QWEST CORP, 10-Q filed on 11/9/2016
Quarterly Report
v3.5.0.2
Document and Entity Information - shares
 9 Months Ended
Sep. 30, 2016
Nov. 09, 2016
Document and Entity Information    
Entity Registrant Name QWEST CORP  
Entity Central Index Key 0000068622  
Current Fiscal Year End Date --12-31  
Entity Filer Category Non-accelerated Filer  
Entity Current Reporting Status Yes  
Document Type 10-Q  
Document Period End Date Sep. 30, 2016  
Document Fiscal Year Focus 2016  
Document Fiscal Period Focus Q3  
Amendment Flag false  
Entity Common Stock, Shares Outstanding   1
v3.5.0.2
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
$ in Millions
 3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
OPERATING REVENUES        
Operating revenues $ 1,554 $ 1,670 $ 4,726 $ 4,924
Operating revenues - affiliates 672 617 1,976 1,802
Total operating revenues 2,226 2,287 6,702 6,726
OPERATING EXPENSES        
Cost of services and products (exclusive of depreciation and amortization) 757 734 2,196 2,169
Selling, general and administrative 232 266 717 792
Operating expenses - affiliates 237 249 719 735
Depreciation and amortization 424 466 1,267 1,392
Total operating expenses 1,650 1,715 4,899 5,088
OPERATING INCOME 576 572 1,803 1,638
OTHER (EXPENSE) INCOME        
Interest expense (121) (119) (362) (356)
Interest expense - affiliates, net (15) (13) (44) (39)
Other expense, net (26) (1) (24) 0
Total other expense, net (162) (133) (430) (395)
INCOME BEFORE INCOME TAX EXPENSE 414 439 1,373 1,243
Income tax expense 159 171 526 490
NET INCOME $ 255 $ 268 $ 847 $ 753
v3.5.0.2
CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Millions
Sep. 30, 2016
Dec. 31, 2015
CURRENT ASSETS    
Cash and cash equivalents $ 7 $ 3
Accounts receivable, less allowance of $49 and $47 679 688
Advances to affiliates 974 788
Other 135 123
Total current assets 1,795 1,602
NET PROPERTY, PLANT AND EQUIPMENT    
Property, plant and equipment 12,902 12,182
Accumulated depreciation (5,395) (4,808)
Net property, plant and equipment 7,507 7,374
GOODWILL AND OTHER ASSETS    
Goodwill 9,354 9,354
Other intangible assets, less accumulated amortization of $1,471 and $1,383 503 613
Other, net 100 92
Total goodwill and other assets 11,969 12,494
TOTAL ASSETS 21,271 21,470
CURRENT LIABILITIES    
Current maturities of long-term debt 509 242
Accounts payable 377 369
Note payable - affiliate 884 855
Accrued expenses and other liabilities    
Salaries and benefits 179 211
Income and other taxes 183 189
Other 175 135
Current affiliate obligations, net 93 97
Advance billings and customer deposits 315 324
Total current liabilities 2,715 2,422
LONG-TERM DEBT 6,749 6,997
DEFERRED CREDITS AND OTHER LIABILITIES    
Deferred revenues 121 137
Deferred income taxes, net 1,844 1,896
Affiliate obligations, net 983 1,051
Other 55 60
Total deferred credits and other liabilities 3,003 3,144
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDER'S EQUITY    
Common stock - one share without par value, owned by Qwest Services Corporation 10,050 10,050
Accumulated deficit (1,246) (1,143)
Total stockholder's equity 8,804 8,907
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY 21,271 21,470
Customer relationships    
Customer relationships, less accumulated amortization of $3,687 and $3,264 $ 2,012 $ 2,435
v3.5.0.2
CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
$ in Millions
Sep. 30, 2016
Dec. 31, 2015
Accounts receivable, allowance (dollars) $ 49 $ 47
Other intangible assets, accumulated amortization $ 1,471 $ 1,383
Common stock, share issued (in shares) 1 1
Common stock, share outstanding (in shares) 1 1
Common stock, value outstanding $ 10,050 $ 10,050
Customer relationships    
Customer relationships, accumulated amortization $ 3,687 $ 3,264
v3.5.0.2
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Millions
 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
OPERATING ACTIVITIES    
Net income $ 847 $ 753
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 1,267 1,392
Deferred income taxes (52) (242)
Provision for uncollectible accounts 58 59
Net long-term debt issuance costs and premium amortization (8) (14)
Net loss on early retirement of debt 27 0
Accrued interest on affiliate note 29 31
Changes in current assets and liabilities:    
Accounts receivable (49) (25)
Accounts payable (3) 34
Accrued income and other taxes (6) 13
Other current assets and liabilities, net (25) 57
Other current assets and liabilities - affiliates, net 15 9
Changes in other noncurrent assets and liabilities, net (21) (26)
Changes in affiliate obligations, net (72) (5)
Other, net 3 4
Net cash provided by operating activities 2,010 2,040
INVESTING ACTIVITIES    
Payments for property, plant and equipment and capitalized software (860) (899)
Changes in advances to affiliates (186) (571)
Proceeds from sale of property 7 0
Net cash used in investing activities (1,039) (1,470)
FINANCING ACTIVITIES    
Net proceeds from issuance of long-term debt 1,173 495
Payments of long-term debt (1,190) (112)
Dividends paid to Qwest Services Corporation (950) (950)
Net cash used in financing activities (967) (567)
Net increase in cash and cash equivalents 4 3
Cash and cash equivalents at beginning of period 3 6
Cash and cash equivalents at end of period 7 9
Supplemental cash flow information:    
Income taxes paid, net (578) (732)
Interest paid (net of capitalized interest of $13 and $14) $ (353) $ (347)
v3.5.0.2
CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) - USD ($)
$ in Millions
 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Statement of Cash Flows [Abstract]    
Interest paid, capitalized interest $ 13 $ 14
v3.5.0.2
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY - USD ($)
$ in Millions
Total
COMMON STOCK
ACCUMULATED DEFICIT
Balance at beginning of period at Dec. 31, 2014   $ 10,050 $ (867)
Increase (Decrease) in Stockholder's Equity      
Net income $ 753   753
Dividends declared to Qwest Services Corporation     (950)
Balance at end of period at Sep. 30, 2015 8,986 10,050 (1,064)
Balance at beginning of period at Dec. 31, 2015 8,907 10,050 (1,143)
Increase (Decrease) in Stockholder's Equity      
Net income 847   847
Dividends declared to Qwest Services Corporation (950)   (950)
Balance at end of period at Sep. 30, 2016 $ 8,804 $ 10,050 $ (1,246)
v3.5.0.2
Basis of Presentation
 9 Months Ended
Sep. 30, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation
Basis of Presentation
General
We are an integrated communications company engaged primarily in providing an array of services to our residential and business customers. Our communications services include local voice, broadband, private line (including special access), network access, Ethernet, information technology, video and other ancillary services. In certain local and regional markets, we also provide local access and fiber transport services to competitive local exchange carriers.
We generate the majority of our total consolidated operating revenues from services provided in the 14-state region of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. We refer to this region as our local service area.
Our consolidated balance sheet as of December 31, 2015, which was derived from our audited consolidated financial statements, and our unaudited interim consolidated financial statements provided herein have been prepared in accordance with the instructions for Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission ("SEC"); however, in our opinion, the disclosures made are adequate to make the information presented not misleading. We believe that these consolidated financial statements include all normal recurring adjustments necessary to fairly present the results for the interim periods. The consolidated results of operations for the first nine months of the year are not necessarily indicative of the consolidated results of operations that might be expected for the entire year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.
The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries. Intercompany amounts and transactions with our consolidated subsidiaries have been eliminated. Transactions with our non-consolidated affiliates (referred to herein as affiliates) have not been eliminated.
We reclassified certain prior period amounts to conform to the current period presentation, including the categorization of our revenues. See Note 4—Products and Services Revenues for additional information. These changes had no impact on total operating revenues, total operating expenses or net income for any period.
Connect America Fund
In 2015, CenturyLink accepted funding from the Federal Communications Commission's ("FCC") Connect America Fund ("CAF") of approximately $500 million per year for six years to fund the deployment of voice and broadband capable infrastructure for approximately 1.2 million rural households and businesses in 33 states under the CAF Phase 2 high-cost support program. The funding from the CAF Phase 2 support program in these 33 states will substantially supplant funding from the interstate Universal Service Fund ("USF") high-cost program that we previously utilized to support voice services in high-cost rural markets. Of these amounts, approximately $150 million per year is attributable to our service area, to provide service to approximately 0.3 million rural households and businesses in 13 states. In late 2015, we began receiving these support payments from the FCC under the new CAF Phase 2 support program, which included monthly support payments at a higher rate than under the interstate USF support program. We received a substantial one-time transitional payment of $50 million from the FCC in the third quarter of 2015, of which $42 million was attributable to the first six months of 2015. The transitional payment was designed to align the prior USF payments with the new CAF Phase 2 payments for the full year 2015. Consequently, we do not expect funding from the CAF Phase 2 support program (including the prior USF funding) to materially change our operating revenues for the full year 2016 when compared to the full year 2015.
Recent Accounting Pronouncements
Financial Instruments
On June 16, 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires our management team to estimate the total credit losses expected on the portfolio of financial instruments. We are currently reviewing the requirements of the standard and evaluating the impact on our consolidated financial statements.    
We are required to adopt the provisions of ASU 2016-13 effective January 1, 2020, but could elect to early adopt the provisions as of January 1, 2019. We expect to recognize the impacts of adopting ASU 2016-13 through a cumulative adjustment to retained earnings as of the date of adoption.
Share-based Compensation
On March 30, 2016, the FASB issued ASU 2016-09, “Improvement to Employee Share-Based Payment Accounting" (“ASU 2016-09”). ASU 2016-09 modifies the accounting and associated income tax accounting for share-based compensation in order to reduce the cost and complexity associated with current generally accepted accounting principles. ASU 2016-09 is effective as of January 1, 2017, but early adoption may be elected. ASU 2016-09 includes different transition requirements for the different changes implemented, including some provisions which allow retrospective application. We will implement this new standard on its effective date, but we have not determined if we will retrospectively apply the requirements when allowed.
The primary provisions of ASU 2016-09 that we expect will affect our financial statements are: 1) a reclassification of the tax effect associated with the difference between the expense recognized for share-based payments and the associated tax deduction from additional paid-in capital to income tax expense; 2) a reclassification of the tax effect associated with the difference between compensation expense and associated deduction from financing cash flow to operating cash flow; and 3) an optional accounting policy election to account for forfeitures of share-based payment grants as they occur as opposed to our current policy of estimating the forfeitures on the grant date. Although these provisions would not have had a material impact on our previously-issued financial statements, we cannot provide any assurance regarding their future impacts. Adoption of ASU 2016-09 may increase the volatility of income tax expense and cash flow from operating activities.
Leases
On February 25, 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). The core principle of ASU 2016-02 will require lessees to present right-of-use assets and lease liabilities on their balance sheets for operating leases, which are currently not reflected on their balance sheets.
ASU 2016-02 is effective for annual and interim periods beginning January 1, 2019. Early adoption of ASU 2016-02 is permitted. Upon adoption of ASU 2016-02, we are required to recognize and measure leases at the beginning of the earliest period presented in our consolidated financial statements using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that we may elect to apply. We have not yet decided when we will adopt ASU 2016-02 or which practical expedient options we will elect.
We are currently evaluating our existing lease accounting systems to determine whether our current systems will support the new accounting requirements or if upgrades or new systems will be required, and we are in the process of developing an implementation plan. We are also currently evaluating and assessing the impact ASU 2016-02 will have on us and our consolidated financial statements. As of the date of this report, we cannot provide any estimate of the impact of adopting ASU 2016-02.
Revenue Recognition
On May 28, 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU 2014-09 replaces virtually all existing generally accepted accounting principles (“GAAP”) on revenue recognition and replaces them with a principles-based approach for determining revenue recognition using a new five step model. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes new accounting principles related to the deferral and amortization of contract acquisition and fulfillment costs. We currently do not defer any contract acquisition costs and we defer contract fulfillment costs only up to the extent of any revenue deferred.
On July 9, 2015, the FASB approved the deferral of the effective date of ASU 2014-09 by one year until January 1, 2018, which is the date we plan to adopt this standard. ASU 2014-09 may be adopted by applying the provisions of this standard on a retrospective basis to the periods included in the financial statements or on a modified retrospective basis which would result in the recognition of a cumulative effect of adopting ASU 2014-09 in the first quarter of 2018. We have not yet decided which implementation method we will adopt. We have completed our initial assessment of our business and systems requirements and we are currently developing and implementing a new revenue recognition system to comply with the requirements of ASU 2014-09. We continue to work on developing estimates of the impact of ASU 2014-09 on the timing of our revenue recognition but cannot currently provide a reasonably accurate estimate of its impact.
v3.5.0.2
Long-Term Debt and Revolving Promissory Note
 9 Months Ended
Sep. 30, 2016
Debt Disclosure [Abstract]  
Long-Term Debt and Revolving Promissory Note
Long-Term Debt and Revolving Promissory Note
Long-term debt, including unamortized discounts and premiums, unamortized debt issuance costs and note payable - affiliate, were as follows:
 
Interest Rates
 
Maturities
 
As of 
 September 30, 2016
 
As of 
 December 31, 2015
 
 
 
 
 
(Dollars in millions)
Senior notes
6.125% - 7.750%
 
2017 - 2056
 
$
7,259

 
7,229

Term loan
2.280%
 
2025
 
100

 
100

Capital lease and other obligations
Various
 
Various
 
28

 
17

Unamortized premiums, net
 
 
 
 
6

 
16

Unamortized debt issuance costs
 
 
 
 
(135
)
 
(123
)
Total long-term debt
 
 
 
 
7,258

 
7,239

Less current maturities
 
 
 
 
(509
)
 
(242
)
Long-term debt, excluding current maturities
 
 
 
 
$
6,749

 
6,997

Note payable - affiliate
6.795%
 
2022
 
$
884

 
855


New Issuances
On August 22, 2016, QC issued $978 million aggregate principal amount of 6.5% Notes due 2056, including $128 million principal amount that was sold pursuant to an over-allotment option, in exchange for net proceeds, after deducting underwriting discounts and other expenses, of $946 million. All of the 6.5% Notes are unsecured obligations and may be redeemed by QC, in whole or in part, on or after September 1, 2021, at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date.
On January 29, 2016, QC issued $235 million aggregate principal amount of 7% Notes due 2056, in exchange for net proceeds, after deducting underwriting discounts and other expenses, of $227 million. All of the 7% Notes are unsecured obligations and may be redeemed by QC, in whole or in part, on or after February 1, 2021, at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to the redemption date.
Repayments
On September 15, 2016, QC redeemed $287 million of its 7.5% Notes due 2051, which resulted in a loss of $9 million.
On August 29, 2016, QC redeemed all $661 million of its 7.375% Notes due 2051, which resulted in a loss of $18 million.
On May 2, 2016, QC paid at maturity the $235 million principal amount and accrued and unpaid interest due under its 8.375% Notes.
Revolving Promissory Note
We are currently indebted to an affiliate of our ultimate parent company, CenturyLink, Inc., under a revolving promissory note that provides us with a funding commitment of up to $1.0 billion aggregate principal amount through June 30, 2022, of which $884 million was outstanding as of September 30, 2016. As of September 30, 2016, the weighted-average interest rate was 6.795%. As of September 30, 2016 and December 31, 2015, this revolving promissory note is reflected on our consolidated balance sheets as a current liability under note payable - affiliate. As of September 30, 2016, $20 million of accrued interest is reflected in other current liabilities on our consolidated balance sheet. In accordance with the note agreement, all accrued interest and unpaid interest is capitalized to the unpaid principal balance on June 1 and December 1 of each year.
Covenants
The indentures governing our notes contain certain covenants including, but not limited to: (i) a prohibition on certain liens on our assets; and (ii) a limitation on mergers or sales of all, or substantially all, of our assets, which limitation requires that a successor assume the obligation with regard to these notes. These indentures do not contain any cross-default provisions.
Our senior notes were issued under indentures dated April 15, 1990 and October 15, 1999. These indentures do not contain any financial covenants, but do include restrictions that limit our ability to (i) incur, issue or create liens upon our property and (ii) consolidate with or merge into, transfer or lease all or substantially all of our assets to any other party.
As of September 30, 2016, we believe we were in compliance with the provisions and covenants of our debt agreements.
v3.5.0.2
Fair Value Disclosure
 9 Months Ended
Sep. 30, 2016
Fair Value Disclosures [Abstract]  
Fair Value Disclosure
Fair Value Disclosure
Our financial instruments consist of cash and cash equivalents, accounts receivable, advances to affiliates, accounts payable, note payable - affiliate and long-term debt, excluding capital lease and other obligations. Due to their short-term nature, the carrying amounts of our cash and cash equivalents, accounts receivable, advances to affiliates, accounts payable, and note payable - affiliate approximate their fair values.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the FASB. We determined the fair values of our long-term debt, including the current portion, based on quoted market prices where available or, if not available, based on discounted future cash flows using current market interest rates.
The three input levels in the hierarchy of fair value measurements are defined by the FASB generally as follows:
Input Level
 
Description of Input
 
 
 
Level 1
 
Observable inputs such as quoted market prices in active markets.
Level 2
 
Inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3
 
Unobservable inputs in which little or no market data exists.

The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding capital lease and other obligations, as well as the input level used to determine the fair values indicated below:
 
 
 
As of September 30, 2016
 
As of December 31, 2015
 
Input
Level
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
 
 
(Dollars in millions)
Liabilities—Long-term debt, excluding capital lease and other obligations
2
 
$
7,230

 
7,685

 
7,222

 
7,456
v3.5.0.2
Products and Services Revenues
 9 Months Ended
Sep. 30, 2016
Segment Reporting [Abstract]  
Products and Services Revenues
Products and Services Revenues
We are an integrated communications company engaged primarily in providing an array of services, including local voice, broadband, private line (including special access), network access, Ethernet, information technology, video and other ancillary services. We strive to maintain our customer relationships by, among other things, bundling our service offerings to provide our customers with a complete offering of integrated communications services.
From time to time, we may change the categorization of our products and services. During the second quarter of 2016, we determined that because of declines due to customer migration to other strategic products and services, certain of our services, specifically our private line (including special access) services, are more closely aligned with our legacy services than with our strategic services. As a result, we reflect these operating revenues as legacy services, and we have reclassified certain prior period amounts to conform to this change. The revision resulted in a reduction of revenue from strategic services and a corresponding increase in revenue from legacy services of $201 million and $627 million for the three and nine months ended September 30, 2015, respectively.
We categorize our products, services and revenues among the following three categories:
•
Strategic services, which include primarily broadband, Ethernet, video and other ancillary services;
•
Legacy services, which include primarily local voice, private line (including special access), Integrated Services Digital Network ("ISDN") (which use regular telephone lines to support voice, video and data applications), switched access, traditional wide area network ("WAN") (which allow a local communications network to link to networks in remote locations) and other ancillary services; and
•
Affiliates and other services, which consist primarily of CAF support payments, USF support payments, USF surcharges and services we provide to our affiliates. We receive federal support payments from both CAF Phase 1 and CAF Phase 2 programs and support payments from both federal and state USF programs. These support payments are government subsidies designed to reimburse us for various costs related to certain telecommunications services, including the costs of deploying, maintaining and operating voice and broadband infrastructure in high-cost rural areas where we are not able to fully recover our costs from our customers. USF surcharges are the amounts we collect based on specific items we list on our customers' invoices to fund the FCC's universal service programs. We provide to our affiliates, telecommunication services that we also provide to external customers. In addition, we provide to our affiliates, computer system development and support services, network support and technical services.
Our operating revenues for our products and services consisted of the following categories:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in millions)
Strategic services
$
674

 
651

 
2,018

 
1,942

Legacy services
796

 
890

 
2,455

 
2,723

Affiliates and other services
756

 
746

 
2,229

 
2,061

Total operating revenues
$
2,226

 
2,287

 
6,702

 
6,726


We do not have any single external customer that provides more than 10% of our total consolidated operating revenues. Substantially all of our consolidated revenues come from customers located in the United States.
We recognize revenues in our consolidated statements of operations for certain USF surcharges and transaction taxes that we bill to our customers. Our consolidated statements of operations also reflect the offsetting expense for the amounts we remit to the government agencies. The total amount of such surcharges and transaction taxes that we included in revenues aggregated to $37 million for each of the three months ended September 30, 2016 and 2015, and $113 million and $111 million for the nine months ended September 30, 2016 and 2015, respectively. These USF surcharges, where we record revenue, are included in "affiliates and other services" revenues and these transaction taxes are included in "legacy services" revenues. We also act as a collection agent for certain other USF and transaction taxes that we are required by government agencies to bill our customers, for which we do not record any revenue or expense because we only act as a pass-through agent.
Our operations are integrated into and reported as part of the consolidated segment data of CenturyLink. CenturyLink's chief operating decision maker ("CODM") is our CODM, but reviews our financial information on an aggregate basis only in connection with our quarterly and annual reports that we file with the Securities and Exchange Commission. Consequently, we do not provide our discrete financial information to the CODM on a regular basis. As such, we believe we have one reportable segment.
v3.5.0.2
Commitments and Contingencies
 9 Months Ended
Sep. 30, 2016
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies
Commitments and Contingencies
Pending Matters
Subsidiaries of CenturyLink, Inc., including us, are among hundreds of companies in an industry-wide dispute, raised in nearly 100 federal lawsuits (filed between 2014 and 2016) that have been consolidated in the United States District Court for the District of Northern Texas for pretrial procedures. The disputes relate to switched access charges that local exchange carriers ("LECs") collect from interexchange carriers ("IXCs") for IXCs' use of LEC's access services. In the lawsuits, three IXCs, Sprint Communications Company L.P. ("Sprint"), affiliates of Verizon Communications Inc. ("Verizon") and affiliates of Level 3 Communications LLC ("Level 3"), assert that federal and state laws bar LECs from collecting access charges when IXCs exchange certain types of calls between mobile and wireline devices that are routed through an IXC. Some of these IXCs have asserted claims seeking refunds of payments for access charges previously paid and relief from future access charges. In addition, Level 3 has ceased paying switched access charges on these calls.
In November 2015, the federal court agreed with the LECs and rejected the IXCs' contention that federal law prohibits these particular access charges, and also allowed the IXCs to refile state-law claims. Since then, many of the LECs and IXCs have filed revised pleadings and additional motions, which remain pending. Separately, some of the defendants, including us, have petitioned the Federal Communications Commission to address these issues on an industry-wide basis.
The outcome of these disputes and lawsuits, as well as any related regulatory proceedings that could ensue, are currently not predictable. If we are required to stop assessing these charges or to pay refunds of any such charges, our financial results could be negatively affected.
Other Proceedings and Disputes
From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, administrative hearings of state public utility commissions relating primarily to our rates or services, actions relating to employee claims, various tax issues, environmental law issues, grievance hearings before labor regulatory agencies and miscellaneous third party tort actions.
We are currently defending several patent infringement lawsuits asserted against us by non-practicing entities, many of whom are seeking substantial recoveries. These cases have progressed to various stages and one or more may go to trial in the coming 24 months if they are not otherwise resolved. Where applicable, we are seeking full or partial indemnification from our vendors and suppliers. As with all litigation, we are vigorously defending these actions and, as a matter of course, are prepared to litigate these matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities.
We are subject to various federal, state and local environmental protection and health and safety laws. From time to time, we are subject to judicial and administrative proceedings brought by various governmental authorities under these laws. Several such proceedings are currently pending, but none is reasonably expected to exceed $100,000 in fines and penalties.
The outcome of these other proceedings is not predictable. However, based on current circumstances, we do not believe that the ultimate resolution of these other proceedings, after considering available defenses and any insurance coverage or indemnification rights, will have a material adverse effect on our financial position, results of operations or cash flows.
CenturyLink, Inc. and its affiliates are involved in several legal proceedings to which we are not a party that, if resolved against them, could have a material adverse effect on their business and financial condition. As an indirect wholly-owned subsidiary of CenturyLink, Inc., our business and financial condition could be similarly affected. You can find descriptions of these legal proceedings in CenturyLink, Inc.'s quarterly and annual reports filed with the Securities and Exchange Commission. Because we are not a party to any of the matters, we have not accrued any liabilities for the matters.
v3.5.0.2
Dividends
 9 Months Ended
Sep. 30, 2016
Dividends [Abstract]  
Dividends
Dividends
During the nine months ended September 30, 2016, we declared and paid dividends of $950 million to our direct parent company, Qwest Services Corporation. Dividends paid are reflected on our consolidated statements of cash flows as financing activities.
v3.5.0.2
Other Financial Information
 9 Months Ended
Sep. 30, 2016
Additional Financial Information Disclosure [Abstract]  
Other financial information
Other Financial Information
Other Current Assets
The following table presents details of other current assets in our consolidated balance sheets:
 
As of 
 September 30, 2016
 
As of 
 December 31, 2015
 
(Dollars in millions)
Prepaid expenses
$
66

 
46

Other
69

 
77

Total other current assets
$
135

 
123


Selected Current Liabilities
Current liabilities reflected in our consolidated balance sheets include accounts payable:
 
As of 
 September 30, 2016
 
As of 
 December 31, 2015
 
(Dollars in millions)
Accounts payable
$
377

 
369


Included in accounts payable at September 30, 2016 and December 31, 2015, was $39 million and $29 million, respectively, associated with capital expenditures.
v3.5.0.2
Labor Union Contracts
 9 Months Ended
Sep. 30, 2016
Labor Union Contracts [Abstract]  
Concentration risk disclosure
Labor Union Contracts
Over 48% of our employees are members of various bargaining units represented by the Communication Workers of America and the International Brotherhood of Electrical Workers. Approximately 11,000, or 48%, of our employees are subject to collective bargaining agreements that are scheduled to expire October 7, 2017.
v3.5.0.2
Basis of Presentation Basis of Presentation (Policies)
 9 Months Ended
Sep. 30, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Consolidation policy
The accompanying consolidated financial statements include our accounts and the accounts of our subsidiaries. Intercompany amounts and transactions with our consolidated subsidiaries have been eliminated. Transactions with our non-consolidated affiliates (referred to herein as affiliates) have not been eliminated.
Reclassification policy
We reclassified certain prior period amounts to conform to the current period presentation, including the categorization of our revenues. See Note 4—Products and Services Revenues for additional information. These changes had no impact on total operating revenues, total operating expenses or net income for any period.
Recent accounting pronouncements
Recent Accounting Pronouncements
Financial Instruments
On June 16, 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires our management team to estimate the total credit losses expected on the portfolio of financial instruments. We are currently reviewing the requirements of the standard and evaluating the impact on our consolidated financial statements.    
We are required to adopt the provisions of ASU 2016-13 effective January 1, 2020, but could elect to early adopt the provisions as of January 1, 2019. We expect to recognize the impacts of adopting ASU 2016-13 through a cumulative adjustment to retained earnings as of the date of adoption.
Share-based Compensation
On March 30, 2016, the FASB issued ASU 2016-09, “Improvement to Employee Share-Based Payment Accounting" (“ASU 2016-09”). ASU 2016-09 modifies the accounting and associated income tax accounting for share-based compensation in order to reduce the cost and complexity associated with current generally accepted accounting principles. ASU 2016-09 is effective as of January 1, 2017, but early adoption may be elected. ASU 2016-09 includes different transition requirements for the different changes implemented, including some provisions which allow retrospective application. We will implement this new standard on its effective date, but we have not determined if we will retrospectively apply the requirements when allowed.
The primary provisions of ASU 2016-09 that we expect will affect our financial statements are: 1) a reclassification of the tax effect associated with the difference between the expense recognized for share-based payments and the associated tax deduction from additional paid-in capital to income tax expense; 2) a reclassification of the tax effect associated with the difference between compensation expense and associated deduction from financing cash flow to operating cash flow; and 3) an optional accounting policy election to account for forfeitures of share-based payment grants as they occur as opposed to our current policy of estimating the forfeitures on the grant date. Although these provisions would not have had a material impact on our previously-issued financial statements, we cannot provide any assurance regarding their future impacts. Adoption of ASU 2016-09 may increase the volatility of income tax expense and cash flow from operating activities.
Leases
On February 25, 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). The core principle of ASU 2016-02 will require lessees to present right-of-use assets and lease liabilities on their balance sheets for operating leases, which are currently not reflected on their balance sheets.
ASU 2016-02 is effective for annual and interim periods beginning January 1, 2019. Early adoption of ASU 2016-02 is permitted. Upon adoption of ASU 2016-02, we are required to recognize and measure leases at the beginning of the earliest period presented in our consolidated financial statements using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that we may elect to apply. We have not yet decided when we will adopt ASU 2016-02 or which practical expedient options we will elect.
We are currently evaluating our existing lease accounting systems to determine whether our current systems will support the new accounting requirements or if upgrades or new systems will be required, and we are in the process of developing an implementation plan. We are also currently evaluating and assessing the impact ASU 2016-02 will have on us and our consolidated financial statements. As of the date of this report, we cannot provide any estimate of the impact of adopting ASU 2016-02.
Revenue Recognition
On May 28, 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU 2014-09 replaces virtually all existing generally accepted accounting principles (“GAAP”) on revenue recognition and replaces them with a principles-based approach for determining revenue recognition using a new five step model. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes new accounting principles related to the deferral and amortization of contract acquisition and fulfillment costs. We currently do not defer any contract acquisition costs and we defer contract fulfillment costs only up to the extent of any revenue deferred.
On July 9, 2015, the FASB approved the deferral of the effective date of ASU 2014-09 by one year until January 1, 2018, which is the date we plan to adopt this standard. ASU 2014-09 may be adopted by applying the provisions of this standard on a retrospective basis to the periods included in the financial statements or on a modified retrospective basis which would result in the recognition of a cumulative effect of adopting ASU 2014-09 in the first quarter of 2018. We have not yet decided which implementation method we will adopt. We have completed our initial assessment of our business and systems requirements and we are currently developing and implementing a new revenue recognition system to comply with the requirements of ASU 2014-09. We continue to work on developing estimates of the impact of ASU 2014-09 on the timing of our revenue recognition but cannot currently provide a reasonably accurate estimate of its impact.
v3.5.0.2
Long-Term Debt and Revolving Promissory Note (Tables)
 9 Months Ended
Sep. 30, 2016
Debt Disclosure [Abstract]  
Schedule of long-term debt
Long-term debt, including unamortized discounts and premiums, unamortized debt issuance costs and note payable - affiliate, were as follows:
 
Interest Rates
 
Maturities
 
As of 
 September 30, 2016
 
As of 
 December 31, 2015
 
 
 
 
 
(Dollars in millions)
Senior notes
6.125% - 7.750%
 
2017 - 2056
 
$
7,259

 
7,229

Term loan
2.280%
 
2025
 
100

 
100

Capital lease and other obligations
Various
 
Various
 
28

 
17

Unamortized premiums, net
 
 
 
 
6

 
16

Unamortized debt issuance costs
 
 
 
 
(135
)
 
(123
)
Total long-term debt
 
 
 
 
7,258

 
7,239

Less current maturities
 
 
 
 
(509
)
 
(242
)
Long-term debt, excluding current maturities
 
 
 
 
$
6,749

 
6,997

Note payable - affiliate
6.795%
 
2022
 
$
884

 
855
v3.5.0.2
Fair Value Disclosure (Tables)
 9 Months Ended
Sep. 30, 2016
Fair Value Disclosures [Abstract]  
Schedule of the three input levels in the hierarchy of fair value measurements
The three input levels in the hierarchy of fair value measurements are defined by the FASB generally as follows:
Input Level
 
Description of Input
 
 
 
Level 1
 
Observable inputs such as quoted market prices in active markets.
Level 2
 
Inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3
 
Unobservable inputs in which little or no market data exists.
Schedule of carrying amounts and estimated fair values of long-term debt, excluding capital lease obligations, and input level to determine fair values
The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding capital lease and other obligations, as well as the input level used to determine the fair values indicated below:
 
 
 
As of September 30, 2016
 
As of December 31, 2015
 
Input
Level
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
 
 
(Dollars in millions)
Liabilities—Long-term debt, excluding capital lease and other obligations
2
 
$
7,230

 
7,685

 
7,222

 
7,456
v3.5.0.2
Products and Services Revenues (Tables)
 9 Months Ended
Sep. 30, 2016
Segment Reporting [Abstract]  
Schedule of operating revenues by products and services
Our operating revenues for our products and services consisted of the following categories:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in millions)
Strategic services
$
674

 
651

 
2,018

 
1,942

Legacy services
796

 
890

 
2,455

 
2,723

Affiliates and other services
756

 
746

 
2,229

 
2,061

Total operating revenues
$
2,226

 
2,287

 
6,702

 
6,726
v3.5.0.2
Other Financial Information (Tables)
 9 Months Ended
Sep. 30, 2016
Additional Financial Information Disclosure [Abstract]  
Schedule of components other current assets
The following table presents details of other current assets in our consolidated balance sheets:
 
As of 
 September 30, 2016
 
As of 
 December 31, 2015
 
(Dollars in millions)
Prepaid expenses
$
66

 
46

Other
69

 
77

Total other current assets
$
135

 
123
Schedule of selected current liabilities
Current liabilities reflected in our consolidated balance sheets include accounts payable:
 
As of 
 September 30, 2016
 
As of 
 December 31, 2015
 
(Dollars in millions)
Accounts payable
$
377

 
369
v3.5.0.2
Basis of Presentation (Details)
Sep. 30, 2016
state
Geographic Areas, Revenues from External Customers [Abstract]  
Number of states in which entity operates (states) 14
v3.5.0.2
Basis of Presentation (Details 2)
number in Millions, $ in Millions
 6 Months Ended 9 Months Ended
Aug. 27, 2015
USD ($)
state
Jun. 30, 2015
USD ($)
Sep. 30, 2015
USD ($)
Sep. 30, 2016
state
Products and Services Revenues        
Number of states in which entity operates (states) | state       14
CAF Phase 2 Support | CenturyLink, Inc.        
Products and Services Revenues        
Federal support, total amount per agreement | $ $ 500      
Agreement term (in years) 6 years      
Number of rural households and businesses 1.2      
Number of states in which entity operates (states) | state 33      
CAF Phase 2 Support | Qwest Corporation        
Products and Services Revenues        
Federal support, total amount per agreement | $ $ 150      
Number of rural households and businesses 0.3      
Number of states in which entity operates (states) | state 13      
Other Operating Revenues, Transitional Revenues | $   $ 42 $ 50  
v3.5.0.2
Long-Term Debt and Revolving Promissory Note (Details) - USD ($)
$ in Millions
Sep. 30, 2016
Dec. 31, 2015
Long-term debt    
Capital lease and other obligations $ 28 $ 17
Unamortized premiums, net 6 16
Unamortized debt issuance costs (135) (123)
Total long-term debt 7,258 7,239
Less current maturities (509) (242)
Long-term debt, excluding current maturities 6,749 6,997
Note payable - affiliate 884 855
Senior notes    
Long-term debt    
Long-term debt, gross $ 7,259 7,229
Senior notes | Minimum    
Long-term debt    
Stated interest rate (percent) 6.125%  
Senior notes | Maximum    
Long-term debt    
Stated interest rate (percent) 7.75%  
Term loan    
Long-term debt    
Long-term debt, gross $ 100 100
Stated interest rate (percent) 2.28%  
Loans payable | Affiliated entity    
Long-term debt    
Weighted average interest rate (percent) 6.795%  
Note payable - affiliate $ 884 $ 855
v3.5.0.2
Long-Term Debt and Revolving Promissory Note (Details 2) - USD ($)
$ in Millions
 9 Months Ended
Sep. 15, 2016
Aug. 29, 2016
Aug. 22, 2016
Jan. 29, 2016
Sep. 30, 2016
Sep. 30, 2015
May 02, 2016
Dec. 31, 2015
Long-term debt                
Loss on early retirement of debt         $ 27 $ 0    
Note payable - affiliate         884     $ 855
Senior notes | 6.5% Notes due 2056                
Long-term debt                
Debt instrument face amount     $ 978          
Stated interest rate (percent)     6.50%          
Debt instrument, face amount, over-allotment     $ 128          
Proceeds from debt, net of issuance costs     $ 946          
Senior notes | 7.00% Notes due 2056                
Long-term debt                
Debt instrument face amount       $ 235        
Stated interest rate (percent)       7.00%        
Proceeds from debt, net of issuance costs       $ 227        
Senior notes | 7.5% Notes due 2051                
Long-term debt                
Stated interest rate (percent) 7.50%              
Debt instrument, repurchased face amount $ 287              
Loss on early retirement of debt $ 9              
Senior notes | 7.375% Notes Due 2051                
Long-term debt                
Stated interest rate (percent)   7.375%            
Debt instrument, repurchased face amount   $ 661            
Loss on early retirement of debt   $ 18            
Senior notes | 8.375% Notes due 2016                
Long-term debt                
Stated interest rate (percent)             8.375%  
Debt instrument, repurchased face amount             $ 235  
Affiliated entity | Loans payable                
Long-term debt                
Line of credit, maximum borrowing capacity         1,000      
Note payable - affiliate         $ 884     $ 855
Weighted average interest rate (percent)         6.795%      
Accrued interest payable on affiliate note payable         $ 20      
Debt instrument, redemption, period one | Senior notes | 6.5% Notes due 2056                
Long-term debt                
Debt instrument, redemption, period one     on or after September 1, 2021, at a redemption price equal to 100% of the principal amount redeemed          
Debt instrument, redemption, period one | Senior notes | 7.00% Notes due 2056                
Long-term debt                
Debt instrument, redemption, period one       on or after February 1, 2021, at a redemption price equal to 100% of the principal amount redeemed        
v3.5.0.2
Fair Value Disclosure (Details) - Fair value measurements, nonrecurring - Fair value inputs, Level 2 - USD ($)
$ in Millions
Sep. 30, 2016
Dec. 31, 2015
Carrying Amount    
Liabilities    
Liabilities—Long-term debt, excluding capital lease and other obligations $ 7,230 $ 7,222
Fair Value    
Liabilities    
Liabilities—Long-term debt, excluding capital lease and other obligations $ 7,685 $ 7,456
v3.5.0.2
Products and Services Revenues (Details)
$ in Millions
 3 Months Ended 9 Months Ended
Sep. 30, 2016
USD ($)
Sep. 30, 2015
USD ($)
Sep. 30, 2016
USD ($)
category
segment
Sep. 30, 2015
USD ($)
Products and Services Revenues        
Operating revenues $ 2,226 $ 2,287 $ 6,702 $ 6,726
Number of categories of products and services (categories) | category     3  
USF surcharges included in operating revenues 37 37 $ 113 111
Number of reportable segments (segments) | segment     1  
Individual customers accounting for more than 10% of total operating revenues     We do not have any single external customer that provides more than 10% of our total consolidated operating revenues.  
Strategic services        
Products and Services Revenues        
Operating revenues 674 651 $ 2,018 1,942
Legacy services        
Products and Services Revenues        
Operating revenues 796 890 2,455 2,723
Affiliates and other services        
Products and Services Revenues        
Operating revenues $ 756 746 $ 2,229 2,061
Low-bandwidth data services | Restatement adjustment | Strategic services        
Products and Services Revenues        
Operating revenues   (201)   (627)
Low-bandwidth data services | Restatement adjustment | Legacy services        
Products and Services Revenues        
Operating revenues   $ 201   $ 627
v3.5.0.2
Commitments and Contingencies Commitments and Contingencies (Details)
 9 Months Ended
Sep. 30, 2016
USD ($)
plaintiff
lawsuit
Unfavorable regulatory action  
Loss Contingencies [Line Items]  
Estimate of possible loss (per proceeding) | $ $ 100,000
Pending litigation  
Loss Contingencies [Line Items]  
Number of patents allegedly infringed (minimum) 1
Interexchange carriers | Subsidiaries of CenturyLink, Inc.  
Loss Contingencies [Line Items]  
Number of lawsuits (approximately) 100
Number of plaintiffs | plaintiff 3
v3.5.0.2
Dividends (Details)
$ in Millions
 9 Months Ended
Sep. 30, 2016
USD ($)
Dividends [Abstract]  
Dividends declared and paid to Qwest Services Corporation $ 950
v3.5.0.2
Other Financial Information (Details) - USD ($)
$ in Millions
 9 Months Ended 12 Months Ended
Sep. 30, 2016
Dec. 31, 2015
Prepaid Expense and Other Assets, Current [Abstract]    
Prepaid expenses $ 66 $ 46
Other 69 77
Total other current assets 135 123
Accounts Payable, Current [Abstract]    
Accounts payable 377 369
Capital expenditures incurred and included in accounts payable $ 39 $ 29
v3.5.0.2
Labor Union Contracts (Details)
 9 Months Ended
Sep. 30, 2016
Employees subject to collective bargaining arrangements, expiring within subsequent calendar year  
Concentration Risk [Line Items]  
Number of unionized employees 11,000
Total number of employees | Unionized employees concentration risk  
Concentration Risk [Line Items]  
Concentration risk (percent) 48.00%
Total number of employees | Unionized employees concentration risk | Employees subject to collective bargaining arrangements, expiring within subsequent calendar year  
Concentration Risk [Line Items]  
Concentration risk (percent) 48.00%