lumn-20210930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File No. 001-03040

QWEST CORPORATION

(Exact name of registrant as specified in its charter)

Colorado

84-0273800

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

100 CenturyLink Drive,

Monroe,

Louisiana

71203

(Address of principal executive offices)

(Zip Code)

(318) 388-9000

(Registrant's telephone number, including area code)

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

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

6.5% Notes Due 2056

CTBB

New York Stock Exchange

6.75% Notes Due 2057

CTDD

New York Stock Exchange

THE REGISTRANT, A WHOLLY OWNED INDIRECT SUBSIDIARY OF LUMEN TECHNOLOGIES, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

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

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐



	Special Note Regarding Forward-Looking Statements	4
Part I.	Financial Information
Item 1.	Financial Statements
	Consolidated Statements of Operations (Unaudited)	7
	Consolidated Balance Sheets (Unaudited)	8
	Consolidated Statements of Cash Flows (Unaudited)	9
	Consolidated Statements of Stockholder's Equity (Unaudited)	10
	Notes to Consolidated Financial Statements (Unaudited) *	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
Part II.	Other Information
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 6.	Exhibits	38
Signature		39

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


	Three Months Ended September 30,			Nine Months Ended September 30,
	2021		2020	2021	2020
	(Dollars in millions)
OPERATING REVENUE
Operating revenue	$	1,135	1,200	3,452	3,642
Operating revenue—affiliates	595		601	1,794	1,876
Total operating revenue	1,730		1,801	5,246	5,518
OPERATING EXPENSES
Cost of services and products (exclusive of depreciation and amortization)	426		528	1,305	1,491
Selling, general and administrative	36		128	249	410
Operating expenses—affiliates	177		198	561	557
Depreciation and amortization	232		330	780	985
Total operating expenses	871		1,184	2,895	3,443
OPERATING INCOME	859		617	2,351	2,075
OTHER (EXPENSE) INCOME
Interest expense	(47)		(69)	(142)	(219)
Interest expense—affiliate, net	(25)		(18)	(87)	(50)
Other expense, net	(3)		(18)	(7)	(31)
Total other expense, net	(75)		(105)	(236)	(300)
INCOME BEFORE INCOME TAX EXPENSE	784		512	2,115	1,775
Income tax expense	202		133	542	463
NET INCOME	$	582	379	1,573	1,312


	September 30, 2021 (Unaudited)		December 31, 2020
	(Dollars in millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	2	14
Accounts receivable, less allowance of $39 and $61	339		364
Advances to affiliates	368		—
Other	180		122
Total current assets	889		500
Property, plant and equipment, net of accumulated depreciation of $8,913 and $8,347	8,168		8,309
GOODWILL AND OTHER ASSETS
Goodwill	9,360		9,360
Other intangible assets, net	215		343
Other, net	161		147
Total goodwill and other assets	9,736		9,850
TOTAL ASSETS	$	18,793	18,659
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt	$	950	948
Accounts payable	239		292
Advances from affiliates	—		592
Note payable - affiliate	1,187		1,130
Accrued expenses and other liabilities
Salaries and benefits	144		178
Income and other taxes	112		95
Other	192		186
Current portion of deferred revenue	179		183
Total current liabilities	3,003		3,604
LONG-TERM DEBT	2,156		2,386
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes, net	1,225		1,249
Affiliate obligations, net	614		637
Other	694		685
Total deferred credits and other liabilities	2,533		2,571
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDER'S EQUITY
Common stock - one share without par value, owned by Qwest Services Corporation	10,050		10,050
Retained earnings	1,051		48
Total stockholder's equity	11,101		10,098
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	18,793	18,659


	September 30, 2021		December 31, 2020
	(Dollars in millions)
Goodwill	$	9,360	9,360
Customer relationships, less accumulated amortization of $5,699 and $5,611	$	—	88
Other intangible assets, less accumulated amortization of $1,859 and $1,831	215		255
Total other intangible assets, net	$	215	343


	(Dollars in millions)
2021 (remaining three months)	$	21
2022	86
2023	62
2024	13
2025	11


	Three Months Ended September 30, 2021				Three Months Ended September 30, 2020
	Total Revenue		Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers	Total Revenue	Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers
	(Dollars in millions)
Voice and Other	$	522	(83)	439	567	(87)	480
Fiber Infrastructure	495		(30)	465	505	(30)	475
IP and Data Services	118		—	118	128	—	128
Affiliate Services	595		(9)	586	601	(1)	600
Total revenue	$	1,730	(122)	1,608	1,801	(118)	1,683


	Nine Months Ended September 30, 2021				Nine Months Ended September 30, 2020
	Total Revenue		Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers	Total Revenue	Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers
	(Dollars in millions)
Voice and Other	$	1,595	(251)	1,344	1,726	(263)	1,463
Fiber Infrastructure	1,500		(90)	1,410	1,527	(94)	1,433
IP and Data Services	357		—	357	389	—	389
Affiliate Services	1,794		(18)	1,776	1,876	(3)	1,873
Total revenue	$	5,246	(359)	4,887	5,518	(360)	5,158


	Three Months Ended September 30, 2021			Three Months Ended September 30, 2020
	Acquisition Costs		Fulfillment Costs	Acquisition Costs	Fulfillment Costs
	(Dollars in millions)
Beginning of period balance	$	68	49	81	59
Costs incurred	12		7	12	6
Amortization	(14)		(9)	(15)	(8)
End of period balance	$	66	47	78	57


	Business		Mass Markets	Total
	(Dollars in millions)
Beginning balance at January 1, 2021 (1)	$	25	36	61
Provision for expected losses	6		12	18
Write-offs charged against the allowance	(15)		(35)	(50)
Recoveries collected	2		8	10
Ending balance at September 30, 2021	$	18	21	39


	Interest Rates (1)	Maturities (1)	September 30, 2021		December 31, 2020
			(Dollars in millions)
Senior notes	6.500% - 7.750%	2021 - 2057	$	2,935	3,170
Term loan (2) (3)	LIBOR + 2.00%	2027	215		215
Finance lease and other obligations	Various	Various	3		6
Unamortized premiums, net			6		5
Unamortized debt issuance costs			(53)


	Nine Months Ended September 30,
	2021		2020
	(Dollars in millions)
OPERATING ACTIVITIES
Net income	$	1,573	1,312
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	780		985
Deferred income taxes	(24)		(30)
Provision for uncollectible accounts	18		45
Accrued interest on affiliate note	57		61
Net loss on early retirement of debt	8		36
Changes in current assets and liabilities:
Accounts receivable	7		70
Accounts payable	(19)		(34)
Accrued income and other taxes	17		12
Other current assets and liabilities, net	(113)		(193)
Changes in other noncurrent assets and liabilities, net	10		45
Changes in affiliate obligations, net	(23)		(54)
Other, net	8		(4)
Net cash provided by operating activities	2,299		2,251
INVESTING ACTIVITIES
Capital expenditures	(557)		(885)
Changes in advances to affiliates	(368)		1,842
Proceeds from sale of property, plant and equipment and other assets	31		2
Net cash (used in) provided by investing activities	(894)		959
FINANCING ACTIVITIES
Payments of long-term debt	(235)		(1,860)
Dividends paid	(570)		(1,350)
Changes in advances from affiliates	(592)		4
Net cash used in financing activities	(1,397)		(3,206)
Net increase in cash, cash equivalents and restricted cash	8		4
Cash, cash equivalents and restricted cash at beginning of period	15		4
Cash, cash equivalents and restricted cash at end of period	$	23	8
Supplemental cash flow information:
Income taxes paid, net	$	(557)	(473)
Interest paid (net of capitalized interest of $14 and $24)	$	(129)	(232)
Supplemental noncash information of investing activities:
Sale of property, plant and equipment in exchange for receivable	$	56	—
Cash, cash equivalents and restricted cash:

SEC Form 10-Q filed by Qwest Corporation