QWEST CORP, 10-K filed on 2/27/2015
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2014
Feb. 27, 2015
Jun. 30, 2014
Document and Entity Information
 
 
 
Entity Registrant Name
QWEST CORP 
 
 
Entity Central Index Key
0000068622 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2014 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Non-accelerated Filer 
 
 
Entity Public Float
 
 
$ 0 
Entity Common Stock, Shares Outstanding (shares)
 
1 
 
Document Fiscal Year Focus
2014 
 
 
Document Fiscal Period Focus
FY 
 
 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
OPERATING REVENUES
 
 
 
Operating revenues
$ 6,676 
$ 6,818 
$ 7,031 
Operating revenues-affiliates
2,162 
1,935 
1,817 
Total operating revenues
8,838 
8,753 
8,848 
OPERATING EXPENSES
 
 
 
Cost of services and products (exclusive of depreciation and amortization)
2,879 
2,790 
2,868 
Selling, general and administrative
1,086 
1,062 
1,166 
Operating expenses-affiliates
756 
695 
619 
Depreciation and amortization
2,005 
2,128 
2,290 
Total operating expenses
6,726 
6,675 
6,943 
OPERATING INCOME
2,112 
2,078 
1,905 
OTHER (EXPENSE) INCOME
 
 
 
Interest expense
(464)
(450)
(443)
Interest expense-affiliates, net
(40)
(64)
(24)
Net loss on early retirement of debt
0 
0 
(47)
Other income
1 
2 
0 
Total other (expense) income
(503)
(512)
(514)
INCOME BEFORE INCOME TAX EXPENSE
1,609 
1,566 
1,391 
Income tax expense
639 
602 
542 
NET INCOME
$ 970 
$ 964 
$ 849 
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 6 
$ 14 
Accounts receivable, less allowance of $38 and $43
740 
738 
Advances to affiliates
812 
712 
Deferred income taxes, net
163 
161 
Other
125 
126 
Total current assets
1,846 
1,751 
NET PROPERTY, PLANT AND EQUIPMENT
 
 
Property, plant and equipment
11,157 
10,193 
Accumulated depreciation
(3,956)
(2,985)
Net property, plant and equipment
7,201 
7,208 
GOODWILL AND OTHER ASSETS
 
 
Goodwill
9,354 
9,354 
Customer relationships, Net
3,039 
3,687 
Other intangible assets, net
808 
1,008 
Other, net
209 
210 
Total goodwill and other assets
13,410 
14,259 
TOTAL ASSETS
22,457 
23,218 
CURRENT LIABILITIES
 
 
Current maturities of long-term debt
117 
637 
Accounts payable
464 
440 
Note payable-affiliate
796 
754 
Accrued expenses and other liabilities
 
 
Salaries and benefits
220 
217 
Income and other taxes
197 
206 
Other
140 
126 
Advance billings and customer deposits
327 
320 
Total current liabilities
2,261 
2,700 
LONG-TERM DEBT
7,262 
6,921 
DEFERRED CREDITS AND OTHER LIABILITIES
 
 
Deferred revenues
153 
161 
Deferred income taxes, net
2,247 
2,473 
Affiliates obligations, net
1,271 
1,263 
Other
80 
87 
Total deferred credits and other liabilities
3,751 
3,984 
COMMITMENTS AND CONTINGENCIES (Note 15)
   
   
STOCKHOLDER'S EQUITY
 
 
Common stock-one share without par value, owned by Qwest Services Corporation
10,050 
10,050 
Accumulated deficit
(867)
(437)
Total stockholder's equity
9,183 
9,613 
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY
$ 22,457 
$ 23,218 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Statement of Financial Position [Abstract]
 
 
Accounts receivable, allowance (in dollars)
$ 38 
$ 43 
Common stock, share outstanding (shares)
1 
1 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Statement of Cash Flows [Abstract]
 
 
 
Net income
$ 970 
$ 964 
$ 849 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
2,005 
2,128 
2,290 
Deferred income taxes
(228)
(152)
(201)
Provision for uncollectible accounts
64 
65 
74 
Net long-term debt premium amortization
(39)
(52)
(65)
Accrued interest on affiliate note
42 
0 
0 
Net loss on early retirement of debt
0 
0 
47 
Impairment of asset
17 
0 
0 
Changes in current assets and liabilities:
 
 
 
Accounts receivable
(66)
(94)
(76)
Accounts payable
(9)
(1)
(58)
Accrued income and other taxes
(9)
(9)
(9)
Other current assets and liabilities, net
34 
34 
(17)
Other current assets and liabilities-affiliates
9 
0 
0 
Changes in other noncurrent assets and liabilities, net
1 
0 
61 
Changes in affiliate obligations, net
8 
(179)
(130)
Other, net
2 
9 
9 
Net cash provided by operating activities
2,801 
2,713 
2,774 
INVESTING ACTIVITIES
 
 
 
Payments for property, plant and equipment and capitalized software
(1,165)
(1,264)
(1,266)
Changes in advances to affiliates
100 
119 
395 
Proceeds from sale of property
14 
2 
133 
Net cash used in investing activities
(1,251)
(1,381)
(1,528)
FINANCING ACTIVITIES
 
 
 
Net proceeds from issuance of long-term debt
483 
752 
896 
Payments of long-term debt
(641)
(806)
(1,430)
Early retirement of debt costs
0 
0 
178 
Dividends paid to Qwest Services Corporation
(1,400)
(1,325)
(1,150)
Changes in note payable-affiliate
0 
53 
701 
Changes in advances from affiliates
0 
0 
(80)
Net cash used in financing activities
(1,558)
(1,326)
(1,241)
Net (decrease) increase in cash and cash equivalents,
(8)
6 
5 
Cash and cash equivalents at beginning of period
14 
8 
3 
Cash and cash equivalents at end of period
6 
14 
8 
Supplemental cash flow information:
 
 
 
Income taxes paid, net
(861)
(750)
(607)
Interest paid (net of capitalized interest of $17, $17 and $18)
$ (505)
$ (513)
$ (513)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Statement of Cash Flows [Abstract]
 
 
 
Interest paid, capitalized interest
$ 17 
$ 17 
$ 18 
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) (USD $)
In Millions, unless otherwise specified
Total
COMMON STOCK
ACCUMULATED DEFICIT
Balance at beginning of period at Dec. 31, 2011
 
$ 9,950 
$ (85)
COMMON STOCK
 
 
 
Tax benefit of pension deduction
 
100 
 
ACCUMULATED DEFICIT
 
 
 
Net income
849 
 
849 
Dividends declared to Qwest Services Corporation
(840)
 
(840)
Balance at end of period at Dec. 31, 2012
9,974 
10,050 
(76)
COMMON STOCK
 
 
 
Tax benefit of pension deduction
 
0 
 
ACCUMULATED DEFICIT
 
 
 
Net income
964 
 
964 
Dividends declared to Qwest Services Corporation
(1,325)
 
(1,325)
Balance at end of period at Dec. 31, 2013
9,613 
10,050 
(437)
COMMON STOCK
 
 
 
Tax benefit of pension deduction
 
0 
 
ACCUMULATED DEFICIT
 
 
 
Net income
970 
 
970 
Dividends declared to Qwest Services Corporation
(1,400)
 
(1,400)
Balance at end of period at Dec. 31, 2014
$ 9,183 
$ 10,050 
$ (867)
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Summary of SIgnificant Accounting Policies
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
We are an integrated communications company engaged primarily in providing an array of communications services to our residential, business, governmental and wholesale customers. Our communications services include local, broadband, private line (including special access), network access, Ethernet, information technology, wireless and video 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 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.
On April 1, 2011, our indirect parent QCII became a wholly-owned subsidiary of CenturyLink, Inc. in a tax-free, stock-for-stock transaction.
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.
Changes in Estimates
As a result of our annual reviews to evaluate the reasonableness of the depreciable lives for our property, plant and equipment, effective January 2014, we changed the estimates of the remaining economic lives of certain switch and circuit network equipment. These changes resulted in an increase in depreciation expense of approximately $20 million for the year ended December 31, 2014. This increase in depreciation expense, net of tax, reduced consolidated net income by approximately $12 million for the year ended December 31, 2014.
Summary of Significant Accounting Policies
Use of Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we make when accounting for items and matters such as, but not limited to, long-term contracts, customer retention patterns, allowance for doubtful accounts, depreciation, amortization, asset valuations, rates used for affiliate cost allocations, internal labor capitalization rates, recoverability of assets (including deferred tax assets), impairment assessments, pension, post-retirement and other post-employment benefits, taxes, certain liabilities and other provisions and contingencies are reasonable, based on information available at the time they were made. Our accounting for CenturyLink's indirect acquisition of us required extensive use of estimates in determining the acquisition date fair values of our assets and liabilities. These estimates, judgments and assumptions can affect the reported amounts of assets, liabilities and components of stockholder's equity or deficit as of the dates of the consolidated balance sheets, as well as the reported amounts of revenues, expenses and components of cash flows during the periods presented in our consolidated statements of operations and our consolidated statements of cash flows. We also make estimates in our assessments of potential losses in relation to threatened or pending tax and legal matters. See Note 11—Income Taxes and Note 15—Commitments and Contingencies for additional information.
For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. If we have the potential to recover a portion of the estimated loss from a third party, we make a separate assessment of recoverability and reduce the estimated loss if recovery is also deemed probable.
For matters related to income taxes, if we determine that the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Interest is recognized on the amount of unrecognized benefit from uncertain tax positions.
For all of these and other matters, actual results could differ from our estimates.
Revenue Recognition
We recognize revenue for services when the related services are provided. Recognition of certain payments received in advance of services being provided is deferred until the service is provided. These advance payments include activation and installation charges, which we recognize as revenue over the expected customer relationship period, which ranges from eighteen months to over ten years depending on the service. We also defer costs for customer activations and installations. The deferral of customer activation and installation costs is limited to the amount of revenue deferred on advance payments. Costs in excess of advance payments are recorded as expense in the period such costs are incurred. Expected customer relationship periods are estimated using historical experience. Termination fees or other fees on existing contracts that are negotiated in conjunction with new contracts are deferred and recognized over the new contract term.
We offer bundle discounts to our customers who receive certain groupings of services. These bundle discounts are recognized concurrently with the associated revenue and are allocated to the various services in the bundled offering based on the estimated selling price of services included in each bundled combination.
Customer arrangements that include both equipment and services are evaluated to determine whether the elements are separable. If the elements are deemed separable and separate earnings processes exist, the revenue associated with the customer arrangement is allocated to each element based on the relative estimated selling price of the separate elements. We have estimated the selling prices of each element by reference to vendor-specific objective evidence of selling prices when the elements are sold separately. The revenue associated with each element is then recognized as earned. For example, if we receive an advance payment when we sell equipment and continuing service together, we immediately recognize as revenue the amount allocated to the equipment as long as all the conditions for revenue recognition have been satisfied. The portion of the advance payment allocated to the service based upon its relative selling price is recognized ratably over the longer of the contractual period or the expected customer relationship period.
We periodically transfer optical capacity assets on our network to other telecommunications service carriers. These transactions are structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically 20 years. We account for the cash consideration received on transfers of optical capacity assets and on all of the other elements deliverable under an IRU, as revenue ratably over the term of the agreement. We have not recognized revenue on any contemporaneous exchanges of our optical capacity assets for other optical capacity assets.
In connection with offering products and services provided by third-party vendors, we review the relationship between us, the vendor and the end customer to assess whether revenue should be reported on a gross or net basis. In assessing whether revenue should be reported on a gross or net basis, we consider whether we act as a principal in the transaction, take title to the products, have risk and rewards of ownership or act as an agent or broker. Based on CenturyLink's agreements with DIRECTV and Verizon Wireless, we offer these services through sales agency relationships which are reported on a net basis.
Affiliate Transactions
We provide to our affiliates telecommunications services that we also provide to external customers. In addition, we provide to our affiliates computer system development and support services. Services provided by us to our affiliates are recognized as operating revenue-affiliates on our consolidated statements of operations. We also purchase services from our affiliates including telecommunications services, marketing and employee-related support services. Services provided to us from our affiliates are recognized as operating expenses-affiliates on our consolidated statements of operations. Because of the significance of the services we provide to our affiliates and our affiliates provide to us, the results of operations, financial position and cash flows presented herein are not necessarily indicative of the results of operations, financial position and cash flows we would have achieved had we operated as a stand-alone entity during the periods presented.
We recognize intercompany charges at the amounts billed to us by our affiliates and we recognize intercompany revenue for services we bill to our affiliates. Regulatory rules require certain revenues and expenses to be recorded at market price or fully distributed cost. Our compliance with regulations is subject to review by regulators. Adjustments to intercompany charges that result from these reviews are recorded in the period they become known.
CenturyLink has cash management arrangements between certain of its subsidiaries that include lines of credit, affiliate obligations, capital contributions and dividends. As part of these cash management arrangements, an affiliate provides lines of credit to certain other affiliates. Amounts outstanding under these lines of credit and intercompany obligations vary from time to time. Under these arrangements, the majority of our cash balance is transferred on a daily basis to CenturyLink and most affiliate transactions are deemed to be settled at the time the transactions are recorded in our accounting records, with the resulting net balance at the end of each period reflected as advances to affiliates on the accompanying consolidated balance sheets. From time to time we declare and pay dividends to our parent, QSC, which are settled through the advances to affiliates, which has the net effect of reducing the amount of these advances. Dividends declared are reflected on our consolidated statements of stockholder's equity and the consolidated statements of cash flows reflects the changes in advances to affiliates as investing activities and changes in advances from affiliates as financing activities. Interest is assessed on the advances to/from affiliates on either the three-month U.S T-bill rate (for advances to affiliates) or CenturyLink’s weighted average borrowing rate (for advances from affiliates).
The affiliates obligations, net in noncurrent liabilities on the consolidated balance sheets represents the cumulative allocation of expense associated with CenturyLink’s pension plans and post-retirement benefits plans. Changes in the affiliates obligations, net are reflected in operating activities on our consolidated statements of cash flows.
In the normal course of business, we transfer assets to and from various affiliates through our parent, QSC, which are recorded through our equity. It is our policy to record asset transfers based on carrying values.
USF, Gross Receipts Taxes and Other Surcharges
In determining whether to include in our revenues and expenses the taxes and surcharges collected from customers and remitted to government authorities, including Universal Service Fund ("USF") charges, sales, use, value added and some excise taxes, we assess, among other things, whether we are the primary obligor or principal taxpayer for the taxes assessed in each jurisdiction where we do business. In jurisdictions where we determine that we are the principal taxpayer, we record the surcharges on a gross basis and include them in our revenues and costs of services and products.
In jurisdictions where we determine that we are merely a collection agent for the government authority, we record the taxes on a net basis and do not include them in our revenues and costs of services and products.
Advertising Costs
Costs related to advertising are expensed as incurred and included in selling, general and administrative expenses in our consolidated statements of operations. Our advertising expense was $83 million, $88 million and $90 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Legal Costs
In the normal course of our business, we incur costs to hire and retain external legal counsel to advise us on regulatory, litigation and other matters. We expense these costs as the related services are received.
Income Taxes
Our results are included in the CenturyLink consolidated federal income tax return and certain combined state income tax returns. CenturyLink allocates income tax expense to us based upon a separate return allocation method which results in income tax expense that approximates the expense that would result if we were a stand-alone entity. Our reported deferred tax assets and liabilities, as discussed below and in Note 11—Income Taxes, are primarily determined as a result of the application of the separate return allocation method and therefore the settlement of these amounts is dependent upon our parent, CenturyLink, rather than tax authorities. Our current expectation is that the vast majority of deferred tax assets and liabilities will be settled through our general intercompany obligation based upon the current CenturyLink policy. CenturyLink has the right to change their policy regarding settlement of these assets and liabilities at any time.
The provision for income taxes consists of an amount for taxes currently payable, an amount for tax consequences deferred to future periods, adjustments to our liabilities for uncertain tax positions and amortization of investment tax credits. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to differences between the financial statement carrying value of assets and liabilities and the tax bases of those assets and liabilities. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date.
We establish valuation allowances when necessary to reduce deferred income tax assets to the amounts that we believe are more likely than not to be recovered. Each quarter we evaluate the need to retain all or a portion of the valuation allowance on our deferred tax assets. See Note 11—Income Taxes for additional information.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates. As a result, the value at which cash and cash equivalents are reported in our consolidated financial statements approximates their fair value. Our cash collections are transferred to CenturyLink on a daily basis and our ultimate parent funds our cash disbursement needs. The net cash transferred to CenturyLink has been reflected as advances to affiliates in our consolidated balance sheets.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recognized based upon the amount due from customers for the services provided or at cost for purchased and other receivables less an allowance for doubtful accounts. The allowance for doubtful accounts receivable reflects our best estimate of probable losses inherent in our receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence. We generally consider our accounts past due if they are outstanding over 30 days. Our collection process varies by the customer segment, amount of the receivable, and our evaluation of the customer's credit risk. Our past due accounts are written off against our allowance for doubtful accounts when collection is considered to be not probable. Any recoveries of accounts previously written off are generally recognized as a reduction in bad debt expense in the period received. The carrying value of accounts receivable net of the allowance for doubtful accounts approximates fair value.
Property, Plant and Equipment
Purchased and constructed property, plant and equipment is recorded at cost. Property, plant and equipment is depreciated primarily using the straight-line group method. Under the straight-line group method, assets dedicated to providing telecommunications services (which comprise the majority of our property, plant and equipment) that have similar physical characteristics, use and expected useful lives are pooled for purposes of depreciation and tracking. The equal life group procedure is used to establish each pool's average remaining useful life. Generally, under the straight-line group method, when an asset is sold or retired in the course of normal business activities, the cost is deducted from property, plant and equipment and charged to accumulated depreciation without recognition of a gain or loss. A gain or loss is recognized in our consolidated statements of operations only if a disposal is abnormal or unusual. Leasehold improvements are amortized over the shorter of the useful lives of the assets or the expected lease term. Expenditures for maintenance and repairs are expensed as incurred. Interest is capitalized during the construction phase of network and other internal-use capital projects. Employee-related costs for construction of network and other internal use assets are also capitalized during the construction phase. Property, plant and equipment supplies used internally are carried at average cost, except for significant individual items for which cost is based on specific identification.
We perform annual internal reviews to evaluate the reasonableness of the depreciable lives for our property, plant and equipment. Our reviews utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution and, in certain instances, actuarially determined probabilities to estimate the remaining useful life of our asset base. Our remaining useful life assessments anticipate the loss in service value of assets that may precede the physical retirement. Assets shared among many customers may lose service value as those customers leave the network. However, the asset is not retired until all customers no longer utilize the asset.
We review long-lived tangible assets for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. For assessment purposes, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, absent a material change in operations. An impairment loss is recognized only if the carrying amount of the asset group is not recoverable and exceeds its fair value. Recoverability of the asset group to be held and used is assessed by comparing the carrying amount of the asset group to the estimated undiscounted future net cash flows expected to be generated by the asset group. If the asset group's carrying value is not recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. We determine fair values by using a combination of comparable market values and discounted cash flows, as appropriate.
Goodwill, Customer Relationships and Other Intangible Assets
Intangible assets arising from business combinations, such as goodwill, customer relationships and capitalized software are initially recorded at estimated fair value. We amortize customer relationships primarily over an estimated life of ten years, using either the sum-of-the-years-digits or the straight-line methods, depending on the type of customer. We amortize capitalized software using the straight-line method over estimated lives ranging up to seven years. Other intangible assets not arising from business combinations are initially recorded at cost. We review long-lived intangible assets, other than goodwill, for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable.
Internally used software, whether purchased or developed by us, is capitalized and amortized using the straight-line method over its estimated useful life. We have capitalized certain costs associated with software such as costs of employees devoting time to the projects and external direct costs for materials and services. Costs associated with software to be used for internal purposes are expensed until the point at which the project has reached the development stage. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance, data conversion and training costs are expensed in the period in which they are incurred. We review the remaining economic lives of our capitalized software annually. Capitalized software is included in other intangible assets, net, in our consolidated balance sheets.
We assess customer relationships for impairment whenever facts and circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized only if the carrying amount is not recoverable and exceeds its fair value. Recoverability of our customer relationships is measured by comparing the carrying amount to the estimated undiscounted future net cash flows expected to be generated by them. If the customer relationship's carrying value is not recoverable, an impairment charge is recognized for the amount by which the carrying amount exceeds its fair value. We determine fair values by using the discounted cash flows method.
We are required to assess goodwill for impairment at least annually, or more frequently if events or a change in circumstances indicate that an impairment may have occurred. We are required to write-down the value of goodwill in periods in which the recorded amount of goodwill exceeds the implied fair value of goodwill. The impairment assessment is at the reporting unit level, and in reviewing the criteria for reporting units when assigning the goodwill resulting from CenturyLink's indirect acquisition of us, we have determined that our operations consist of one reporting unit, consistent with our determination that our business consists of one operating segment. See Note 2—Goodwill, Customer Relationships and Other Intangible Assets for additional information.
During the fourth quarter of 2013, we elected to change the date of our annual assessment of goodwill impairment from September 30 to October 31. This is a change in method of applying an accounting principle which management believes is a preferable alternative as the new date of the assessment is more closely aligned with our strategic planning process. The change in the assessment date did not delay, accelerate or avoid a potential impairment charge in 2013. We performed our annual goodwill impairment assessment at September 30, 2013, prior to the change in our annual assessment date. We then performed a qualitative assessment of our goodwill as of October 31, 2013 and concluded that our goodwill was not impaired as of that date.
Pension and Post-Retirement Benefits
A substantial portion of our employees participate in the CenturyLink Combined Pension Plan. On December 31, 2014, the QCII pension plan and a pension plan of an affiliate were merged into the CenturyLink Retirement Plan. The CenturyLink Retirement Plan was renamed the CenturyLink Combined Pension Plan. QCII maintains a non-qualified pension plan for certain of our eligible highly compensated employees. In addition, certain employees may become eligible to participate in CenturyLink's post-retirement health care and life insurance benefit plans. CenturyLink and QCII allocate income and expenses relating to pension, non-qualified pension, and post-retirement health care and life insurance benefits to us and their other affiliates. The amounts contributed by us through CenturyLink and QCII are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other employees of CenturyLink and QCII's affiliates. The allocation of expense to us is based upon the demographics of our employees and retirees compared to all the remaining participants.
For further information on qualified pension, non-qualified pension, post-retirement and other post-employment benefit plans, see CenturyLink's Annual Report on Form 10-K for the year ended December 31, 2014.
Recent Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09” or “new standard”). The new standard is effective for annual and interim periods beginning January 1, 2017, and early adoption is prohibited. ASU 2014-09 may be adopted by applying the provisions of the new 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 2017. We have not yet decided which implementation method we will adopt.
The new standard 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 defer contract fulfillment costs only up to the extent of any revenue deferred.
We are studying the new standard and are in the early stages of assessing the impact the new standard will have on us and our consolidated financial statements. We cannot, however, provide any estimate of the impact of adopting the new standard at this time.
Goodwill, Customer Relationships and Other Intangible Assets
Goodwill, Customer Relationships and Other Intangible Assets
Goodwill, Customer Relationships and Other Intangible Assets
Goodwill, customer relationships and other intangible assets consisted of the following:
 
As of December 31,
 
2014
 
2013
 
(Dollars in millions)
Goodwill
$
9,354

 
9,354

Customer relationships, less accumulated amortization of $2,660 and $2,012
3,039

 
3,687

Other intangible assets subject to amortization:
 
 
 
Capitalized software, less accumulated amortization of $1,247 and $994
808

 
1,008


As of December 31, 2014, the gross carrying amount of goodwill, customer relationships and other intangible assets was $17.108 billion.
Total amortization expense for intangible assets was as follows:
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(Dollars in millions)
Amortization expense for intangible assets
$
957

 
1,029

 
1,115


We estimate that total amortization expense for intangible assets for the years ending December 31, 2015 through 2019 will be as follows:
 
(Dollars in millions)
Year ending December 31,
 
2015
$
808

2016
740

2017
669

2018
589

2019
503


We annually review the estimated lives and methods used to amortize our other intangible assets. The actual amounts of amortization expense may differ materially from our estimates, depending on the results of our annual reviews.
Our goodwill impairment assessment is done at the reporting unit level; in reviewing the criteria for reporting units when assigning the goodwill resulting from our acquisition by CenturyLink, we have determined that we are one reporting unit. We are required to assess goodwill recorded in business combinations for impairment at least annually, or more frequently such as when events or circumstances indicate there may be impairment. Our annual goodwill impairment assessment date is October 31. We are required to write-down the value of goodwill when our assessment determines the recorded amount of goodwill exceeds the fair value.
We compare our estimated fair value of equity to our carrying value of equity. If the estimated fair value of our equity is greater than the carrying value of our equity, we conclude that no impairment exists. If the estimated fair value of our equity is less than our carrying value of our equity, a second calculation is required in which the implied fair value of goodwill is compared to our carrying value of goodwill. If the implied fair value of goodwill is less than our carrying value of goodwill, goodwill must be written down to the implied fair value.
At October 31, 2014, we estimated the fair value of our equity by considering both a market approach method and a discounted cash flow method, which resulted in a Level 3 fair value measurement. The market approach method includes the use of comparable multiples of publicly traded companies whose services are comparable to ours. The discounted cash flow method is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows beyond the cash flows from the discrete projection period. We discounted the estimated cash flows using a rate that represents our estimated weighted average cost of capital, which we determined to be approximately 6.0% as of the assessment date (which was comprised of an after-tax cost of debt of 2.9% and a cost of equity of 8.2%). Based on our assessment performed with respect to our reporting unit described above, we concluded that our goodwill was not impaired.
Long-Term Debt and Revolving Promissory Note
Long-Term Debt and Revolving Promissory Note
Long-Term Debt and Revolving Promissory Note
Long-term debt, including unamortized discounts and premiums and note payable-affiliate, were as follows:
 
 
 
 
 
As of December 31,
 
Interest Rates
 
Maturities
 
2014
 
2013
 
 
 
 
 
(Dollars in millions)
Senior notes
6.125% - 8.375%
 
2015 - 2054
 
$
7,311

 
7,411

Capital lease and other obligations
Various
 
Various
 
32

 
72

Unamortized premiums, net
 
 
 
 
36

 
75

Total long-term debt
 
 
 
 
7,379

 
7,558

Less current maturities
 
 
 
 
(117
)
 
(637
)
Long-term debt, excluding current maturities
 
 
 
 
$
7,262

 
6,921

Note payable-affiliate
6.657%
 
2022
 
$
796

 
754

New Issuances
2014
On September 29, 2014, we issued $500 million aggregate principal amount of 6.875% Notes due 2054, in exchange for net proceeds, after deducting underwriting discounts and other expenses, of $483 million. The Notes are senior unsecured obligations and may be redeemed, in whole or in part, on or after October 1, 2019, at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date.
2013
On May 23, 2013, we issued $775 million aggregate principal amount of 6.125% Notes due 2053, including $25 million principal amount that was sold pursuant to an over-allotment option granted to the underwriters for the offering, in exchange for net proceeds, after deducting underwriting discounts and other expenses, of approximately $752 million. The Notes are unsecured obligations and may be redeemed, in whole or in part, on or after June 1, 2018 at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date.
Repayments
2014
On October 1, 2014, we paid at maturity the $600 million principal amount of our 7.50% Notes.
2013
On June 17, 2013, we paid at maturity the $750 million principal amount of our floating rate Notes.
Aggregate Maturities of Long-Term Debt
Aggregate maturities of our long-term debt (excluding unamortized premiums, discounts and other and excluding note payable-affiliate):
 
(Dollars in millions)(1)
2015
$
117

2016
237

2017
500

2018
—

2019
—

2020 and thereafter
6,489

Total long-term debt
$
7,343

_______________________________________________________________________________
(1) Actual principal paid in all years may differ due to the possible future refinancing of outstanding debt or the issuance of new debt.
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 $796 million was outstanding as of December 31, 2014. As of December 31, 2014, the weighted average interest rate was 6.657%. As of December 31, 2014 and 2013, this revolving promissory note is reflected on our consolidated balance sheets as a current liability under “Note payable-affiliate”. As of December 31, 2014, $9 million of accrued interest is reflected in other current liabilities on our consolidated balance sheet. In accordance with the note agreement, all accrued and unpaid interest is capitalized to the unpaid principal balance on April 1 and November 1 of each year.
Interest Expense
Interest expense includes interest on long-term debt. The following table presents the amount of gross interest expense, net of capitalized interest and interest expense-affiliates, net:
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(Dollars in millions)
Interest expense:
 
 
 
 
 
Gross interest expense
$
481

 
467

 
461

Capitalized interest
(17
)
 
(17
)
 
(18
)
Total interest expense
$
464

 
450

 
443

Interest expense-affiliates, net
$
40

 
64

 
24


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 December 31, 2014, we believe we were in compliance with the provisions and covenants of our debt agreements.
Subsequent Event
On February 20, 2015, we entered into a new credit agreement with several lenders that allows us to borrow up to $100 million under a term loan. Under this new agreement, we borrowed $100 million under a ten-year term note that expires on February 20, 2025.
Accounts Receivable
Accounts Receivable
Accounts Receivable
The following table presents details of our accounts receivable balances:
 
As of December 31,
 
2014
 
2013
 
(Dollars in millions)
Trade and purchased receivables
$
649

 
697

Earned and unbilled receivables
120

 
73

Other
9

 
11

Total accounts receivable
778

 
781

Less: allowance for doubtful accounts
(38
)
 
(43
)
Accounts receivable, less allowance
$
740

 
738

We are exposed to concentrations of credit risk from residential and business customers within our local service area and from other telecommunications service providers. No customers individually represented more than 10% of our accounts receivable for all periods presented herein. We generally do not require collateral to secure our receivable balances. We have agreements with other telecommunications service providers whereby we agree to bill and collect on their behalf for services rendered by those providers to our customers within our local service area. We purchase accounts receivable from other telecommunications service providers primarily on a recourse basis and include these amounts in our accounts receivable balance. We have not experienced any significant loss associated with these purchased receivables.
The following table presents details of our allowance for doubtful accounts:
 
Beginning
Balance
 
Additions
 
Deductions
 
Ending
Balance
 
(Dollars in millions)
2014
$
43

 
64

 
(69
)
 
38

2013
$
46

 
65

 
(68
)
 
43

2012
$
42

 
74

 
(70
)
 
46

Property, Plant and Equipment
Property, Plant and Equipment
Property, Plant and Equipment
Net property, plant and equipment is composed of the following:
 
Depreciable
Lives
 
As of December 31,
 
 
2014
 
2013
 
 
 
(Dollars in millions)
Property, plant and equipment:
 
 
 
 
 
Land
N/A
 
$
350

 
356

Fiber, conduit and other outside plant(1)
15-45 years
 
4,640

 
4,033

Central office and other network electronics(2)
4-10 years
 
3,362

 
3,026

Support assets(3)
5-30 years
 
2,496

 
2,470

Construction in progress(4)
N/A
 
309

 
308

Gross property, plant and equipment
 
 
11,157

 
10,193

Accumulated depreciation
 
 
(3,956
)
 
(2,985
)
Net property, plant and equipment
 
 
$
7,201

 
7,208

_______________________________________________________________________________
(1) 
Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures.
(2) 
Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics providing service to customers.
(3) 
Support assets consist of buildings, computers and other administrative and support equipment.
(4) 
Construction in progress includes inventory held for construction and property of the aforementioned categories that has not been placed in service as it is still under construction.
We recorded depreciation expense of $1.048 billion, $1.099 billion and $1.175 billion for the years ended December 31, 2014, 2013 and 2012, respectively.
On April 2, 2012, we sold an office building for net proceeds of $133 million. As part of the transaction, we agreed to lease a portion of the building from the new owner. As a result, the $16 million gain from the sale was deferred and will be recognized as a reduction to rent expense over the 10 year lease term.
In 2014, we recorded an impairment charge of $17 million in connection with a sale-leaseback transaction involving an office building which closed in the fourth quarter of 2014. This impairment charge is included in selling, general and administrative expense in our consolidated statements of operations for the year ended December 31, 2014.
Severance
Severance
Severance
Periodically, we have reductions in our workforce and have accrued liabilities for the related severance costs. These workforce reductions resulted primarily from the progression or completion of our post-acquisition integration plans related to CenturyLink's indirect acquisition of us, increased competitive pressures, cost reduction initiatives and reduced workload demands due to the loss of customers purchasing certain legacy services.
We report severance liabilities within accrued expenses and other liabilities-salaries and benefits in our consolidated balance sheets and report severance expenses in cost of services and products and selling, general and administrative expenses in our consolidated statements of operations.
Changes in our accrued liability for severance expenses were as follows:
 
Severance
 
(Dollars in millions)
Balance at December 31, 2012
$
7

Accrued to expense
10

Payments, net
(12
)
Balance at December 31, 2013
$
5

Accrued to expense
44

Payments, net
(39
)
Balance at December 31, 2014
$
10

Employee Benefits
Employee Benefits
Employee Benefits
Pension and Post-Retirement Benefits
We are required to disclose the amount of our contributions to CenturyLink and QCII relative to the CenturyLink qualified pension plans and post-retirement benefit plans and the QCII non-qualified pension plan. QCII's post-retirement benefit plans were merged into CenturyLink's post-retirement benefit plans on January 1, 2012 and on December 31, 2014, the QCII qualified pension plan and a pension plan of an affiliate were merged into the CenturyLink Combined Pension Plan. QCII was not required and did not make contributions to the pension plan trust in 2014. Based on current laws and circumstances, (i) CenturyLink will not be required to make a cash contribution to this plan in 2015 and (ii) CenturyLink does not expect it will be required to make a contribution in 2016. The amount of required contributions to the plan in 2016 and beyond will depend on earnings on plan investments, prevailing discount rates, demographic experience, changes in plan benefits and changes in funding laws and regulations. No contributions were made to the post-retirement occupational health care trust in 2014 or 2013 and CenturyLink does not expect to make a contribution in 2015.
The unfunded status of CenturyLink's qualified pension plan for accounting purposes was $2.402 billion as of December 31, 2014, which includes the merged QCII qualified pension plan. The unfunded status of QCII's qualified pension plan for accounting purposes was $159 million as of December 31, 2013. The unfunded status of CenturyLink's post-retirement benefit plans for accounting purposes was $3.477 billion and $3.153 billion as of December 31, 2014 and 2013, respectively. CenturyLink and, prior to the pension plan merger, QCII allocate income and expenses to us based upon the demographics of our employee and retirees compared to all the remaining participants.
We were allocated $98 million, $178 million and $117 million in pension income during the years ended December 31, 2014, 2013 and 2012, respectively. Our allocated post-retirement benefit expense for the years ended December 31, 2014, 2013 and 2012 was $128 million, $88 million and $106 million, respectively. These allocated amounts represent our share of the pension and post-retirement benefit expenses based on the actuarially determined amounts. Our allocated portion of QCII's total pension and CenturyLink's total post-retirement benefit income and expenses were 92%, 91% and 91% for the years ended December 31, 2014, 2013 and 2012, respectively. CenturyLink and QCII allocate the income and expenses of these plans to us and their other affiliates. The allocation of income and expense to us is based upon demographics of our employees compared to all remaining participants. The combined net pension and post-retirement benefits (income) expenses is included in cost of services and products and selling, general and administrative expenses on our consolidated statements of operations for the years ended December 31, 2014, 2013 and 2012.
QCII sponsored a noncontributory qualified defined benefit pension plan (referred to as QCII's pension plan) for substantially all of our employees. As noted above, QCII's pension plan was merged into the CenturyLink Combined Pension Plan on December 31, 2014. In addition to this tax qualified pension plan, QCII also maintains a non-qualified pension plan for certain eligible highly compensated employees. These plans also provide survivor and disability benefits to certain employees. In November 2009, QCII amended the pension plan and the non-qualified pension plans to no longer provide pension benefit accruals for active non-represented employees after December 31, 2009. In addition, non-represented employees hired after January 1, 2009 are not eligible to participate in the plans. Active non-represented employees who participate in these plans retain their accrued pension benefit earned as of December 31, 2009 and certain participants will continue to earn interest credits on their benefit after December 31, 2009. Employees are eligible to receive their vested accrued benefit when they separate from CenturyLink. The plans also provided a death benefit for eligible beneficiaries of certain retirees; however, QCII has eliminated this benefit effective March 1, 2010 for retirees who retired prior to January 1, 2004 and whose deaths occur after February 28, 2010. QCII previously eliminated the death benefit for eligible beneficiaries of certain retirees who retired after December 31, 2003.
CenturyLink maintains post-retirement benefit plans that provide health care and life insurance benefits for certain eligible retirees. The QCII post-retirement benefit plans were merged into CenturyLink's post-retirement benefit plans on January 1, 2012. The benefit obligation for the occupational health care and life insurance post-retirement plans is estimated based on the terms of benefit plans. In calculating this obligation, CenturyLink considers numerous assumptions, estimates and judgments, including but not limited to, discount rates, health care cost trend rates and plan amendments. In October 2013, we renewed a four-year collective bargaining agreement which covers approximately 11,000 of our unionized employees. Effective January 1, 2014, the approximately 11,000 active employees and eligible post-1990 retirees who are former represented employees, have changes to their health and welfare benefits including: (i) changes to align the coverage and benefits for these active employees and non-Medicare eligible post-1990 retirees with the health and welfare coverage and benefits offered to all other CenturyLink employees and other CenturyLink retirees (with some exceptions) (ii) increased out-of-pocket health care costs through plan design changes effective January 1, 2014 and the elimination of Class II dependent coverage and (iii) elimination of the group medical plan coverage and benefits for Medicare-eligible post-1990 retirees and the establishment of a health reimbursement account and assistance to this population with their transition effective May 1, 2014 to their own purchase of individual policies through the Medicare Exchange market place using the health reimbursement account. In order to maintain their eligibility, post-1990 retirees continue to be obligated to contribute to the cost of health care benefits in excess of specified limits on the company-funded portion of retiree health care costs (also referred to as the "caps"), as they have since January 1, 2009.
The terms of the post-retirement health care and life insurance plans between CenturyLink and its eligible non-represented employees and its eligible post-1990 non-represented retirees are established by CenturyLink and are subject to change at its discretion. CenturyLink has a practice of sharing some of the cost of providing health care benefits with its non-represented employees and post-1990 non-represented retirees. The benefit obligation for the non-represented post-retirement health care benefits is based on the terms of the current written plan documents and is adjusted for anticipated continued cost sharing with non-represented employees and post-1990 non-represented retirees. However, CenturyLink's contribution under its post-1990 non-represented retirees' health care plan is capped at a specific dollar amount.
Medicare Prescription Drug, Improvement and Modernization Act of 2003
CenturyLink (formerly QCII) sponsors post-retirement health care plans with several benefit options that provide prescription drug benefits that CenturyLink deems actuarially equivalent to or exceeding Medicare Part D. CenturyLink recognizes the impact of the federal subsidy received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the calculation of its post-retirement benefit obligation and net periodic post-retirement benefit expense.
Other Benefit Plans
Health Care and Life Insurance
We provide health care and life insurance benefits to essentially all of our active employees. We are largely self-funded for the cost of the health care plan. Our health care benefit expenses for our current employees were $204 million, $223 million and $221 million for the years ended December 31, 2014, 2013 and 2012, respectively. Union represented employee benefits are based on negotiated collective bargaining agreements. Employees are required to partially fund the health care benefits provided by us, in addition to paying their own out-of-pocket costs. CenturyLink's group basic life insurance plans are fully insured and the premiums are paid by CenturyLink.
401(k) Plan
CenturyLink sponsors qualified defined contribution plans covering substantially all of our employees. Under these plans, employees may contribute a percentage of their annual compensation to the plans up to certain maximums, as defined by the plans and by the Internal Revenue Service ("IRS"). Currently, we match a percentage of our employees' contributions in cash. We recognized $47 million, $49 million and $46 million in expense related to these plans for the years ended December 31, 2014, 2013 and 2012, respectively.
Deferred Compensation Plans
QCII sponsored a non-qualified unfunded deferred compensation plan for various groups that include certain of our current and former highly compensated employees. The plan is frozen and participants can no longer defer compensation to the plan. The value of the assets and liabilities related to this plan is not significant.
Stock-Based Compensation
Stock-Based Compensation
Share-based Compensation
Share-based compensation expenses are included in cost of services and products, and selling, general, and administrative expenses in our consolidated statements of operations. We recognized compensation expense for options and awards granted to our employees under CenturyLink's equity incentive plans, including plans assumed in connection with us being indirectly acquired. We record share-based compensation expense that is allocated to us from CenturyLink, which is included in operating expenses-affiliates in our consolidated statements of operations. Based on many factors that affect the allocation, the amount of share-based compensation expense recorded at CenturyLink and ultimately allocated to us may fluctuate. We settle the share-based compensation expense allocated to us from CenturyLink through affiliate transactions.
For the years ended December 31, 2014, 2013 and 2012, we were allocated a share-based compensation expense of approximately $21 million, $17 million and $18 million, respectively. We recognized an income tax benefit from our compensation expense of approximately $8 million, $7 million and $7 million, respectively, during the years ended December 31, 2014, 2013 and 2012, respectively.
Products and Services Revenues
Products and Services Revenues
Products and Services Revenues
We are an integrated communications company engaged primarily in providing an array of communications services, including local voice, broadband, private line (including special access), network access, Ethernet, information technology, video and wireless services. We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services. We categorize our products, services and revenues among the following three categories:
•
Strategic services, which include primarily broadband, private line (including special access), Ethernet, video (including resold satellite video services) and Verizon Wireless services;
•
Legacy services, which include primarily local voice, Integrated Services Digital Network ("ISDN") (which uses regular telephone lines to support voice, video and data applications), switched access and traditional wide area network ("WAN") services (which allows a local communications network to link to networks in remote locations); and
•
Affiliates and other services, which consist primarily of Universal Service Fund ("USF") support and USF surcharges and services we provide to our affiliates. We receive both federal and state USF support, which are government subsidies designed to reimburse us for the portion of the cost of providing certain telecommunications services, such as in high-cost rural areas, that we are not able to recover from our customers. USF surcharges are the amount that 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 revenue categorization:
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(Dollars in millions)
Strategic services
$
3,429

 
3,342

 
3,265

Legacy services
2,987

 
3,208

 
3,471

Affiliates and other services
2,422

 
2,203

 
2,112

Total operating revenues
$
8,838

 
8,753

 
8,848


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 comes from customers located in the United States.
Affiliates and other services revenues include revenues from universal service funds, which allow us to recover a portion of our costs under federal and state cost recovery mechanisms, and certain surcharges to our customers, including billings for our required contributions to several USF programs.
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 reflects the related expense for the amounts we remit to the government agencies. The total amount of such surcharges that we included in revenues, aggregated approximately $151 million, $154 million and $171 million for the years ended December 31, 2014, 2013 and 2012, respectively. Those USF surcharges, where we record revenue, are included in the "other" operating revenues and transaction tax surcharges 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 include in our bills to 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.
Affiliate Transactions
Affiliate Transactions
Affiliate Transactions
We provide to our affiliates, telecommunications services that we also provide to external customers. In addition, we provide to our affiliates, computer system development and support services and network support and technical services.
Below are details of the services we provide to our affiliates:
•
Telecommunications services. Data, Internet and voice services in support of our affiliates' service offerings;
•
Computer system development and support services. Information technology services primarily include the labor cost of developing, testing and implementing the system changes necessary to support order entry, provisioning, billing, network and financial systems, as well as the cost of improving, maintaining and operating our operations support systems and shared internal communications networks; and
•
Network support and technical services. Network support and technical services relate to forecasting demand volumes and developing plans around network utilization and optimization, developing and implementing plans for overall product development, provisioning and customer care.
We charge our affiliates for services based on market price or fully distributed cost ("FDC"). We charge our affiliates market price for services that we also provide to external customers, while other services that we provide only to our affiliates are priced by applying an FDC methodology. FDC rates include salaries and wages, payroll taxes, employee related benefits, miscellaneous expenses, and charges for the use of our buildings, computing and software assets. Whenever possible, costs are directly assigned to our affiliates for the services they use. If costs cannot be directly assigned, they are allocated among all affiliates based upon cost causative measures; or if no cost causative measure is available, these costs are allocated based on a general allocator. These cost allocation methodologies are reasonable. From time to time, we adjust the basis for allocating the costs of a shared service among affiliates. Such changes in allocation methodologies are generally billed prospectively.
We also purchase services from our affiliates including telecommunication services, insurance, flight services and other support services such as legal, regulatory, finance and accounting, tax, human resources and executive support. Our affiliates charge us for these services based on market price or FDC.
Income Taxes
Income Taxes
Income Taxes
We were included in the consolidated federal income tax returns and the combined state income tax returns of QCII until CenturyLink's April 1, 2011 acquisition of QCII and the consolidated federal income tax returns and certain combined state income tax returns of CenturyLink subsequent to the acquisition. Both CenturyLink and QCII treat our consolidated results as if we were a separate taxpayer. The policy requires us to settle our tax liabilities through a change in our general intercompany obligation based upon our separate return taxable income, which is reflected in advances to affiliates on our consolidated balance sheets and the changes in advances to affiliates are reflected as investing activities on our consolidated statements of cash flows. Because we are included in the consolidated federal income tax returns and the combined state income tax returns of CenturyLink (and previously with QCII), any tax audits involving CenturyLink or QCII will also involve us. The IRS previously examined all of QCII's federal income tax returns prior to 2008 because they were included in its coordinated industry case program and now examines all of QCII's federal income tax returns as included in the consolidated federal return of the ultimate parent company, CenturyLink.
In years prior to 2011, QCII filed amended federal income tax returns for 2002-2007 to make protective claims with respect to items reserved in our audit settlements and to correct items not addressed in prior audits. The examination of those amended federal income tax returns by the IRS was completed in 2012. In 2012, QCII filed an amended 2008 federal income tax return primarily to report the carryforward impact of prior year settlements and in 2013, QCII filed an amended return for 2009. Such amended filings are subject to adjustment by the IRS.
CenturyLink also files combined income tax returns in many states, and these combined returns remain open for adjustments to its federal income tax returns. In addition, certain combined state income tax returns filed by CenturyLink and QCII since 1999 are still open for state specific adjustments.
As of December 31, 2014 and 2013, we had no liability for interest related to uncertain tax positions. As of December 31, 2012, we had a recorded liability for interest related to uncertain tax positions in the amounts of $5 million. We did not record a liability for interest related to uncertain tax positions for the year ended December 31, 2014. We made no accrual for penalties related to income tax positions.
Income Tax Expense
The components of the income tax expense from continuing operations are as follows:

Years Ended December 31,

2014
 
2013
 
2012

(Dollars in millions)
Income tax expense:





Current tax provision:





Federal and foreign
$
738


653

 
638

State and local
129


101

 
105

Total current tax provision
867


754


743

Deferred tax expense:





Federal and foreign
(209
)

(125
)
 
(175
)
State and local
(19
)

(27
)
 
(26
)
Total deferred tax expense
(228
)

(152
)

(201
)
Income tax expense
$
639


602


542


The effective income tax rate for continuing operations differs from the statutory tax rate as follows:
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(in percent)
Effective income tax rate:
 
 
 
 
 
Federal statutory income tax rate
35.0
%
 
35.0
%
 
35.0
%
State income taxes-net of federal effect
4.0
%
 
3.1
%
 
3.7
%
Other
0.7
%
 
0.3
%
 
0.3
%
Effective income tax rate
39.7
%
 
38.4
%
 
39.0
%

Deferred Tax Assets and Liabilities
The components of the deferred tax assets and liabilities are as follows:
 
As of December 31,
 
2014
 
2013
 
(Dollars in millions)
Deferred tax assets and liabilities:
 
 
 
Deferred tax liabilities:
 
 
 
Property, plant and equipment
$
(1,380
)
 
(1,281
)
Intangibles assets
(1,449
)
 
(1,772
)
Receivable from an affiliate due to pension plan participation
(500
)
 
(462
)
Other
(52
)
 
(52
)
Total deferred tax liabilities
(3,381
)
 
(3,567
)
Deferred tax assets:
 
 
 
Payable to affiliate due to post-retirement benefit plan participation
998

 
983

Debt premiums
36

 
55

Other
275

 
229

Total deferred tax assets
1,309

 
1,267

Valuation allowance on deferred tax assets
(12
)
 
(12
)
Net deferred tax assets
1,297

 
1,255

Net deferred tax liabilities
$
(2,084
)
 
(2,312
)

At December 31, 2014, we have established a valuation allowance of $12 million as it is not more likely than not that this amount of deferred tax assets will be realized.
Other Income Tax Information
We paid $861 million, $750 million and $607 million to QSC related to income taxes in the years ended December 31, 2014, 2013 and 2012, respectively.
Fair Value Disclosure
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 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 levels used to determine the fair values:
 
 
 
As of December 31, 2014
 
As of December 31, 2013
 
Input
Level
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
 
 
(Dollars in millions)
Liabilities-Long-term debt excluding capital lease and other obligations
2
 
$
7,347

 
7,702

 
7,486

 
7,226

Stockholder's Equity
Stockholder's Equity
Stockholder's Equity
Common Stock
We have one share of common stock (no par value) issued and outstanding, which is owned by QSC.
Other Net Asset Transfers
During 2012, we recognized a $100 million equity contribution for the tax benefit associated with a deduction for pension funding. Since we are the employer of a significant percentage of the participants and none of the 2011 QCII pension funding was allocated to us, a tax deduction was recognized on our separate company tax return and, therefore, we recognized an equity contribution for the tax benefits associated with this deduction.
In addition, in the normal course of business, we transfer assets and liabilities to and from QSC and its affiliates, which are recorded through our equity. It is our policy to record these asset transfers based on carrying values.
Dividends
We declared the following cash dividend to QSC:
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(Dollars in millions)
Cash dividend declared to QSC
$
1,400

 
1,325

 
840

Cash dividend paid to QSC
1,400

 
1,325

 
1,150


The timing of cash payments for declared dividends to QSC is at our discretion in consultation with QSC. We may declare and pay dividends to QSC in excess of our earnings to the extent permitted by applicable law. Our debt covenants do not limit the amount of dividends we can pay to QSC.
Quarterly Financial Data (Unaudited)
Quarterly Financial Data (Unaudited)
Quarterly Financial Data (Unaudited)
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Total
 
(Dollars in millions)
2014
 
 
 
 
 
 
 
 
 
Operating revenues
$
2,211

 
2,206

 
2,198

 
2,223

 
8,838

Operating income
542

 
546

 
528

 
496

 
2,112

Income tax expense
160

 
162

 
156

 
161

 
639

Net income
253

 
256

 
245

 
216

 
970

 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Total
 
(Dollars in millions)
2013
 
 
 
 
 
 
 
 
 
Operating revenues
$
2,159

 
2,199

 
2,188

 
2,207

 
8,753

Operating income
553

 
525

 
493

 
507

 
2,078

Income tax expense
166

 
155

 
139

 
142

 
602

Net income
264

 
246

 
218

 
236

 
964

Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies
Legal Matters
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. 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.
We are currently defending several patent infringement lawsuits asserted against us by non-practicing entities. 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 both to litigate the matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities.
We are among hundreds of defendants nationwide in dozens of lawsuits filed over the past year by Sprint Communications Company and affiliates of Verizon Communications Inc. The plaintiffs in these suits have challenged the right of local exchange carriers to bill interexchange carriers for switched access charges for certain calls between mobile and wireline devices that are routed through an interexchange carrier. In the lawsuits, the plaintiffs are seeking refunds of access charges previously paid and relief from future access charges. In addition, these and some other interexchange carriers have ceased paying switched access charges on these calls. Recently the lawsuits involving us and many other carriers have been consolidated for pretrial purposes in the United States District Court for the District of Northern Texas. 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 suits, 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.
CenturyLink 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, our business and financial condition could be similarly affected. You can find descriptions of these legal proceedings in CenturyLink's quarterly and annual reports filed with the SEC. Because we are not a party to any of the matters, we have not accrued any liabilities for the matters.
Capital Leases
We lease certain facilities and equipment under various capital lease arrangements. Depreciation of assets under capital leases is included in depreciation and amortization expense in our consolidated statements of operations. Payments on capital leases are included in repayments of long-term debt, including current maturities in our consolidated statements of cash flows.
The tables below summarize our capital lease activity:
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(Dollars in millions)
Assets acquired through capital leases
$
3

 
—

 
—

Depreciation expense
32

 
42

 
50

Cash payments towards capital leases
32

 
40

 
41

 
As of December 31,
 
2014
 
2013
 
(Dollars in millions)
Assets included in property, plant and equipment
$
137

 
168

Accumulated depreciation
108

 
109


The future annual minimum payments under capital lease arrangements as of December 31, 2014 were as follows:
 
Future Minimum
Payments
 
(Dollars in millions)
Capital lease obligations:
 
2015
$
22

2016
2

2017
1

2018
1

2019
1

2020 and thereafter
7

Total minimum payments
34

Less: amount representing interest and executory costs
(8
)
Present value of minimum payments
26

Less: current portion
(20
)
Long-term portion
$
6


Operating Leases
We lease various equipment, office facilities, retail outlets, switching facilities and other network sites. These leases, with few exceptions, provide for renewal options and escalations that are either fixed or based on the consumer price index. Any rent abatements, along with rent escalations, are included in the computation of rent expense calculated on a straight-line basis over the lease term. The lease term for most leases includes the initial non-cancelable term plus any term under renewal options that are reasonably assured. For the years ended December 31, 2014, 2013 and 2012, our gross rental expense was $79 million, $83 million and $93 million, respectively. We also received sublease rental income for the same periods of $4 million, $4 million and $8 million, respectively.
At December 31, 2014, our future rental commitments for operating leases were as follows:
 
Future Minimum
Payments
 
(Dollars in millions)
Operating leases:
 
2015
$
56

2016
50

2017
44

2018
38

2019
27

2020 and thereafter
36

Total future minimum payments(1)
$
251

_______________________________________________________________________________
(1) 
Minimum payments have not been reduced by minimum sublease rentals of $30 million due in the future under non-cancelable subleases.
Purchase Obligations
We have several commitments primarily for marketing activities and support services from a variety of vendors to be used in the ordinary course of business totaling $139 million at December 31, 2014. Of this amount, we expect to purchase $50 million in 2015, $72 million in 2016 through 2017, $16 million in 2018 through 2019 and $1 million in 2020 and thereafter. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we were contractually committed as of December 31, 2014.
Other Financial Information
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 December 31,
 
2014
 
2013
 
(Dollars in millions)
Prepaid expenses
$
45

 
47

Other
80

 
79

Total other current assets
$
125

 
126


Selected Current Liabilities
Current liabilities reflected in our consolidated balance sheets include accounts payable:
 
As of December 31,
 
2014
 
2013
 
(Dollars in millions)
Accounts payable
$
464

 
440


Included in accounts payable at December 31, 2014 and 2013, were $44 million and $11 million, respectively associated with capital expenditures.
Labor Union Contracts
Labor Union Contracts
Labor Union Contracts
Approximately 11,000, or 48%, of our employees are members of various bargaining units represented by the Communications Workers of America ("CWA") or the International Brotherhood of Electrical Workers ("IBEW") and are subject to collective bargaining agreements that expire in 2017.
Basis of Presentation and Summary of Significant Accounting Policies (Policies)
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.
Use of Estimates 
Use of Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions we make when accounting for items and matters such as, but not limited to, long-term contracts, customer retention patterns, allowance for doubtful accounts, depreciation, amortization, asset valuations, rates used for affiliate cost allocations, internal labor capitalization rates, recoverability of assets (including deferred tax assets), impairment assessments, pension, post-retirement and other post-employment benefits, taxes, certain liabilities and other provisions and contingencies are reasonable, based on information available at the time they were made. Our accounting for CenturyLink's indirect acquisition of us required extensive use of estimates in determining the acquisition date fair values of our assets and liabilities. These estimates, judgments and assumptions can affect the reported amounts of assets, liabilities and components of stockholder's equity or deficit as of the dates of the consolidated balance sheets, as well as the reported amounts of revenues, expenses and components of cash flows during the periods presented in our consolidated statements of operations and our consolidated statements of cash flows. We also make estimates in our assessments of potential losses in relation to threatened or pending tax and legal matters. See Note 11—Income Taxes and Note 15—Commitments and Contingencies for additional information.
For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. If we have the potential to recover a portion of the estimated loss from a third party, we make a separate assessment of recoverability and reduce the estimated loss if recovery is also deemed probable.
For matters related to income taxes, if we determine that the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Interest is recognized on the amount of unrecognized benefit from uncertain tax positions.
For all of these and other matters, actual results could differ from our estimates.
Revenue Recognition 
Revenue Recognition
We recognize revenue for services when the related services are provided. Recognition of certain payments received in advance of services being provided is deferred until the service is provided. These advance payments include activation and installation charges, which we recognize as revenue over the expected customer relationship period, which ranges from eighteen months to over ten years depending on the service. We also defer costs for customer activations and installations. The deferral of customer activation and installation costs is limited to the amount of revenue deferred on advance payments. Costs in excess of advance payments are recorded as expense in the period such costs are incurred. Expected customer relationship periods are estimated using historical experience. Termination fees or other fees on existing contracts that are negotiated in conjunction with new contracts are deferred and recognized over the new contract term.
We offer bundle discounts to our customers who receive certain groupings of services. These bundle discounts are recognized concurrently with the associated revenue and are allocated to the various services in the bundled offering based on the estimated selling price of services included in each bundled combination.
Customer arrangements that include both equipment and services are evaluated to determine whether the elements are separable. If the elements are deemed separable and separate earnings processes exist, the revenue associated with the customer arrangement is allocated to each element based on the relative estimated selling price of the separate elements. We have estimated the selling prices of each element by reference to vendor-specific objective evidence of selling prices when the elements are sold separately. The revenue associated with each element is then recognized as earned. For example, if we receive an advance payment when we sell equipment and continuing service together, we immediately recognize as revenue the amount allocated to the equipment as long as all the conditions for revenue recognition have been satisfied. The portion of the advance payment allocated to the service based upon its relative selling price is recognized ratably over the longer of the contractual period or the expected customer relationship period.
We periodically transfer optical capacity assets on our network to other telecommunications service carriers. These transactions are structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically 20 years. We account for the cash consideration received on transfers of optical capacity assets and on all of the other elements deliverable under an IRU, as revenue ratably over the term of the agreement. We have not recognized revenue on any contemporaneous exchanges of our optical capacity assets for other optical capacity assets.
In connection with offering products and services provided by third-party vendors, we review the relationship between us, the vendor and the end customer to assess whether revenue should be reported on a gross or net basis. In assessing whether revenue should be reported on a gross or net basis, we consider whether we act as a principal in the transaction, take title to the products, have risk and rewards of ownership or act as an agent or broker. Based on CenturyLink's agreements with DIRECTV and Verizon Wireless, we offer these services through sales agency relationships which are reported on a net basis.
Affiliate Transactions 
Affiliate Transactions
We provide to our affiliates telecommunications services that we also provide to external customers. In addition, we provide to our affiliates computer system development and support services. Services provided by us to our affiliates are recognized as operating revenue-affiliates on our consolidated statements of operations. We also purchase services from our affiliates including telecommunications services, marketing and employee-related support services. Services provided to us from our affiliates are recognized as operating expenses-affiliates on our consolidated statements of operations. Because of the significance of the services we provide to our affiliates and our affiliates provide to us, the results of operations, financial position and cash flows presented herein are not necessarily indicative of the results of operations, financial position and cash flows we would have achieved had we operated as a stand-alone entity during the periods presented.
We recognize intercompany charges at the amounts billed to us by our affiliates and we recognize intercompany revenue for services we bill to our affiliates. Regulatory rules require certain revenues and expenses to be recorded at market price or fully distributed cost. Our compliance with regulations is subject to review by regulators. Adjustments to intercompany charges that result from these reviews are recorded in the period they become known.
CenturyLink has cash management arrangements between certain of its subsidiaries that include lines of credit, affiliate obligations, capital contributions and dividends. As part of these cash management arrangements, an affiliate provides lines of credit to certain other affiliates. Amounts outstanding under these lines of credit and intercompany obligations vary from time to time. Under these arrangements, the majority of our cash balance is transferred on a daily basis to CenturyLink and most affiliate transactions are deemed to be settled at the time the transactions are recorded in our accounting records, with the resulting net balance at the end of each period reflected as advances to affiliates on the accompanying consolidated balance sheets. From time to time we declare and pay dividends to our parent, QSC, which are settled through the advances to affiliates, which has the net effect of reducing the amount of these advances. Dividends declared are reflected on our consolidated statements of stockholder's equity and the consolidated statements of cash flows reflects the changes in advances to affiliates as investing activities and changes in advances from affiliates as financing activities. Interest is assessed on the advances to/from affiliates on either the three-month U.S T-bill rate (for advances to affiliates) or CenturyLink’s weighted average borrowing rate (for advances from affiliates).
The affiliates obligations, net in noncurrent liabilities on the consolidated balance sheets represents the cumulative allocation of expense associated with CenturyLink’s pension plans and post-retirement benefits plans. Changes in the affiliates obligations, net are reflected in operating activities on our consolidated statements of cash flows.
In the normal course of business, we transfer assets to and from various affiliates through our parent, QSC, which are recorded through our equity. It is our policy to record asset transfers based on carrying values.
USF, Gross Receipts Taxes and Other Surcharges 
USF, Gross Receipts Taxes and Other Surcharges
In determining whether to include in our revenues and expenses the taxes and surcharges collected from customers and remitted to government authorities, including Universal Service Fund ("USF") charges, sales, use, value added and some excise taxes, we assess, among other things, whether we are the primary obligor or principal taxpayer for the taxes assessed in each jurisdiction where we do business. In jurisdictions where we determine that we are the principal taxpayer, we record the surcharges on a gross basis and include them in our revenues and costs of services and products.
In jurisdictions where we determine that we are merely a collection agent for the government authority, we record the taxes on a net basis and do not include them in our revenues and costs of services and products.
Advertising Costs 
Advertising Costs
Costs related to advertising are expensed as incurred and included in selling, general and administrative expenses in our consolidated statements of operations.
Legal Costs 
Legal Costs
In the normal course of our business, we incur costs to hire and retain external legal counsel to advise us on regulatory, litigation and other matters. We expense these costs as the related services are received.
Income Taxes 
Income Taxes
Our results are included in the CenturyLink consolidated federal income tax return and certain combined state income tax returns. CenturyLink allocates income tax expense to us based upon a separate return allocation method which results in income tax expense that approximates the expense that would result if we were a stand-alone entity. Our reported deferred tax assets and liabilities, as discussed below and in Note 11—Income Taxes, are primarily determined as a result of the application of the separate return allocation method and therefore the settlement of these amounts is dependent upon our parent, CenturyLink, rather than tax authorities. Our current expectation is that the vast majority of deferred tax assets and liabilities will be settled through our general intercompany obligation based upon the current CenturyLink policy. CenturyLink has the right to change their policy regarding settlement of these assets and liabilities at any time.
The provision for income taxes consists of an amount for taxes currently payable, an amount for tax consequences deferred to future periods, adjustments to our liabilities for uncertain tax positions and amortization of investment tax credits. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to differences between the financial statement carrying value of assets and liabilities and the tax bases of those assets and liabilities. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date.
We establish valuation allowances when necessary to reduce deferred income tax assets to the amounts that we believe are more likely than not to be recovered. Each quarter we evaluate the need to retain all or a portion of the valuation allowance on our deferred tax assets. See Note 11—Income Taxes for additional information.
Cash and Cash Equivalents 
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates. As a result, the value at which cash and cash equivalents are reported in our consolidated financial statements approximates their fair value. Our cash collections are transferred to CenturyLink on a daily basis and our ultimate parent funds our cash disbursement needs. The net cash transferred to CenturyLink has been reflected as advances to affiliates in our consolidated balance sheets.
Accounts Receivable and Allowance for Doubtful Accounts 
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recognized based upon the amount due from customers for the services provided or at cost for purchased and other receivables less an allowance for doubtful accounts. The allowance for doubtful accounts receivable reflects our best estimate of probable losses inherent in our receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence. We generally consider our accounts past due if they are outstanding over 30 days. Our collection process varies by the customer segment, amount of the receivable, and our evaluation of the customer's credit risk. Our past due accounts are written off against our allowance for doubtful accounts when collection is considered to be not probable. Any recoveries of accounts previously written off are generally recognized as a reduction in bad debt expense in the period received. The carrying value of accounts receivable net of the allowance for doubtful accounts approximates fair value.
Property, Plant and Equipment 
Property, Plant and Equipment
Purchased and constructed property, plant and equipment is recorded at cost. Property, plant and equipment is depreciated primarily using the straight-line group method. Under the straight-line group method, assets dedicated to providing telecommunications services (which comprise the majority of our property, plant and equipment) that have similar physical characteristics, use and expected useful lives are pooled for purposes of depreciation and tracking. The equal life group procedure is used to establish each pool's average remaining useful life. Generally, under the straight-line group method, when an asset is sold or retired in the course of normal business activities, the cost is deducted from property, plant and equipment and charged to accumulated depreciation without recognition of a gain or loss. A gain or loss is recognized in our consolidated statements of operations only if a disposal is abnormal or unusual. Leasehold improvements are amortized over the shorter of the useful lives of the assets or the expected lease term. Expenditures for maintenance and repairs are expensed as incurred. Interest is capitalized during the construction phase of network and other internal-use capital projects. Employee-related costs for construction of network and other internal use assets are also capitalized during the construction phase. Property, plant and equipment supplies used internally are carried at average cost, except for significant individual items for which cost is based on specific identification.
We perform annual internal reviews to evaluate the reasonableness of the depreciable lives for our property, plant and equipment. Our reviews utilize models that take into account actual usage, physical wear and tear, replacement history, assumptions about technology evolution and, in certain instances, actuarially determined probabilities to estimate the remaining useful life of our asset base. Our remaining useful life assessments anticipate the loss in service value of assets that may precede the physical retirement. Assets shared among many customers may lose service value as those customers leave the network. However, the asset is not retired until all customers no longer utilize the asset.
We review long-lived tangible assets for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. For assessment purposes, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, absent a material change in operations. An impairment loss is recognized only if the carrying amount of the asset group is not recoverable and exceeds its fair value. Recoverability of the asset group to be held and used is assessed by comparing the carrying amount of the asset group to the estimated undiscounted future net cash flows expected to be generated by the asset group. If the asset group's carrying value is not recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. We determine fair values by using a combination of comparable market values and discounted cash flows, as appropriate.
Goodwill, Customer Relationships and Other Intangible Assets 
Goodwill, Customer Relationships and Other Intangible Assets
Intangible assets arising from business combinations, such as goodwill, customer relationships and capitalized software are initially recorded at estimated fair value. We amortize customer relationships primarily over an estimated life of ten years, using either the sum-of-the-years-digits or the straight-line methods, depending on the type of customer. We amortize capitalized software using the straight-line method over estimated lives ranging up to seven years. Other intangible assets not arising from business combinations are initially recorded at cost. We review long-lived intangible assets, other than goodwill, for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable.
Internally used software, whether purchased or developed by us, is capitalized and amortized using the straight-line method over its estimated useful life. We have capitalized certain costs associated with software such as costs of employees devoting time to the projects and external direct costs for materials and services. Costs associated with software to be used for internal purposes are expensed until the point at which the project has reached the development stage. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance, data conversion and training costs are expensed in the period in which they are incurred. We review the remaining economic lives of our capitalized software annually. Capitalized software is included in other intangible assets, net, in our consolidated balance sheets.
We assess customer relationships for impairment whenever facts and circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized only if the carrying amount is not recoverable and exceeds its fair value. Recoverability of our customer relationships is measured by comparing the carrying amount to the estimated undiscounted future net cash flows expected to be generated by them. If the customer relationship's carrying value is not recoverable, an impairment charge is recognized for the amount by which the carrying amount exceeds its fair value. We determine fair values by using the discounted cash flows method.
We are required to assess goodwill for impairment at least annually, or more frequently if events or a change in circumstances indicate that an impairment may have occurred. We are required to write-down the value of goodwill in periods in which the recorded amount of goodwill exceeds the implied fair value of goodwill. The impairment assessment is at the reporting unit level, and in reviewing the criteria for reporting units when assigning the goodwill resulting from CenturyLink's indirect acquisition of us, we have determined that our operations consist of one reporting unit, consistent with our determination that our business consists of one operating segment. See Note 2—Goodwill, Customer Relationships and Other Intangible Assets for additional information.
During the fourth quarter of 2013, we elected to change the date of our annual assessment of goodwill impairment from September 30 to October 31. This is a change in method of applying an accounting principle which management believes is a preferable alternative as the new date of the assessment is more closely aligned with our strategic planning process. The change in the assessment date did not delay, accelerate or avoid a potential impairment charge in 2013. We performed our annual goodwill impairment assessment at September 30, 2013, prior to the change in our annual assessment date. We then performed a qualitative assessment of our goodwill as of October 31, 2013 and concluded that our goodwill was not impaired as of that date.
Pension and Post-Retirement Benefits 
Pension and Post-Retirement Benefits
A substantial portion of our employees participate in the CenturyLink Combined Pension Plan. On December 31, 2014, the QCII pension plan and a pension plan of an affiliate were merged into the CenturyLink Retirement Plan. The CenturyLink Retirement Plan was renamed the CenturyLink Combined Pension Plan. QCII maintains a non-qualified pension plan for certain of our eligible highly compensated employees. In addition, certain employees may become eligible to participate in CenturyLink's post-retirement health care and life insurance benefit plans. CenturyLink and QCII allocate income and expenses relating to pension, non-qualified pension, and post-retirement health care and life insurance benefits to us and their other affiliates. The amounts contributed by us through CenturyLink and QCII are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other employees of CenturyLink and QCII's affiliates. The allocation of expense to us is based upon the demographics of our employees and retirees compared to all the remaining participants.
For further information on qualified pension, non-qualified pension, post-retirement and other post-employment benefit plans, see CenturyLink's Annual Report on Form 10-K for the year ended December 31, 2014.
Recent Accounting Pronouncements 
Recent Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09” or “new standard”). The new standard is effective for annual and interim periods beginning January 1, 2017, and early adoption is prohibited. ASU 2014-09 may be adopted by applying the provisions of the new 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 2017. We have not yet decided which implementation method we will adopt.
The new standard 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 defer contract fulfillment costs only up to the extent of any revenue deferred.
We are studying the new standard and are in the early stages of assessing the impact the new standard will have on us and our consolidated financial statements. We cannot, however, provide any estimate of the impact of adopting the new standard at this time.
Goodwill, Customer Relationships and Other Intangible Assets (Tables)
Schedule of goodwill, customer relationships and other intangible assets 
Goodwill, customer relationships and other intangible assets consisted of the following:
 
As of December 31,
 
2014
 
2013
 
(Dollars in millions)
Goodwill
$
9,354

 
9,354

Customer relationships, less accumulated amortization of $2,660 and $2,012
3,039

 
3,687

Other intangible assets subject to amortization:
 
 
 
Capitalized software, less accumulated amortization of $1,247 and $994
808

 
1,008

Summary of amortization expense 
Total amortization expense for intangible assets was as follows:
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(Dollars in millions)
Amortization expense for intangible assets
$
957

 
1,029

 
1,115

Schedule of estimated amortization expense for intangible assets 
We estimate that total amortization expense for intangible assets for the years ending December 31, 2015 through 2019 will be as follows:
 
(Dollars in millions)
Year ending December 31,
 
2015
$
808

2016
740

2017
669

2018
589

2019
503

Long-Term Debt and Revolving Promissory Note (Tables)
Schedule of long-term debt, including unamortized discounts and premiums 
Long-term debt, including unamortized discounts and premiums and note payable-affiliate, were as follows:
 
 
 
 
 
As of December 31,
 
Interest Rates
 
Maturities
 
2014
 
2013
 
 
 
 
 
(Dollars in millions)
Senior notes
6.125% - 8.375%
 
2015 - 2054
 
$
7,311

 
7,411

Capital lease and other obligations
Various
 
Various
 
32

 
72

Unamortized premiums, net
 
 
 
 
36

 
75

Total long-term debt
 
 
 
 
7,379

 
7,558

Less current maturities
 
 
 
 
(117
)
 
(637
)
Long-term debt, excluding current maturities
 
 
 
 
$
7,262

 
6,921

Note payable-affiliate
6.657%
 
2022
 
$
796

 
754

Schedule of aggregate maturities of the entity's long-term debt (excluding unamortized premiums, discounts, and other) 
Aggregate maturities of our long-term debt (excluding unamortized premiums, discounts and other and excluding note payable-affiliate):
 
(Dollars in millions)(1)
2015
$
117

2016
237

2017
500

2018
—

2019
—

2020 and thereafter
6,489

Total long-term debt
$
7,343

_______________________________________________________________________________
(1) Actual principal paid in all years may differ due to the possible future refinancing of outstanding debt or the issuance of new debt.
Schedule of amount of gross interest expense, net of capitalized interest and interest expense (income)-affiliates 
Interest expense includes interest on long-term debt. The following table presents the amount of gross interest expense, net of capitalized interest and interest expense-affiliates, net:
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(Dollars in millions)
Interest expense:
 
 
 
 
 
Gross interest expense
$
481

 
467

 
461

Capitalized interest
(17
)
 
(17
)
 
(18
)
Total interest expense
$
464

 
450

 
443

Interest expense-affiliates, net
$
40

 
64

 
24

Accounts Receivable (Tables)
Schedule of the entity's accounts receivable balances 
The following table presents details of our accounts receivable balances:
 
As of December 31,
 
2014
 
2013
 
(Dollars in millions)
Trade and purchased receivables
$
649

 
697

Earned and unbilled receivables
120

 
73

Other
9

 
11

Total accounts receivable
778

 
781

Less: allowance for doubtful accounts
(38
)
 
(43
)
Accounts receivable, less allowance
$
740

 
738

Schedule of the entity's allowance for doubtful accounts 
The following table presents details of our allowance for doubtful accounts:
 
Beginning
Balance
 
Additions
 
Deductions
 
Ending
Balance
 
(Dollars in millions)
2014
$
43

 
64

 
(69
)
 
38

2013
$
46

 
65

 
(68
)
 
43

2012
$
42

 
74

 
(70
)
 
46

Property, Plant and Equipment (Tables)
Schedule of net property, plant and equipment
Net property, plant and equipment is composed of the following:
 
Depreciable
Lives
 
As of December 31,
 
 
2014
 
2013
 
 
 
(Dollars in millions)
Property, plant and equipment:
 
 
 
 
 
Land
N/A
 
$
350

 
356

Fiber, conduit and other outside plant(1)
15-45 years
 
4,640

 
4,033

Central office and other network electronics(2)
4-10 years
 
3,362

 
3,026

Support assets(3)
5-30 years
 
2,496

 
2,470

Construction in progress(4)
N/A
 
309

 
308

Gross property, plant and equipment
 
 
11,157

 
10,193

Accumulated depreciation
 
 
(3,956
)
 
(2,985
)
Net property, plant and equipment
 
 
$
7,201

 
7,208

_______________________________________________________________________________
(1) 
Fiber, conduit and other outside plant consists of fiber and metallic cable, conduit, poles and other supporting structures.
(2) 
Central office and other network electronics consists of circuit and packet switches, routers, transmission electronics and electronics providing service to customers.
(3) 
Support assets consist of buildings, computers and other administrative and support equipment.
(4) 
Construction in progress includes inventory held for construction and property of the aforementioned categories that has not been placed in service as it is still under construction.
Severance (Tables)
Schedule of changes in accrued liability for severance expenses
Changes in our accrued liability for severance expenses were as follows:
 
Severance
 
(Dollars in millions)
Balance at December 31, 2012
$
7

Accrued to expense
10

Payments, net
(12
)
Balance at December 31, 2013
$
5

Accrued to expense
44

Payments, net
(39
)
Balance at December 31, 2014
$
10

Products and Services Revenues (Tables)
Schedule of operating revenues by products and services
Our operating revenues for our products and services consisted of the following revenue categorization:
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(Dollars in millions)
Strategic services
$
3,429

 
3,342

 
3,265

Legacy services
2,987

 
3,208

 
3,471

Affiliates and other services
2,422

 
2,203

 
2,112

Total operating revenues
$
8,838

 
8,753

 
8,848

Income Taxes (Tables)
Schedule of components of the income tax expense from continuing operations 
The components of the income tax expense from continuing operations are as follows:

Years Ended December 31,

2014
 
2013
 
2012

(Dollars in millions)
Income tax expense:





Current tax provision:





Federal and foreign
$
738


653

 
638

State and local
129


101

 
105

Total current tax provision
867


754


743

Deferred tax expense:





Federal and foreign
(209
)

(125
)
 
(175
)
State and local
(19
)

(27
)
 
(26
)
Total deferred tax expense
(228
)

(152
)

(201
)
Income tax expense
$
639


602


542

Schedule of effective income tax rate for continuing operations that differs from the statutory tax rate 
The effective income tax rate for continuing operations differs from the statutory tax rate as follows:
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(in percent)
Effective income tax rate:
 
 
 
 
 
Federal statutory income tax rate
35.0
%
 
35.0
%
 
35.0
%
State income taxes-net of federal effect
4.0
%
 
3.1
%
 
3.7
%
Other
0.7
%
 
0.3
%
 
0.3
%
Effective income tax rate
39.7
%
 
38.4
%
 
39.0
%
Schedule of components of the deferred tax assets and liabilities 
The components of the deferred tax assets and liabilities are as follows:
 
As of December 31,
 
2014
 
2013
 
(Dollars in millions)
Deferred tax assets and liabilities:
 
 
 
Deferred tax liabilities:
 
 
 
Property, plant and equipment
$
(1,380
)
 
(1,281
)
Intangibles assets
(1,449
)
 
(1,772
)
Receivable from an affiliate due to pension plan participation
(500
)
 
(462
)
Other
(52
)
 
(52
)
Total deferred tax liabilities
(3,381
)
 
(3,567
)
Deferred tax assets:
 
 
 
Payable to affiliate due to post-retirement benefit plan participation
998

 
983

Debt premiums
36

 
55

Other
275

 
229

Total deferred tax assets
1,309

 
1,267

Valuation allowance on deferred tax assets
(12
)
 
(12
)
Net deferred tax assets
1,297

 
1,255

Net deferred tax liabilities
$
(2,084
)
 
(2,312
)
Fair Value Disclosure (Tables)
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 levels 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 levels used to determine the fair values:
 
 
 
As of December 31, 2014
 
As of December 31, 2013
 
Input
Level
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
 
 
(Dollars in millions)
Liabilities-Long-term debt excluding capital lease and other obligations
2
 
$
7,347

 
7,702

 
7,486

 
7,226

Stockholder's Equity (Tables)
Schedule of cash dividends declared
We declared the following cash dividend to QSC:
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(Dollars in millions)
Cash dividend declared to QSC
$
1,400

 
1,325

 
840

Cash dividend paid to QSC
1,400

 
1,325

 
1,150


Quarterly Financial Data (Unaudited) (Tables)
Schedule of quarterly financial information
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Total
 
(Dollars in millions)
2014
 
 
 
 
 
 
 
 
 
Operating revenues
$
2,211

 
2,206

 
2,198

 
2,223

 
8,838

Operating income
542

 
546

 
528

 
496

 
2,112

Income tax expense
160

 
162

 
156

 
161

 
639

Net income
253

 
256

 
245

 
216

 
970

 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Total
 
(Dollars in millions)
2013
 
 
 
 
 
 
 
 
 
Operating revenues
$
2,159

 
2,199

 
2,188

 
2,207

 
8,753

Operating income
553

 
525

 
493

 
507

 
2,078

Income tax expense
166

 
155

 
139

 
142

 
602

Net income
264

 
246

 
218

 
236

 
964

Commitments and Contingencies (Tables)
Summary of the entity's capital lease activity 
The tables below summarize our capital lease activity:
 
Years Ended December 31,
 
2014
 
2013
 
2012
 
(Dollars in millions)
Assets acquired through capital leases
$
3

 
—

 
—

Depreciation expense
32

 
42

 
50

Cash payments towards capital leases
32

 
40

 
41

 
As of December 31,
 
2014
 
2013
 
(Dollars in millions)
Assets included in property, plant and equipment
$
137

 
168

Accumulated depreciation
108

 
109

Schedule of future annual minimum payments under capital lease 
The future annual minimum payments under capital lease arrangements as of December 31, 2014 were as follows:
 
Future Minimum
Payments
 
(Dollars in millions)
Capital lease obligations:
 
2015
$
22

2016
2

2017
1

2018
1

2019
1

2020 and thereafter
7

Total minimum payments
34

Less: amount representing interest and executory costs
(8
)
Present value of minimum payments
26

Less: current portion
(20
)
Long-term portion
$
6

Schedule of future minimum payments under operating leases 
At December 31, 2014, our future rental commitments for operating leases were as follows:
 
Future Minimum
Payments
 
(Dollars in millions)
Operating leases:
 
2015
$
56

2016
50

2017
44

2018
38

2019
27

2020 and thereafter
36

Total future minimum payments(1)
$
251

_______________________________________________________________________________
(1) 
Minimum payments have not been reduced by minimum sublease rentals of $30 million due in the future under non-cancelable subleases.
Other Financial Information (Tables)
Schedule of other current assets reflected on the entity's balance sheets 
The following table presents details of other current assets in our consolidated balance sheets:
 
As of December 31,
 
2014
 
2013
 
(Dollars in millions)
Prepaid expenses
$
45

 
47

Other
80

 
79

Total other current assets
$
125

 
126

Schedule of accounts payable 
Current liabilities reflected in our consolidated balance sheets include accounts payable:
 
As of December 31,
 
2014
 
2013
 
(Dollars in millions)
Accounts payable
$
464

 
440

Basis of Presentation and Summary of Significant Accounting Policies (Details) (USD $)
In Millions, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 31, 2014
Sep. 30, 2014
Jun. 30, 2014
Mar. 31, 2014
Dec. 31, 2013
Sep. 30, 2013
Jun. 30, 2013
Mar. 31, 2013
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Change in accounting estimates
 
 
 
 
 
 
 
 
 
 
 
Depreciation expense
 
 
 
 
 
 
 
 
$ (1,048)
$ (1,099)
$ (1,175)
Net income
216 
245 
256 
253 
236 
218 
246 
264 
970 
964 
849 
Switch, Circuit and Cable Network Equipment [Member] |
Service life
 
 
 
 
 
 
 
 
 
 
 
Change in accounting estimates
 
 
 
 
 
 
 
 
 
 
 
Depreciation expense
 
 
 
 
 
 
 
 
(20)
 
 
Net income
 
 
 
 
 
 
 
 
$ 12 
 
 
Basis of Presentation and Summary of Significant Accounting Policies (Details 2) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
segment
state
Dec. 31, 2013
Dec. 31, 2012
Schedule of Accounting Policies [Line Items]
 
 
 
Number of states in which entity operates
14 
 
 
Revenue Recognition
 
 
 
Term of indefeasible rights of use (in years)
20 years 
 
 
Advertising Costs
 
 
 
Advertising expense
$ 83 
$ 88 
$ 90 
Finite-Lived Intangible Assets, Net [Abstract]
 
 
 
Number of reporting units (segment)
1 
 
 
Number of Operating Segments
1 
 
 
Minimum
 
 
 
Revenue Recognition
 
 
 
Customer relationship period for revenue recognition (from eighteen months to over ten years)
18 months 
 
 
Accounts Receivable, Net [Abstract]
 
 
 
Period accounts receivable are past due
30 days 
 
 
Maximum
 
 
 
Revenue Recognition
 
 
 
Customer relationship period for revenue recognition (from eighteen months to over ten years)
10 years 
 
 
Customer relationships
 
 
 
Finite-Lived Intangible Assets, Net [Abstract]
 
 
 
Finite-Lived Intangible Asset, Useful Life
10 years 
 
 
Capitalized software |
Maximum
 
 
 
Finite-Lived Intangible Assets, Net [Abstract]
 
 
 
Finite-Lived Intangible Asset, Useful Life
7 years 
 
 
Goodwill, Customer Relationships and Other Intangible Assets (Details) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
segment
Dec. 31, 2013
Dec. 31, 2012
Finite and Indefinite-Lived Intangible Assets by Major Class [Line Items]
 
 
 
Goodwill
$ 9,354 
$ 9,354 
 
Finite-lived intangible assets, net
3,039 
3,687 
 
Gross carrying amounts of goodwill, customer relationships and other intangible assets
17,108 
 
 
Amortization expense for intangible assets
957 
1,029 
1,115 
Number of reporting units (segment)
1 
 
 
Weighted average cost of capital to calculate discount rate as of the measurement date (as a percent)
6.00% 
 
 
Weighted average cost of capital, cost of equity (as a percent)
8.20% 
 
 
Weighted average cost of capital, after-tax cost of debt (as a percent)
2.90% 
 
 
Estimated amortization expense for intangible assets
 
 
 
2015
808 
 
 
2016
740 
 
 
2017
669 
 
 
2018
589 
 
 
2019
503 
 
 
Customer relationships
 
 
 
Finite and Indefinite-Lived Intangible Assets by Major Class [Line Items]
 
 
 
Finite-lived intangible assets, net
3,039 
3,687 
 
Accumulated amortization
2,660 
2,012 
 
Capitalized software
 
 
 
Finite and Indefinite-Lived Intangible Assets by Major Class [Line Items]
 
 
 
Finite-lived intangible assets, net
808 
1,008 
 
Accumulated amortization
$ 1,247 
$ 994 
 
Long-Term Debt and Revolving Promissory Note (Details) (USD $)
Dec. 31, 2014
Dec. 31, 2013
Long-term debt
 
 
Long-term debt, gross
$ 7,343,000,000 
 
Capital lease and other obligations
32,000,000 
72,000,000 
Unamortized premiums, net
36,000,000 
75,000,000 
Total long-term debt
7,379,000,000 
7,558,000,000 
Less current maturities
(117,000,000)
(637,000,000)
Long-term debt, excluding current maturities
7,262,000,000 
6,921,000,000 
Revolving Promissory Note [Abstract]
 
 
Note payable-affiliate
796,000,000 
754,000,000 
Senior notes
 
 
Long-term debt
 
 
Long-term debt, gross
7,311,000,000 
7,411,000,000 
Senior notes |
Minimum
 
 
Long-term debt
 
 
Interest rate, stated percentage (as a percent)
6.125% 
 
Senior notes |
Maximum
 
 
Long-term debt
 
 
Interest rate, stated percentage (as a percent)
8.375% 
 
Revolving promissory note |
CenturyLink, Inc. affiliate
 
 
Revolving Promissory Note [Abstract]
 
 
Short-term debt, weighted average interest rate (as a percent)
6.657% 
 
Note payable-affiliate
796,000,000 
754,000,000 
Maximum borrowing capacity, note payable-affiliate
1,000,000,000 
 
Accrued interest payable. note payable-affiliate
$ 9,000,000 
 
Long-Term Debt and Revolving Promissory Note Long-Term Debt and Revolving Promissory Note (Details 2) (USD $)
In Millions, unless otherwise specified
12 Months Ended 0 Months Ended 0 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Sep. 29, 2014
Qwest Corporation
Senior notes
Notes, 6.875 percent due 2054 [Member]
Sep. 29, 2014
Qwest Corporation
Senior notes
Notes, 6.875 percent due 2054 [Member]
Debt Instrument, Redemption, Period One [Member]
May 23, 2013
Qwest Corporation
Senior notes
6.125% Notes due 2053
May 23, 2013
Qwest Corporation
Senior notes
6.125% Notes due 2053
Debt Instrument, Redemption, Period One [Member]
Oct. 2, 2014
Qwest Corporation
Senior notes
7.500 percent Notes due 2014
Oct. 1, 2014
Qwest Corporation
Senior notes
7.500 percent Notes due 2014
Jun. 17, 2013
Qwest Corporation
Senior notes
Notes bearing floating interest rates due 2013
Feb. 20, 2015
Subsequent Event [Member]
Qwest Corporation
Term Loan
Debt Instrument [Line Items]
 
 
 
 
 
 
 
 
 
 
 
Debt Instrument, Face Amount
 
 
 
$ 500 
 
$ 775 
 
 
 
 
$ 100 
Interest rate, stated percentage (as a percent)
 
 
 
6.875% 
 
6.125% 
 
 
7.50% 
 
 
Net proceeds from issuance of debt
 
 
 
483 
 
752 
 
 
 
 
 
Redemption price of debt instrument (as a percent)
 
 
 
 
100.00% 
 
100.00% 
 
 
 
 
Debt instrument face amount of debt sold pursuant to over allotment option granted to underwriters
 
 
 
 
 
25 
 
 
 
 
 
Repayments of long-term debt
 
 
 
 
 
 
 
600 
 
750 
 
Proceeds from term loan
 
 
 
 
 
 
 
 
 
 
100 
Amount of gross interest expense, net of capitalized interest and interest expense ( income) -affiliates
 
 
 
 
 
 
 
 
 
 
 
Gross interest expense
481 
467 
461 
 
 
 
 
 
 
 
 
Capitalized interest
(17)
(17)
(18)
 
 
 
 
 
 
 
 
Total interest expense
464 
450 
443 
 
 
 
 
 
 
 
 
Interest expense-affiliates, net
$ 40 
$ 64 
$ 24 
 
 
 
 
 
 
 
 
Long-Term Debt and Revolving Promissory Note Long-Term Debt and Revolving Promissory Note (Details 3) (USD $)
In Millions, unless otherwise specified
Dec. 31, 2014
Maturities of long-term debt (excluding unamortized premiums, discounts, and other)
 
2015
$ 117 
2016
237 
2017
500 
2018
0 
2019
0 
2020 and thereafter
6,489 
Total long-term debt
$ 7,343 
Accounts Receivable (Details) (USD $)
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Accounts receivable
 
 
 
Trade and purchased receivables
$ 649,000,000 
$ 697,000,000 
 
Earned and unbilled receivables
120,000,000 
73,000,000 
 
Other
9,000,000 
11,000,000 
 
Total accounts receivable
778,000,000 
781,000,000 
 
Accounts receivable, allowance (in dollars)
(38,000,000)
(43,000,000)
 
Accounts receivable, less allowance
740,000,000 
738,000,000 
 
Customer receivable in excess of 10% of accounts receivable
0 
 
 
Allowance for doubtful accounts
 
 
 
Changes in allowance for doubtful accounts
 
 
 
Beginning balance
43,000,000 
46,000,000 
42,000,000 
Additions
64,000,000 
65,000,000 
74,000,000 
Deductions
(69,000,000)
(68,000,000)
(70,000,000)
Ending balance
$ 38,000,000 
$ 43,000,000 
$ 46,000,000 
Property, Plant and Equipment (Details) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Property, plant and equipment
 
 
 
Property, plant and equipment
$ 11,157 
$ 10,193 
 
Accumulated depreciation
(3,956)
(2,985)
 
Net property, plant and equipment
7,201 
7,208 
 
Depreciation expense
1,048 
1,099 
1,175 
Land
 
 
 
Property, plant and equipment
 
 
 
Property, plant and equipment
350 
356 
 
Fiber, conduit and other outside plant
 
 
 
Property, plant and equipment
 
 
 
Property, plant and equipment
4,640 
4,033 
 
Fiber, conduit and other outside plant |
Minimum
 
 
 
Property, plant and equipment
 
 
 
Depreciable lives
15 years 
 
 
Fiber, conduit and other outside plant |
Maximum
 
 
 
Property, plant and equipment
 
 
 
Depreciable lives
45 years 
 
 
Central office and other network electronics
 
 
 
Property, plant and equipment
 
 
 
Property, plant and equipment
3,362 
3,026 
 
Central office and other network electronics |
Minimum
 
 
 
Property, plant and equipment
 
 
 
Depreciable lives
4 years 
 
 
Central office and other network electronics |
Maximum
 
 
 
Property, plant and equipment
 
 
 
Depreciable lives
10 years 
 
 
Support assets
 
 
 
Property, plant and equipment
 
 
 
Property, plant and equipment
2,496 
2,470 
 
Support assets |
Minimum
 
 
 
Property, plant and equipment
 
 
 
Depreciable lives
5 years 
 
 
Support assets |
Maximum
 
 
 
Property, plant and equipment
 
 
 
Depreciable lives
30 years 
 
 
Construction in progress
 
 
 
Property, plant and equipment
 
 
 
Property, plant and equipment
$ 309 
$ 308 
 
Property, Plant and Equipment (Details 2) (USD $)
In Millions, unless otherwise specified
12 Months Ended 0 Months Ended 12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Apr. 2, 2012
Office Building
Dec. 31, 2014
Office Building
Apr. 2, 2013
Office Building
Property, plant and equipment
 
 
 
 
 
 
Proceeds from sale of office building
$ 14 
$ 2 
$ 133 
$ 133 
 
 
Deferred gain on sale of property
 
 
 
 
 
(16)
Deferred gain on sale of property, recognition period
 
 
 
10 years 
 
 
Impairment of real estate
$ (17)
$ 0 
$ 0 
 
$ (17)
 
Severance (Details) (Employee severance, USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Employee severance
 
 
Restructuring reserve
 
 
Balance at the beginning of the period
$ 5 
$ 7 
Accrued to expense
44 
10 
Payments, net
(39)
(12)
Balance at the end of the period
$ 10 
$ 5 
Employee Benefits (Details) (USD $)
In Millions, unless otherwise specified
12 Months Ended 12 Months Ended 1 Months Ended
Dec. 31, 2014
CenturyLink, Inc. and Qwest Communications International Inc.
Dec. 31, 2013
CenturyLink, Inc. and Qwest Communications International Inc.
Dec. 31, 2012
CenturyLink, Inc. and Qwest Communications International Inc.
Dec. 31, 2014
Pension Plan
QCII
Dec. 31, 2013
Pension Plan
QCII
Dec. 31, 2012
Pension Plan
QCII
Dec. 31, 2014
Pension Plan
CenturyLink, Inc.
Dec. 31, 2014
Post-Retirement Benefit Plan
CenturyLink, Inc.
Dec. 31, 2013
Post-Retirement Benefit Plan
CenturyLink, Inc.
Dec. 31, 2012
Post-Retirement Benefit Plan
CenturyLink, Inc.
Oct. 31, 2013
Employees covered under collective bargaining agreements
Dec. 31, 2014
Employees covered under collective bargaining agreements
Employee
Employee Benefits
 
 
 
 
 
 
 
 
 
 
 
 
Unfunded status
 
 
 
 
$ (159)
 
$ (2,402)
$ (3,477)
$ (3,153)
 
 
 
Pension (income) expense
 
 
 
$ (98)
$ (178)
$ (117)
 
$ 128 
$ 88 
$ 106 
 
 
Allocated portion of QCII's total pension and CenturyLink's post-retirement benefit expenses (as a percent)
92.00% 
91.00% 
91.00% 
 
 
 
 
 
 
 
 
 
Collective bargaining agreements, term
 
 
 
 
 
 
 
 
 
 
4 years 
 
Collective bargaining arrangement, number of participating unionized employees
 
 
 
 
 
 
 
 
 
 
 
11,000 
Collective bargaining arrangement, number of participating active employees and retirees
 
 
 
 
 
 
 
 
 
 
 
11,000 
Employee Benefits (Details 2) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Health Care and Life Insurance
 
 
 
Health care benefit expenses
$ 204 
$ 223 
$ 221 
Employee Benefits (Details 3) (CenturyLink, Inc., 401(k) Plan, USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
CenturyLink, Inc. |
401(k) Plan
 
 
 
Defined Contribution Plan Disclosure [Line Items]
 
 
 
Expenses related to the 401(k) Plan
$ 47 
$ 49 
$ 46 
Stock-Based Compensation (Details) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Stock-based compensation
 
 
 
Income tax benefit recognized, associated with stock compensation expense
$ 8 
$ 7 
$ 7 
CenturyLink
 
 
 
Stock-based compensation
 
 
 
Stock based compensation expense
$ 21 
$ 17 
$ 18 
Products and Services Revenues (Details) (USD $)
In Millions, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 31, 2014
Sep. 30, 2014
Jun. 30, 2014
Mar. 31, 2014
Dec. 31, 2013
Sep. 30, 2013
Jun. 30, 2013
Mar. 31, 2013
Dec. 31, 2014
category
Dec. 31, 2013
Dec. 31, 2012
Products and Services Revenues
 
 
 
 
 
 
 
 
 
 
 
Number of categories of products and services (categories)
 
 
 
 
 
 
 
 
3 
 
 
Operating revenues
$ 2,223 
$ 2,198 
$ 2,206 
$ 2,211 
$ 2,207 
$ 2,188 
$ 2,199 
$ 2,159 
$ 8,838 
$ 8,753 
$ 8,848 
Taxes and surcharges included in operating revenues and expenses
 
 
 
 
 
 
 
 
151 
154 
171 
Operating revenues |
Customer concentration risk
 
 
 
 
 
 
 
 
 
 
 
Products and Services Revenues
 
 
 
 
 
 
 
 
 
 
 
Concentration risk, percentage
 
 
 
 
 
 
 
 
10.00% 
 
 
Strategic services
 
 
 
 
 
 
 
 
 
 
 
Products and Services Revenues
 
 
 
 
 
 
 
 
 
 
 
Operating revenues
 
 
 
 
 
 
 
 
3,429 
3,342 
3,265 
Legacy services
 
 
 
 
 
 
 
 
 
 
 
Products and Services Revenues
 
 
 
 
 
 
 
 
 
 
 
Operating revenues
 
 
 
 
 
 
 
 
2,987 
3,208 
3,471 
Affiliates and other services
 
 
 
 
 
 
 
 
 
 
 
Products and Services Revenues
 
 
 
 
 
 
 
 
 
 
 
Operating revenues
 
 
 
 
 
 
 
 
$ 2,422 
$ 2,203 
$ 2,112 
Income Taxes (Details) (USD $)
In Millions, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 31, 2014
Sep. 30, 2014
Jun. 30, 2014
Mar. 31, 2014
Dec. 31, 2013
Sep. 30, 2013
Jun. 30, 2013
Mar. 31, 2013
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Income Tax Contingency [Line Items]
 
 
 
 
 
 
 
 
 
 
 
Liabilities recorded for interest related to uncertain tax positions
 
 
 
 
 
 
 
 
 
 
$ 5 
Current tax provision:
 
 
 
 
 
 
 
 
 
 
 
Federal and foreign
 
 
 
 
 
 
 
 
738 
653 
638 
State and local
 
 
 
 
 
 
 
 
129 
101 
105 
Total current tax provision
 
 
 
 
 
 
 
 
867 
754 
743 
Deferred tax expense:
 
 
 
 
 
 
 
 
 
 
 
Federal and foreign
 
 
 
 
 
 
 
 
(209)
(125)
(175)
State and local
 
 
 
 
 
 
 
 
(19)
(27)
(26)
Total deferred tax expense
 
 
 
 
 
 
 
 
(228)
(152)
(201)
Income tax expense
161 
156 
162 
160 
142 
139 
155 
166 
639 
602 
542 
Effective income tax rate:
 
 
 
 
 
 
 
 
 
 
 
Federal statutory income tax rate (as a percent)
 
 
 
 
 
 
 
 
35.00% 
35.00% 
35.00% 
State income taxes-net of federal effect (as a percent)
 
 
 
 
 
 
 
 
4.00% 
3.10% 
3.70% 
Other (as a percent)
 
 
 
 
 
 
 
 
0.70% 
0.30% 
0.30% 
Effective income tax rate (as a percent)
 
 
 
 
 
 
 
 
39.70% 
38.40% 
39.00% 
Deferred tax liabilities:
 
 
 
 
 
 
 
 
 
 
 
Property, plant and equipment
(1,380)
 
 
 
(1,281)
 
 
 
(1,380)
(1,281)
 
Intangibles assets
(1,449)
 
 
 
(1,772)
 
 
 
(1,449)
(1,772)
 
Receivable from an affiliate due to pension plan participation
(500)
 
 
 
(462)
 
 
 
(500)
(462)
 
Other
(52)
 
 
 
(52)
 
 
 
(52)
(52)
 
Total deferred tax liabilities
(3,381)
 
 
 
(3,567)
 
 
 
(3,381)
(3,567)
 
Deferred tax assets:
 
 
 
 
 
 
 
 
 
 
 
Payable to affiliate due to post-retirement benefit plan participation
998 
 
 
 
983 
 
 
 
998 
983 
 
Debt premiums
36 
 
 
 
55 
 
 
 
36 
55 
 
Other
275 
 
 
 
229 
 
 
 
275 
229 
 
Total deferred tax assets
1,309 
 
 
 
1,267 
 
 
 
1,309 
1,267 
 
Valuation allowance on deferred tax assets
(12)
 
 
 
(12)
 
 
 
(12)
(12)
 
Net deferred tax assets
1,297 
 
 
 
1,255 
 
 
 
1,297 
1,255 
 
Net deferred tax liabilities
$ (2,084)
 
 
 
$ (2,312)
 
 
 
$ (2,084)
$ (2,312)
 
Income Taxes (Details 2) (QSC, USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
QSC
 
 
 
Income taxes
 
 
 
Amount paid to QSC
$ 861 
$ 750 
$ 607 
Fair Value Disclosure (Details) (Input Level 2, Fair Value, USD $)
In Millions, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Carrying Amount
 
 
Liabilities
 
 
Liabilities-Long-term debt excluding capital lease and other obligations
$ 7,347 
$ 7,486 
Fair Value
 
 
Liabilities
 
 
Liabilities-Long-term debt excluding capital lease and other obligations
$ 7,702 
$ 7,226 
Stockholder's Equity (Details) (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Stockholder's Equity (Deficit)
 
 
 
Common stock, shares outstanding (shares)
1 
1 
 
Tax benefit associated with deduction for pension funding recognized in equity contribution
 
 
$ 100 
Dividends
 
 
 
Cash dividend declared to QSC
1,400 
1,325 
840 
Cash dividend paid to QSC
$ 1,400 
$ 1,325 
$ 1,150 
COMMON STOCK
 
 
 
Stockholder's Equity (Deficit)
 
 
 
Common stock, shares issued (shares)
1 
 
 
Common stock, shares outstanding (shares)
1 
 
 
Quarterly Financial Data (Unaudited) (Details) (USD $)
In Millions, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 31, 2014
Sep. 30, 2014
Jun. 30, 2014
Mar. 31, 2014
Dec. 31, 2013
Sep. 30, 2013
Jun. 30, 2013
Mar. 31, 2013
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Quarterly Financial Information Disclosure [Abstract]
 
 
 
 
 
 
 
 
 
 
 
Operating revenues
$ 2,223 
$ 2,198 
$ 2,206 
$ 2,211 
$ 2,207 
$ 2,188 
$ 2,199 
$ 2,159 
$ 8,838 
$ 8,753 
$ 8,848 
Operating income
496 
528 
546 
542 
507 
493 
525 
553 
2,112 
2,078 
1,905 
Income tax expense
161 
156 
162 
160 
142 
139 
155 
166 
639 
602 
542 
Net income
$ 216 
$ 245 
$ 256 
$ 253 
$ 236 
$ 218 
$ 246 
$ 264 
$ 970 
$ 964 
$ 849 
Commitments and Contingencies (Details) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Leases, Capital
 
 
 
Assets acquired through capital leases
$ 3 
$ 0 
$ 0 
Depreciation expense
32 
42 
50 
Cash payments towards capital leases
32 
40 
41 
Assets included in property, plant and equipment
137 
168 
 
Accumulated depreciation
108 
109 
 
Capital lease obligations:
 
 
 
2015
22 
 
 
2016
2 
 
 
2017
1 
 
 
2018
1 
 
 
2019
1 
 
 
2020 and thereafter
7 
 
 
Total minimum payments
34 
 
 
Less: amount representing interest and executory costs
(8)
 
 
Present value of minimum payments
26 
 
 
Less: current portion
(20)
 
 
Long-term portion
$ 6 
 
 
Commitments and Contingencies (Details 2) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Leases, Operating
 
 
 
Operating leases, rent expense
$ 79 
$ 83 
$ 93 
Sublease rental income received
4 
4 
8 
Operating leases:
 
 
 
2015
56 
 
 
2016
50 
 
 
2017
44 
 
 
2018
38 
 
 
2019
27 
 
 
2020 and thereafter
36 
 
 
Total future minimum payments
251 
 
 
Minimum sublease rentals due in the future under non-cancelable subleases
30 
 
 
Purchase Obligations
 
 
 
Total purchase commitments
139 
 
 
2015
50 
 
 
2016 through 2017
72 
 
 
2018 through 2019
16 
 
 
2020 and thereafter
$ 1 
 
 
Other Financial Information (Details) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Prepaid Expense and Other Assets, Current [Abstract]
 
 
Prepaid expenses
$ 45 
$ 47 
Other
80 
79 
Total other current assets
125 
126 
Selected Current Liabilities [Abstract]
 
 
Accounts payable
464 
440 
Accounts Payable, Current [Abstract]
 
 
Capital expenditures incurred but not yet paid
$ 44 
$ 11 
Labor Union Contracts (Details) (Employees covered under collective bargaining agreements)
Dec. 31, 2014
Employee
Employees covered under collective bargaining agreements
 
Labor Union Contracts
 
Approximate percentage of employees who are members of bargaining units (as a percent)
48.00% 
Collective bargaining arrangement, number of participating unionized employees
11,000