 2016 As of December 31, 2015 Input Level Carrying Amount Fair Value Carrying Amount Fair Value (Dollars in millions) Liabilities—Long-term debt, excluding capital lease and other obligations 2 $ 7,207 7,579 7,222 7,456 |
Products and Services Revenues
Products and Services Revenues (Tables) | 6 Months Ended |
Jun. 30, 2016 | |
Segment Reporting [Abstract] | |
Schedule of operating revenues by products and services | Our operating revenues for our products and services consisted of the following categories: Three Months Ended June 30, Six Months Ended June 30, 2016 2015 2016 2015 (Dollars in millions) Strategic services $ 674 650 1,345 1,291 Legacy services 814 904 1,658 1,833 Affiliates and other services 735 668 1,473 1,315 Total operating revenues $ 2,223 2,222 4,476 4,439 |
Other Financial Information (Ta
Other Financial Information (Tables) | 6 Months Ended |
Jun. 30, 2016 | |
Additional Financial Information Disclosure [Abstract] | |
Schedule of components other current assets | The following table presents details of other current assets in our consolidated balance sheets: As of As of (Dollars in millions) Prepaid expenses $ 70 46 Other 78 77 Total other current assets $ 148 123 |
Schedule of selected current liabilities | Current liabilities reflected in our consolidated balance sheets include accounts payable: As of As of (Dollars in millions) Accounts payable $ 350 369 |
Basis of Presentation (Details)
Basis of Presentation (Details) | Jun. 30, 2016state |
Geographic Areas, Revenues from External Customers [Abstract] | |
Number of states in which entity operates (states) | 14 |
Basis of Presentation (Details
Basis of Presentation (Details 2) number in Millions, $ in Millions | Aug. 27, 2015USD ($)state | Jun. 30, 2016USD ($)state | Jun. 30, 2016USD ($)state |
Products and Services Revenues | |||
Number of states in which entity operates (states) | state | 14 | 14 | |
CAF Phase 2 Support | CenturyLink, Inc. | |||
Products and Services Revenues | |||
Federal support, total amount per agreement | $ | $ 500 | ||
Agreement term (in years) | 6 years | ||
Number of rural households and businesses | 1.2 | ||
Number of states in which entity operates (states) | state | 33 | ||
CAF Phase 2 Support | Qwest Corporation | |||
Products and Services Revenues | |||
Federal support, total amount per agreement | $ | $ 150 | ||
Number of rural households and businesses | 0.3 | ||
Number of states in which entity operates (states) | state | 13 | 13 | 13 |
Incremental increase in other operating revenues - CAF Phase II | $ | $ 24 | $ 48 |
Long-Term Debt and Revolving 24
Long-Term Debt and Revolving Promissory Note (Details) - USD ($) $ in Millions | Jun. 30, 2016 | Dec. 31, 2015 |
Long-term debt | ||
Capital lease and other obligations | $ 28 | $ 17 |
Unamortized premiums, net | 8 | 16 |
Unamortized debt issuance costs | (130) | (123) |
Total long-term debt | 7,235 | 7,239 |
Less current maturities | (509) | (242) |
Long-term debt, excluding current maturities | 6,726 | 6,997 |
Note payable - affiliate | 884 | 855 |
Senior notes | ||
Long-term debt | ||
Long-term debt, gross | $ 7,229 | 7,229 |
Senior notes | Minimum | ||
Long-term debt | ||
Stated interest rate (percent) | 6.125% | |
Senior notes | Maximum | ||
Long-term debt | ||
Stated interest rate (percent) | 7.75% | |
Term loan | ||
Long-term debt | ||
Long-term debt, gross | $ 100 | 100 |
Interest rate at end of period - Term loan (percent) | 2.22% | |
Note payable - affiliate | Loans payable | Affiliated entity | ||
Long-term debt | ||
Weighted average interest rate (percent) | 6.795% | |
Note payable - affiliate | $ 884 | $ 855 |
Long-Term Debt and Revolving 25
Long-Term Debt and Revolving Promissory Note (Details 2) - USD ($) $ in Millions | Jan. 31, 2016 | Jun. 30, 2016 | May 02, 2016 |
Senior notes | 7.00% Notes due 2056 | |||
Long-term debt | |||
Debt instrument face amount | $ 235 | ||
Stated interest rate (percent) | 7.00% | ||
Proceeds from debt, net of issuance costs | $ 227 | ||
Senior notes | 8.375% Notes due 2016 | |||
Long-term debt | |||
Stated interest rate (percent) | 8.375% | ||
Face amount of repurchased debt | $ 235 | ||
Affiliated entity | Loans payable | Note payable - affiliate | |||
Long-term debt | |||
Line of credit, maximum borrowing capacity | $ 1,000 | ||
Note payable - affiliate | $ 884 | ||
Weighted average interest rate (percent) | 6.795% | ||
Accrued interest payable on affiliate note payable | $ 5 | ||
Debt Instrument, Redemption, Period One | Senior notes | 7.00% Notes due 2056 | |||
Long-term debt | |||
Debt instrument, redemption, period one | on or after February 1, 2021, at a redemption price equal to 100% of the principal amount redeemed |
Fair Value Disclosure (Details)
Fair Value Disclosure (Details) - Fair value measurements, nonrecurring - Fair value inputs, Level 2 - USD ($) $ in Millions | Jun. 30, 2016 | Dec. 31, 2015 |
Carrying Amount | ||
Liabilities | ||
Liabilities—Long-term debt, excluding capital lease and other obligations | $ 7,207 | $ 7,222 |
Fair Value | ||
Liabilities | ||
Liabilities—Long-term debt, excluding capital lease and other obligations | $ 7,579 | $ 7,456 |
Products and Services Revenue27
Products and Services Revenues (Details) $ in Millions | 3 Months Ended | 6 Months Ended | ||
Jun. 30, 2016USD ($) | Jun. 30, 2015USD ($) | Jun. 30, 2016USD ($)categorysegment | Jun. 30, 2015USD ($) | |
Products and Services Revenues | ||||
Operating revenues | $ 2,223 | $ 2,222 | $ 4,476 | $ 4,439 |
Number of categories of products and services (categories) | category | 3 | |||
USF surcharges included in operating revenues | 38 | 38 | $ 76 | 75 |
Number of reportable segments (segments) | segment | 1 | |||
Individual customers accounting for more than 10% of total operating revenues | We do not have any single external customer that provides more than 10% of our total consolidated operating revenues. | |||
Strategic services | ||||
Products and Services Revenues | ||||
Operating revenues | 674 | 650 | $ 1,345 | 1,291 |
Legacy services | ||||
Products and Services Revenues | ||||
Operating revenues | 814 | 904 | 1,658 | 1,833 |
Affiliates and other services | ||||
Products and Services Revenues | ||||
Operating revenues | $ 735 | 668 | $ 1,473 | 1,315 |
Business low-bandwidth data services | Restatement adjustment | Strategic services | ||||
Products and Services Revenues | ||||
Operating revenues | (209) | (426) | ||
Other business strategic services | Restatement adjustment | Strategic services | ||||
Products and Services Revenues | ||||
Operating revenues | 1 | 2 | ||
Low-bandwidth Data Services | Restatement adjustment | Legacy services | ||||
Products and Services Revenues | ||||
Operating revenues | 209 | 426 | ||
Other business legacy services | Restatement adjustment | Legacy services | ||||
Products and Services Revenues | ||||
Operating revenues | $ (1) | $ (2) |
Commitments and Contingencies C
Commitments and Contingencies Commitments and Contingencies (Details) | 6 Months Ended |
Jun. 30, 2016USD ($)lawsuit | |
Unfavorable regulatory action | |
Loss Contingencies [Line Items] | |
Estimate of possible loss (per proceeding) | $ | $ 100,000 |
Pending litigation | |
Loss Contingencies [Line Items] | |
Number of patents allegedly infringed (minimum) | lawsuit | 1 |
Dividends (Details)
Dividends (Details) $ in Millions | 6 Months Ended |
Jun. 30, 2016USD ($) | |
Dividends [Abstract] | |
Dividends declared and paid to Qwest Services Corporation | $ 700 |
Other Financial Information (De
Other Financial Information (Details) - USD ($) $ in Millions | 6 Months Ended | 12 Months Ended |
Jun. 30, 2016 | Dec. 31, 2015 | |
Prepaid Expense and Other Assets, Current [Abstract] | ||
Prepaid expenses | $ 70 | $ 46 |
Other | 78 | 77 |
Total other current assets | 148 | 123 |
Accounts Payable, Current [Abstract] | ||
Accounts payable | 350 | 369 |
Capital expenditures incurred and included in accounts payable | $ 29 | $ 29 |