QWEST CORP - Quarter Report: 2019 September (Form 10-Q)

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, 2019



☐	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

Q W E S T C O R P O R A T I O N

(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)

THE REGISTRANT, A WHOLLY OWNED INDIRECT SUBSIDIARY OF CENTURYLINK, 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. ☐

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

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



Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
6.125% Notes Due 2053	CTY	New York Stock Exchange
6.875% Notes Due 2054	CTV	New York Stock Exchange
6.625% Notes Due 2055	CTZ	New York Stock Exchange
7.00% Notes Due 2056	CTAA	New York Stock Exchange
6.5% Notes Due 2056	CTBB	New York Stock Exchange
6.75% Notes Due 2057	CTDD	New York Stock Exchange

On November 8, 2019, there was one share of common stock outstanding.

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TABLE OF CONTENTS




	Special Note Regarding Forward-Looking Statements	4
Part I.	Financial Information
Item 1.	Financial Statements
	Consolidated Statements of Operations (Unaudited)	6
	Consolidated Balance Sheets (Unaudited)	7
	Consolidated Statements of Cash Flows (Unaudited)	8
	Consolidated Statements of Stockholder's Equity (Unaudited)	9
	Notes to Consolidated Financial Statements (Unaudited) *	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
Part II.	Other Information
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 6.	Exhibits	36
Signature		37

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

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Special Note Regarding Forward-Looking Statements

This report and other documents filed by us under the federal securities law include, and future oral or written statements or press releases by us and our management may include, forward-looking statements about our business, financial condition, operating results and prospects. These "forward-looking" statements are defined by, and are subject to the "safe harbor" protections under, the federal securities laws. These statements include, among others:


•	forecasts of our anticipated future results of operations, cash flows or financial position;


•	statements concerning the anticipated impact of our transactions, investments, product development, transformational projects and other initiatives, including the impact of our participation in government programs;


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

•

other similar statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts, many of which are highlighted by words such as “may,” “will,” “would,” “could,” “should,” “plan,” “believes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “likely,” “seeks,” “hopes,” or variations or similar expressions with respect to the future.

These forward-looking statements are based upon our judgment and assumptions as of the date such statements are made concerning future developments and events, many of which are beyond our control. These forward-looking statements, and the assumptions upon which they are based, (i) are not guarantees of future results, (ii) are inherently speculative and (iii) are subject to a number of risks and uncertainties. Actual events and results may differ materially from those anticipated, estimated, projected or implied by us in those statements if one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect. All of our forward-looking statements are qualified in their entirety by reference to our discussion of factors that could cause our actual results to differ materially from those anticipated, estimated, projected or implied by us in those forward looking statements. Factors that could affect actual results include but are not limited to:


•	the effects of competition from a wide variety of competitive providers, including decreased demand for our more mature service offerings and increased pricing pressures;


•	the effects of new, emerging or competing technologies, including those that could make our products less desirable or obsolete;


•	our ability to attain our key operating imperatives, including simplifying and consolidating our network, simplifying and automating our service support systems, strengthening our relationships with customers and attaining projected cost savings;


•	our ability to safeguard our network, and to avoid the adverse impact on our business from possible security breaches, service outages, system failures, equipment breakage, or similar events impacting our network or the availability and quality of our services;


•	the effects of ongoing changes in the regulation of the communications industry, including the outcome of regulatory or judicial proceedings relating to intercarrier compensation, interconnection obligations, special access, universal service, broadband deployment, data protection and net neutrality;


•	our ability to effectively adjust to changes in the communications industry and changes in the composition of our markets and product mix;


•	possible changes in the demand for our products and services, including our ability to effectively respond to increased demand for high-speed data transmission services;


•	our ability to successfully maintain the quality and profitability of our existing product and service offerings and to introduce profitable new offerings on a timely and cost-effective basis;


•	our ability to generate cash flows sufficient to fund our financial commitments and objectives, including our capital expenditures, operating costs, debt repayments and dividends;

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


•	our ability to effectively retain and hire key personnel and to successfully negotiate collective bargaining agreements on reasonable terms without work stoppages;


•	the negative impact of increases in the costs of CenturyLink’s pension, health, post-employment or other benefits, including those caused by changes in markets, interest rates, mortality rates, demographics or regulations, which could affect our business and liquidity;


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


•	our ability to meet the terms and conditions of our debt obligations;


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


•	our ability to collect our receivables from financially troubled customers;


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


•	changes in tax, communications, healthcare or other laws or regulations, in governmental support programs, or in general government funding levels;


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


•	the effects of adverse weather, terrorism or other natural or man-made disasters;


•	the effects of more general factors such as changes in interest rates, in exchange rates, in operating costs, in public policy, in the views of financial analysts, or in general market, labor, economic or geo-political conditions;


•	adverse effects of material weaknesses or any other significant deficiencies identified in our internal controls over financial reporting; and


•	other risks referenced in this report or other of our filings with the SEC.

Additional factors or risks that we currently deem immaterial, that are not presently known to us or that arise in the future could also cause our actual results to differ materially from our expected results. Given these uncertainties, investors are cautioned not to unduly rely upon our forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements for any reason, whether as a result of new information, future events or developments, changed circumstances, or otherwise. Furthermore, any information about our intentions contained in any of our forward-looking statements reflects our intentions as of the date of such forward-looking statement, and is based upon, among other things, existing regulatory, technological, industry, competitive, economic and market conditions, and our assumptions as of such date. We may change our intentions, strategies or plans (including our dividend or other capital allocation plans) at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

QWEST CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019		2018
	(Dollars in millions)
OPERATING REVENUE
Operating revenue	$	1,338		1,397		4,002		4,209
Operating revenue - affiliates	701			752		2,143		2,171
Total operating revenue	2,039			2,149		6,145		6,380
OPERATING EXPENSES
Cost of services and products (exclusive of depreciation and amortization)	630			697		1,825		2,106
Selling, general and administrative	131			172		445		602
Operating expenses - affiliates	186			203		600		616
Depreciation and amortization	344			360		1,017		1,081
Total operating expenses	1,291			1,432		3,887		4,405
OPERATING INCOME	748			717		2,258		1,975
OTHER (EXPENSE) INCOME
Interest expense	(95		)	(112	)	(286	)	(350	)
Interest expense - affiliates, net	(15		)	(15	)	(46	)	(42	)
Other income, net	5			(26	)	19		(1	)
Total other expense, net	(105		)	(153	)	(313	)	(393	)
INCOME BEFORE INCOME TAXES	643			564		1,945		1,582
Income tax expense	166			111		504		322
NET INCOME	$	477		453		1,441		1,260

See accompanying notes to consolidated financial statements.

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QWEST CORPORATION

CONSOLIDATED BALANCE SHEETS



	September 30, 2019 (Unaudited)		December 31, 2018
	(Dollars in millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	3	5
Accounts receivable, less allowance of $41 and $41	505		546
Advances to affiliates	1,604		1,148
Other	141		147
Total current assets	2,253		1,846
Property, plant and equipment, net of accumulated depreciation of $7,530 and $6,951	8,103		8,077
GOODWILL AND OTHER ASSETS
Goodwill	9,360		9,360
Operating lease assets	117		—
Customer relationships, net	570		893
Other intangible assets, net	329		311
Other, net	98		96
Total goodwill and other assets	10,474		10,660
TOTAL ASSETS	$	20,830	20,583
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt	$	7	11
Accounts payable	412		441
Note payable - affiliate	1,069		1,008
Accrued expenses and other liabilities
Salaries and benefits	167		251
Income and other taxes	153		140
Interest	58		55
Other	84		75
Current affiliate obligations, net	73		79
Current portion of deferred revenue	205		212
Total current liabilities	2,228		2,272
LONG-TERM DEBT	5,946		5,948
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred revenue	99		91
Deferred income taxes, net	1,001		1,098
Noncurrent operating lease liabilities	90		—
Affiliate obligations, net	698		759
Other	559		547
Total deferred credits and other liabilities	2,447		2,495
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDER'S EQUITY
Common stock - one share without par value, owned by Qwest Services Corporation	10,050		10,050
Retained earnings (accumulated deficit)	159		(182	)
Total stockholder's equity	10,209		9,868
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	20,830	20,583

See accompanying notes to consolidated financial statements.

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QWEST CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



	Nine Months Ended September 30,
	2019			2018
	(Dollars in millions)
OPERATING ACTIVITIES
Net income	$	1,441		1,260
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,017			1,081
Deferred income taxes	(96		)	9
Provision for uncollectible accounts	36			51
Accrued interest on affiliate note	61			43
Net loss on early retirement of debt	—			30
Changes in current assets and liabilities:
Accounts receivable	5			3
Accounts payable	(14		)	(5	)
Accrued income and other taxes	13			(7	)
Other current assets and liabilities, net	(88		)	(108	)
Other current assets and liabilities - affiliates, net	(14		)	(7	)
Changes in other noncurrent assets and liabilities, net	6			385
Changes in affiliate obligations, net	(67		)	(94	)
Other, net	17			11
Net cash provided by operating activities	2,317			2,652
INVESTING ACTIVITIES
Capital expenditures	(777		)	(732	)
Changes in advances to affiliates	(456		)	360
Proceeds from sale of property, plant and equipment and other assets	24			5
Net cash used in investing activities	(1,209		)	(367	)
FINANCING ACTIVITIES
Payments of long-term debt	(10		)	(1,355	)
Dividends paid to Qwest Services Corporation	(1,100		)	(925	)
Net cash used in financing activities	(1,110		)	(2,280	)
Net (decrease) increase in cash, cash equivalents and restricted cash	(2		)	5
Cash, cash equivalents and restricted cash at beginning of period	7			3
Cash, cash equivalents and restricted cash at end of period	$	5		8
Supplemental cash flow information:
Income taxes (paid) refunded, net	$	(584	)	58
Interest paid (net of capitalized interest of $19 and $20)	$	(281	)	(366	)

Cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	3		6
Restricted cash included in other noncurrent assets	2			2
Total	$	5		8

See accompanying notes to consolidated financial statements.

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QWEST CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

(UNAUDITED)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019		2018
	(Dollars in millions)
COMMON STOCK
Balance at beginning of period	$	10,050		10,050		10,050		10,050
Balance at end of period	10,050			10,050		10,050		10,050
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance at beginning of period	82			(353	)	(182	)	(713	)
Net income	477			453		1,441		1,260
Cumulative net effect of adoption of ASU 2014-09, Revenue from Contracts with Customers, net of $—, ($7), $— and ($50) taxes	—			19		—		147
Dividends declared to Qwest Services Corporation	(400		)	(350	)	(1,100	)	(925	)
Balance at end of period	159			(231	)	159		(231	)
TOTAL STOCKHOLDER'S EQUITY	$	10,209		9,819		10,209		9,819

See accompanying notes to consolidated financial statements.

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QWEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Unless the context requires otherwise, references in this report to "QC" refer to Qwest Corporation, references to "Qwest," "we," "us," and "our" refer to Qwest Corporation and its consolidated subsidiaries, references to "QSC" refer to our direct parent company, Qwest Services Corporation and its consolidated subsidiaries, and references to "CenturyLink" refer to our ultimate parent company, CenturyLink, Inc. and its consolidated subsidiaries including Level 3 Parent, LLC, referred to as "Level 3".

(1) Background

General

We are an integrated communications company engaged primarily in providing an array of communications services to our residential and business customers. Our specific products and services are detailed in Note 7—Products and Services Revenue of this report.

We generate the majority of our total consolidated operating revenue 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.

Basis of Presentation

Our consolidated balance sheet as of December 31, 2018, 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 ("GAAP") 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 and cash flows for the first nine months of the year are not necessarily indicative of the consolidated results of operations and cash flows that might be expected for the entire year. These consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2018.

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. See Note 7—Products and Services Revenue for additional information. These changes had no impact on total operating revenue, total operating expenses or net income for any period.

Segments

Our operations are integrated into and reported as part 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 SEC. Consequently, we do not provide our discrete financial information to the CODM on a regular basis. As such, we have one reportable segment.

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Recently Adopted Accounting Pronouncements

We adopted Accounting Standards Update ("ASU") 2016-02, "Leases (ASC 842)", as of January 1, 2019, using the non-comparative transition option pursuant to ASU 2018-11. Therefore, we have not restated comparative period financial information for the effects of ASC 842, and we will not make the new required lease disclosures for comparative periods beginning before January 1, 2019. Instead, we recognized ASC 842's cumulative effect transition adjustment (discussed below) as of January 1, 2019. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things (i) allowed us to carry forward the historical lease classification; (ii) did not require us to reassess whether any expired or existing contracts are or contain leases under the new definition of a lease; and (iii) did not require us to reassess whether previously capitalized initial direct costs for any existing leases would qualify for capitalization under ASC 842. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements. We did not elect the hindsight practical expedient regarding the likelihood of exercising a lessee purchase option or assessing any impairment of right-of-use assets for existing leases.

On March 5, 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-01, "Leases (ASC 842): Codification Improvements", effective for public companies for fiscal years beginning after December 15, 2019. The new ASU aligns the guidance in ASC 842 for determining fair value of the underlying asset by lessors that are not manufacturers or dealers, with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value (in ASC 820, "Fair Value Measurement") should be applied. More importantly, the ASU also exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. Early adoption permits public companies to adopt concurrent with the transition to ASC 842 on leases. We adopted ASU 2019-01 as of January 1, 2019.

Adoption of the new standards resulted in the recording of operating lease assets and operating lease liabilities of approximately $126 million and $133 million, respectively, as of January 1, 2019. The standards did not materially impact our consolidated net earnings and had no material impact on cash flows. Our financial position for reporting periods beginning on or after January 1, 2019 is presented under the new guidance, as discussed above, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.

Recently Issued Accounting Pronouncements

Financial Instruments

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments". 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 evaluating the potential impact ASU 2016-13 will have on our financial assets measured at amortized cost including, but not limited to, customer receivables and contract asset balances.

Over the fourth quarter, we will complete our evaluation of the impact to our accounting and internal controls over financial reporting as a result of ASU 2016-13. We expect to adopt ASU 2016-13 on January 1, 2020 and recognize the impacts through a cumulative adjustment to accumulated deficit as of the date of adoption.

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(2) Goodwill, Customer Relationships and Other Intangible Assets

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



	September 30, 2019		December 31, 2018
	(Dollars in millions)
Goodwill	$	9,360	9,360
Customer relationships, less accumulated amortization of $5,129 and $4,806	$	570	893
Other intangible assets, less accumulated amortization of $1,760 and $1,712	$	329	311

As of September 30, 2019, the gross carrying amount of goodwill, customer relationships and other intangible assets was $17.1 billion. The total amortization expense for intangible assets for the three months ended September 30, 2019 and 2018 totaled $133 million and $144 million, respectively, and for the nine months ended September 30, 2019 and 2018 totaled $404 million and $440 million, respectively.

We estimate that total amortization expense for intangible assets for the years ending December 31, 2019 through 2023 will be as follows:



	(Dollars in millions)
2019 (remaining three months)	$	131
2020	467
2021	155
2022	52
2023	39

(3) Revenue Recognition

Refer to the Revenue Recognition section of Note 1—Background and Summary of Significant Accounting Policies and Note 3—Revenue Recognition in our annual report on Form 10-K for the year ended December 31, 2018 for further information regarding our application of ASC 606, “Revenue from Contracts with Customers”, including practical expedients and judgments applied in determining the amounts and timing of revenue from contracts with customers.

Reconciliation of Total Revenue to Revenue from Contracts with Customers

The following table provides the amount of revenue that is not subject to ASC 606, but is instead governed by other accounting standards:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019		2018
	(Dollars in millions)
Total revenue	$	2,039		2,149		6,145		6,380
Adjustments for non-ASC 606 revenue ⁽¹⁾	(123		)	(82	)	(375	)	(240	)
Total revenue from contracts with customers	$	1,916		2,067		5,770		6,140

______________________________________________________________________


⁽¹⁾	Includes regulatory revenue, lease revenue, sublease rental income and revenue from fiber capacity lease arrangements which are not within the scope of ASC 606.

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Customer Receivables and Contract Balances

The following table provides balances of customer receivables, contract assets and contract liabilities as of September 30, 2019 and December 31, 2018:



	September 30, 2019		December 31, 2018
	(Dollars in millions)
Customer receivables ⁽¹⁾	$	493	518
Contract liabilities	318		207
Contract assets	75		64


(1)	Gross customer receivables of $528 million and $554 million, net of allowance for doubtful accounts of $35 million and $36 million, at September 30, 2019 and December 31, 2018, respectively.

Contract liabilities consist of consideration we have received from our customers or billed in advance of providing goods or services promised in the future. We defer recognizing this consideration as revenue until we have satisfied the related performance obligation to the customer. Contract liabilities include recurring services billed one month in advance and installation and maintenance charges that are deferred and recognized over the actual or expected contract term, which ranges from one to seven years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheets.

The following table provides information about revenue recognized for the three and nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30,			Nine Months Ended September 30,
	2019		2018	2019	2018
	(Dollars in millions)
Revenue recognized in the period from:
Amounts included in contract liability at the beginning of the period (January 1, 2019 and 2018, respectively)	$	4	11	269	291
Performance obligations satisfied in previous periods	—		—	—	—

Performance Obligations

As of September 30, 2019, our estimated revenue expected to be recognized in the future related to performance obligations associated with customer contracts that are partially or wholly unsatisfied is approximately $181 million. We expect to recognize approximately 98% of this revenue through 2021, with the balance recognized thereafter.

We do not disclose the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), or contracts that are classified as leasing arrangements that are not subject to ASC 606.

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Contract Costs

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



	Three Months Ended September 30, 2019					Three Months Ended September 30, 2018
	Acquisition Costs			Fulfillment Costs		Acquisition Costs		Fulfillment Costs
	(Dollars in millions)
Beginning of period balance	$	87		60		89		58
Costs incurred	15			10		29		13
Amortization	(15		)	(8	)	(29	)	(13	)
End of period balance	$	87		62		89		58



	Nine Months Ended September 30, 2019					Nine Months Ended September 30, 2018
	Acquisition Costs			Fulfillment Costs		Acquisition Costs		Fulfillment Costs
	(Dollars in millions)
Beginning of period balance	$	90		57		91		61
Costs incurred	44			29		45		20
Amortization	(47		)	(24	)	(47	)	(23	)
End of period balance	$	87		62		89		58

Acquisition costs include commission fees paid to employees as a result of obtaining contracts. Fulfillment costs include third party and internal costs associated with the provision, installation and activation of communications services to customers, including labor and materials consumed for these activities.

Deferred acquisition and fulfillment costs are amortized based on the transfer of services on a straight-line basis over the average customer life of 30 months for consumer customers and up to 49 months for business customers. Amortized fulfillment costs are included in cost of services products and amortized acquisition costs are included in selling, general and administrative expenses in our consolidated statements of operations. The amount of these deferred costs that are anticipated to be amortized in the next twelve months are included in other current assets on our consolidated balance sheets. The amount of deferred costs expected to be amortized beyond the next twelve months is included in other non-current assets on our consolidated balance sheets. Deferred acquisition and fulfillment costs are assessed for impairment on an annual basis.

(4) Leases

Our financial position for reporting periods beginning on or after January 1, 2019 is presented under the new accounting guidance, while prior periods amounts are not adjusted and continue to be reported in accordance with previous guidance, as discussed in Note 1—Background.

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We primarily lease various office facilities, switching and colocation facilities, equipment and dark fiber. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

We determine if an arrangement is a lease at inception and whether that lease meets the classification criteria of a finance or operating lease. Lease-related assets, or right-of-use assets, are recognized at the lease commencement date at amounts equal to the respective lease liabilities. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rates. As part of the present value calculation for the lease liabilities, we use an incremental borrowing rate as the rates implicit in the leases are not readily determinable. The incremental borrowing rates used for lease accounting are based on our unsecured rates, adjusted to approximate the rates at which we could borrow on a collateralized basis over a term similar to the recognized lease term. We apply the incremental borrowing rates to lease components using a portfolio approach based upon the length of the lease term and the reporting entity in which the lease resides. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.

Some of our lease arrangements contain lease components (including fixed payments, such as, rent, real estate taxes and insurance costs) and non-lease components (including common-area maintenance costs). We generally account for each component separately based on the estimated standalone price of each component. For colocation leases, we account for the lease and non-lease components as a single lease component.

Many of our lease agreements contain renewal options; however, we do not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that we are reasonably certain of renewing the lease at inception or when a triggering event occurs. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain to be exercised. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Lease expense consisted of the following:



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
	(Dollars in millions)
Operating and short-term lease cost	$	8	24
Finance lease cost:
Amortization of right-of-use assets	2		7
Interest on lease liability	1		1
Total finance lease cost	3		8
Total lease cost	$	11	32

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Supplemental unaudited consolidated balance sheet information and other information related to leases:



Leases (millions)	Classification on the Balance Sheet	September 30, 2019
Assets
Operating lease assets	Operating lease assets	$	117
Finance lease assets	Property, plant and equipment, net of accumulated depreciation	16
Total leased assets		$	133

Liabilities
Current
Operating	Other current liabilities	$	29
Finance	Current portion of long-term debt	7
Noncurrent
Operating	Noncurrent operating lease liabilities	90
Finance	Long-term debt	5
Total lease liabilities		$	131

Weighted-average remaining lease term (years)
Operating leases		5.4
Finance leases		4.9
Weighted-average discount rate
Operating leases		6.71		%
Finance leases		5.26		%

Supplemental unaudited consolidated cash flow statement information related to leases:



	Nine Months Ended September 30, 2019
	(Dollars in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	27
Financing cash flows from finance leases	8

As of September 30, 2019, maturities of lease liabilities were as follows:



	Operating Leases			Finance Leases
	(Dollars in millions)
2019 (remaining three months)	$	8		2
2020	32			5
2021	30			1
2022	27			1
2023	22			1
Thereafter	36			4
Total lease payments	155			14
Less: interest	(36		)	(2	)
Total	119			12
Less: current portion	(29		)	(7	)
Long-term portion	$	90		5

As of September 30, 2019, we had no material operating or finance leases that had not yet commenced.

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Operating Lease Income

Qwest leases various data transmission capacity, office facilities, switching facilities and other network sites to third parties under operating leases. Lease and sublease income is included in operating revenue in the consolidated statements of operations.

For the three and nine months ended September 30, 2019, our gross rental income was $79 million and $242 million, respectively, which represents 4% of our operating revenue for both periods. For the three and nine months ended September 30, 2018, our gross rental income was $83 million and $249 million, respectively which represents 4% of our operating revenue for both periods.

Disclosures under ASC 840

We adopted ASU 2016-02 on January 1, 2019 as noted above, and as required, the following disclosure is provided for periods prior to adoption.

The future annual minimum payments under capital lease agreements as of December 31, 2018 were as follows:



	Capital Lease Obligations
	(Dollars in millions)
2019	$	10
2020	6
2021	2
2022	1
2023	1
2024 and thereafter	4
Total minimum payments	24
Less: amount representing interest and executory costs	(5		)
Present value of minimum payments	19
Less: current portion	(12		)
Long-term portion	$	7

At December 31, 2018, our future rental commitments for operating leases were as follows:



	Operating Leases
	(Dollars in millions)
2019	$	35
2020	28
2021	27
2022	23
2023	19
2024 and thereafter	32
Total future minimum payments⁽¹⁾	$	164

_______________________________________________________________________________


(1)	Minimum payments have not been reduced by minimum sublease rentals of $22 million due in the future under non-cancelable subleases.

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(5) Long-Term Debt and Revolving Promissory Note

The following chart reflects (i) the consolidated long-term debt of Qwest Corporation and its subsidiaries, including unamortized discounts and premiums, unamortized debt issuance costs and (ii) note payable - affiliate:



	Interest Rates	Maturities	September 30, 2019			December 31, 2018
			(Dollars in millions)
Senior notes	6.125% - 7.750%	2021 - 2057	$	5,956		5,956
Term loan	4.050%	2025	100			100
Finance lease and other obligations	Various	Various	12			21
Unamortized (discounts) premiums, net			—			(1	)
Unamortized debt issuance costs			(115		)	(117	)
Total long-term debt			5,953			5,959
Less current maturities			(7		)	(11	)
Long-term debt, excluding current maturities			$	5,946		5,948
Note payable - affiliate	5.843%	2022	$	1,069		1,008

Note Payable - Affiliate

On September 30, 2017, Qwest Corporation entered into an amended and restated revolving promissory note in the amount of $965 million with an affiliate of our ultimate parent company, CenturyLink, Inc. This note replaced and amended the original $1.0 billion revolving promissory note Qwest Corporation entered into on April 18, 2012 with the same affiliate. The outstanding principal balance owed by Qwest Corporation under this revolving promissory note and the accrued interest thereon is due and payable on demand, but if no demand is made, then on June 30, 2022. Interest is accrued on the outstanding balance during an interest period using a weighted average per annum interest rate on the consolidated outstanding debt of CenturyLink and its subsidiaries. As of September 30, 2019, the amended and restated revolving promissory note had an outstanding balance of $1.069 billion and bore interest at a weighted-average interest rate of 5.843%. As of September 30, 2019 and December 31, 2018, the amended and restated revolving promissory note is reflected on our consolidated balance sheets as a current liability under "Note payable - affiliate". In accordance with the terms of the amended and restated revolving promissory note, interest shall be assessed on June 30th and December 31st (an "Interest Period"). Any assessed interest for an Interest Period that remains unpaid on the last day of the subsequent Interest Period is to be capitalized on such date and is to begin accruing interest. Through September 30, 2019, $104 million of such interest has been capitalized. As of September 30, 2019, $16 million of accrued interest is reflected in other current liabilities on our consolidated balance sheet.

Aggregate Maturities of Long-Term Debt

Set forth below is the aggregate principal amount of our long-term debt (excluding unamortized premiums and discounts and unamortized debt issuance costs and excluding note payable-affiliate) maturing during the following years:



	(Dollars in millions)
2019 (remaining three months)	$	2
2020	5
2021	951
2022	—
2023	1
2024 and thereafter	5,109
Total long-term debt	$	6,068

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Compliance

As of September 30, 2019, we believe we were in compliance with the financial covenants contained in our material debt agreements in all material respects.

Other

For additional information on our long-term debt and credit facilities, see Note 4—Long-Term Debt and Revolving Promissory Note to our consolidated financial statements in Item 8 of Part II of our annual report on Form 10-K for the year ended December 31, 2018.

(6) Fair Value Disclosure

The Fair Value Measurement and Disclosure framework provides a three-tiered fair value hierarchy based on the reliability of the inputs used to determine fair value. Input Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Input Level 2 refers to fair values estimated using significant other observable inputs and Input Level 3 includes fair values estimated using significant unobservable inputs.

Due to their short-term nature, the carrying amounts of our cash, cash equivalents and restricted cash, accounts receivable and accounts payable approximate their fair values.

The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding finance lease and other obligations, as well as the input level used to determine the fair values indicated below:



		September 30, 2019			December 31, 2018
	Input Level	Carrying Amount		Fair Value	Carrying Amount	Fair Value
		(Dollars in millions)
Liabilities—Long-term debt (excluding finance lease and other obligations)	2	$	5,941	6,226	5,938	5,118

(7) Products and Services Revenue

We are an integrated communications company engaged primarily in providing an array of communications services, including local voice, broadband, private line (including business data services), Ethernet, network access, information technology 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.

We categorize our products, services and revenue among the following six categories:


•	IP and Data Services, which include primarily VPN data networks, Ethernet, IP and other ancillary services;


•	Transport and Infrastructure, which include broadband, private line (including business data services) and other ancillary services;


•	Voice and Collaboration, which includes primarily local voice, including wholesale voice, and other ancillary services;


•	IT and Managed Services, which include information technology services and managed services, which may be purchased in conjunction with our other network services;

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•

Regulatory Revenue, which consist of Universal Service Fund ("USF") and Connect America Fund ("CAF") support payments and other operating revenue. We receive federal support payments from both federal and state USF programs and from the federal CAF program. 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; and


•	Affiliate Services, 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.

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

Our operating revenue for our products and services consisted of the following categories:



	Three Months Ended September 30,			Nine Months Ended September 30,
	2019		2018	2019	2018
	(Dollars in millions)
IP and Data Services	$	169	155	467	459
Transport and Infrastructure	716		739	2,140	2,215
Voice and Collaboration	405		449	1,250	1,369
IT and Managed Services	—		1	2	5
Regulatory Revenue	48		53	143	161
Affiliate Services	701		752	2,143	2,171
Total operating revenue	$	2,039	2,149	6,145	6,380

We recognize revenue 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 USF surcharges are assigned to the products and services categories based on the underlying revenue. 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.

The following table provides the amount of USF surcharges and transaction taxes:



	Three Months Ended September 30,			Nine Months Ended September 30,
	2019		2018	2019	2018
	(Dollars in millions)
USF surcharges and transaction taxes	$	33	28	91	93

(8) Commitments, Contingencies and Other Items

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

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Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and could cause significant expenditure and diversion of management attention. We review our litigation accrual liabilities on a quarterly basis, but in accordance with applicable accounting guidelines only establish accrual liabilities when losses are deemed probable and reasonably estimable and only revise previously-established accrual liabilities when warranted by changes in circumstances, in each case based on then-available information. As such, as of any given date we could have exposure to losses under proceedings as to which no liability has been accrued or as to which the accrued liability is inadequate. Amounts accrued for our litigation and non-income tax contingencies at September 30, 2019 aggregated to approximately $23 million and are included in “Other” current liabilities and “Other Liabilities” in our consolidated balance sheet as of such date. The establishment of an accrual does not mean that actual funds have been set aside to satisfy a given contingency. Thus, the resolution of a particular contingency for the amount accrued could have no effect on our results of operations but nonetheless could have an adverse effect on our cash flows.

In this Note, when we refer to a class action as "putative" it is because a class has been alleged, but not certified in that matter.

Switched Access Disputes

Subsidiaries of CenturyLink, Inc., including us, are among hundreds of companies involved 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 Northern District of 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, IXCs, including Sprint Communications Company L.P. ("Sprint") and various affiliates of Verizon Communications Inc. ("Verizon"), 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 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 FCC 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.

Billing Practices Suits

In June 2017, a former employee of CenturyLink filed an employment lawsuit against CenturyLink claiming that she was wrongfully terminated for alleging that CenturyLink charged some of its retail customers for products and services they did not authorize. Starting shortly thereafter and continuing since then, and based in part on the allegations made by the former employee, several legal proceedings have been filed.

In June 2017, McLeod v. CenturyLink, a putative consumer class action, was filed against CenturyLink in the U.S. District Court for the Central District of California alleging that it charged some of its retail customers for products and services they did not authorize. A number of other complaints asserting similar claims have been filed in other federal and state courts, as well. The lawsuits assert claims including fraud, unfair competition, and unjust enrichment. Also, in June 2017, Craig. v. CenturyLink, Inc., et al., a putative securities investor class action, was filed in U.S. District Court for the Southern District of New York, alleging that it failed to disclose material information regarding improper sales practices, and asserting federal securities law claims. A number of other cases asserting similar claims have also been filed.

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Beginning June 2017, CenturyLink received several shareholder derivative demands addressing related topics. In August 2017, CenturyLink's Board of Directors formed a special litigation committee of outside directors to address the allegations of impropriety contained in the shareholder derivative demands. In April 2018, the special litigation committee concluded its review of the derivative demands and declined to take further action. Since then, derivative cases were filed. Two of these cases, Castagna v. Post and Pinsly v. Post, were filed in Louisiana state court in the Fourth Judicial District Court for the Parish of Ouachita. The remaining derivative cases were filed in federal court in Louisiana and Minnesota. These cases have been brought on behalf of CenturyLink against certain current and former officers and directors of the Company and seek damages for alleged breaches of fiduciary duties.

The consumer putative class actions, the securities investor putative class actions, and the federal derivative actions have been transferred to the U.S. District Court for the District of Minnesota for coordinated and consolidated pretrial proceedings as In Re: CenturyLink Sales Practices and Securities Litigation. Subject to confirmatory discovery and court approval, CenturyLink agreed to settle the consumer putative class actions for payments of $15.5 million to compensate class members and of up to $3.5 million for administrative costs. CenturyLink has accrued a contingent liability for those amounts.

In July 2017, the Minnesota state attorney general filed State of Minnesota v. CenturyTel Broadband Services LLC, et al. in the Anoka County Minnesota District Court, alleging claims of fraud and deceptive trade practices relating to improper consumer sales practices. The suit seeks an order of restitution on behalf of all CenturyLink customers, civil penalties, injunctive relief, and costs and fees. Additionally, CenturyLink has received and responded to information requests and inquiries from other states.

Locate Service Investigations

In June 2019, Minnesota and Arizona initiated investigations related to the timeliness of responses by certain of our vendors to requests for marking the location of underground telecommunications facilities. We, along with CenturyLink and its other subsidiaries are cooperating with the investigations.

Other Proceedings, Disputes and Contingencies

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 which 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 described under this heading is not predictable. However, based on current circumstances, we do not believe that the ultimate resolution of these other proceedings, after considering available defenses and any insurance coverage or indemnification rights, will have a material adverse effect on us.

The matters listed above in this Note do not reflect all of our contingencies. For additional information on our contingencies, see Note 15—Commitments, Contingencies and Other Items to the financial statements included in Item 8 of Part II of our annual report on Form 10-K for the year ended December 31, 2018. The ultimate outcome of the above-described matters may differ materially from the outcomes anticipated, estimated, projected or implied by us in certain of our statements appearing above in this Note, and proceedings currently viewed as immaterial by us may ultimately materially impact us.

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(9) Dividends

From time to time we may declare and pay dividends to our direct parent company, QSC, sometimes in excess of our earnings to the extent permitted by applicable law. Our debt covenants do not currently limit the amount of dividends we can pay to QSC.

During the nine months ended September 30, 2019 and 2018, we declared and paid dividends of $1.1 billion and $925 million, respectively, to QSC. Dividends paid are reflected on our consolidated statements of cash flows as financing activities.

(10) Other Financial Information

Other Current Assets

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



	September 30, 2019		December 31, 2018
	(Dollars in millions)
Prepaid expenses	$	49	37
Contract acquisition costs	50		52
Contract fulfillment costs	28		27
Other	14		31
Total other current assets	$	141	147

(11) Labor Union Contracts

As of September 30, 2019, approximately 42% of our employees were represented by the Communication Workers of America ("CWA") or the International Brotherhood of Electrical Workers ("IBEW"). During the third quarter of 2019, we reached new agreements with the CWA and IBEW, which represented all of the above noted represented employees. Therefore, there are no collective bargaining agreements that are scheduled to expire over the next 12 months. We believe relations with our employees continue to be generally good.

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

Unless the context requires otherwise, references in this report to "QC" refer to Qwest Corporation, and references to "Qwest," "we," "us" and "our" refer to Qwest Corporation and its consolidated subsidiaries.

All references to "Notes" in this Item 2 of Part I refer to the Notes to Consolidated Financial Statements included in Item 1 of Part I of this report.

Certain statements in this report constitute forward-looking statements. See "Special Note Regarding Forward-Looking Statements" appearing at the beginning of this report and "Risk Factors" in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2018 for a discussion of certain factors that could cause our actual results to differ from our anticipated results or otherwise impact our business, financial condition, results of operations, liquidity or prospects.

Overview

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included herein should be read in conjunction with MD&A and the other information included in our annual report on Form 10-K for the year ended December 31, 2018, and with the consolidated financial statements and related notes in Item 1 of Part I of this report. The results of operations for the first nine months of the year are not necessarily indicative of the results of operations that might be expected for the entire year.

Our ultimate parent company, CenturyLink, Inc. ("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, affiliates provide 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 advanced on a daily basis for centralized management by CenturyLink. From time to time we may declare and pay dividends to Qwest Services Corporation ("QSC"), our direct parent, using cash owed to us under these advances, which has the net effect of reducing the amount of these advances. We report the balance of these transfers on our consolidated balance sheet as advances to affiliates.

At September 30, 2019, we served 3.1 million broadband subscribers. Our methodology for counting broadband subscribers may not be comparable to those of other companies.

For the reasons noted in Note 1—Background to our consolidated financial statements in Item 1 of Part I of this report, we believe we have one reportable segment.

We categorize our products, services and revenue among the following six categories:


•	IP and Data Services, which include primarily VPN data networks, Ethernet, IP and other ancillary services;


•	Transport and Infrastructure, which include broadband, private line (including business data services) and other ancillary services;


•	Voice and Collaboration, which includes primarily local voice, including wholesale voice, and other ancillary service;


•	IT and Managed Services, which include information technology services and managed services, which may be purchased in conjunction with our other network services;

•

Regulatory Revenue, which consist of Universal Service Fund ("USF") and Connect America Fund ("CAF") support payments and other operating revenue. We receive federal support payments from both federal and state USF programs and from the federal CAF program. 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; and

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•	Affiliate Services, we provide 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.

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

The following analysis is organized to provide the information we believe will be useful for understanding material trends affecting our business.

Results of Operations

The following table summarizes the results of our consolidated operations for the three and nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019		2018
	(Dollars in millions)
Operating revenue	$	2,039		2,149		6,145		6,380
Operating expenses	1,291			1,432		3,887		4,405
Operating income	748			717		2,258		1,975
Total other expense, net	(105		)	(153	)	(313	)	(393	)
Income tax expense	166			111		504		322
Net income	$	477		453		1,441		1,260

For a discussion of certain trends that impact our business, see the MD&A discussion of trends impacting CenturyLink's business included in CenturyLink's reports filed with the Securities and Exchange Commission ("SEC"), including most recently its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019.

Operating Revenue

The following tables summarize our consolidated operating revenue recorded under each of our six above-described revenue categories:



	Three Months Ended September 30,			Increase/ (Decrease)		% Change
	2019		2018	Increase/ (Decrease)		% Change
	(Dollars in millions)
IP and Data Services	$	169	155	14		9	%
Transport and Infrastructure	716		739	(23	)	(3	)%
Voice and Collaboration	405		449	(44	)	(10	)%
IT and Managed Services	—		1	(1	)	(100	)%
Regulatory Revenue	48		53	(5	)	(9	)%
Affiliate Services	701		752	(51	)	(7	)%
Total operating revenue	$	2,039	2,149	(110	)	(5	)%

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	Nine Months Ended September 30,			Increase/ (Decrease)		% Change
	2019		2018	Increase/ (Decrease)		% Change
	(Dollars in millions)
IP and Data Services	$	467	459	8		2	%
Transport and Infrastructure	2,140		2,215	(75	)	(3	)%
Voice and Collaboration	1,250		1,369	(119	)	(9	)%
IT and Managed Services	2		5	(3	)	(60	)%
Regulatory Revenue	143		161	(18	)	(11	)%
Affiliate Services	2,143		2,171	(28	)	(1	)%
Total operating revenue	$	6,145	6,380	(235	)	(4	)%

Total operating revenue decreased by $110 million, or 5%, and $235 million, or 4%, for the three and nine months ended September 30, 2019 as compared to the three and nine months ended September 30, 2018. The change in operating revenue for both periods was primarily due to decreases in voice and collaboration, transport and infrastructure and affiliate services. The decrease in voice and collaboration was due to a continued decline in revenue services from our local voice services. The reduction in transport and infrastructure was attributable to a continued decline in private line (including business data services).

Operating Expenses

The following tables summarize our consolidated operating expenses:



	Three Months Ended September 30,			Increase/ (Decrease)		% Change
	2019		2018	Increase/ (Decrease)		% Change
	(Dollars in millions)
Cost of services and products (exclusive of depreciation and amortization)	$	630	697	(67	)	(10	)%
Selling, general and administrative	131		172	(41	)	(24	)%
Operating expenses - affiliates	186		203	(17	)	(8	)%
Depreciation and amortization	344		360	(16	)	(4	)%
Total operating expenses	$	1,291	1,432	(141	)	(10	)%



	Nine Months Ended September 30,			Increase/ (Decrease)		% Change
	2019		2018	Increase/ (Decrease)		% Change
	(Dollars in millions)
Cost of services and products (exclusive of depreciation and amortization)	$	1,825	2,106	(281	)	(13	)%
Selling, general and administrative	445		602	(157	)	(26	)%
Operating expenses - affiliates	600		616	(16	)	(3	)%
Depreciation and amortization	1,017		1,081	(64	)	(6	)%
Total operating expenses	$	3,887	4,405	(518	)	(12	)%

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

Cost of services and products (exclusive of depreciation and amortization) decreased $67 million, or 10%, and $281 million, or 13%, respectively, for the three and nine months ended September 30, 2019 as compared to the three and nine months ended September 30, 2018. The decrease in our cost of services and products (exclusive of depreciation and amortization) for both periods was primarily due to lower salaries and wages and employee related expenses from lower headcount, reduced customer premises equipment costs from lower sales, lower voice usage costs and a decline in professional services, which were offset by higher right of way and dark fiber expenses.

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Selling, General and Administrative

Selling, general and administrative expenses decreased by $41 million, or 24%, and $157 million, or 26%, respectively, for the three and nine months ended September 30, 2019 as compared to the three and nine months ended September 30, 2018. The decrease in our selling, general and administrative expenses for both periods was primarily due to lower salaries and wages and employee related expenses from lower headcount, lower contract labor costs and declines in commissions, professional fees, marketing and advertising, insurance and fees, property, other taxes and bad debt expense and an increase in the amount of labor capitalized or deferred. These decreases were partially offset by higher building and network maintenance costs.

Operating Expenses - Affiliates

Operating expenses - affiliates decreased by $17 million, or 8%, and $16 million, or 3%, respectively, for the three and nine month ended September 30, 2019 as compared to the three and nine months ended September 30, 2018. The change in operating expenses - affiliates for both periods was primarily due to the decline in the level of services provided to us by our affiliates.

Depreciation and Amortization

The following tables provide details of our depreciation and amortization expense:



	Three Months Ended September 30,			Increase/ (Decrease)		% Change
	2019		2018	Increase/ (Decrease)		% Change
	(Dollars in millions)
Depreciation	$	211	216	(5	)	(2	)%
Amortization	133		144	(11	)	(8	)%
Total depreciation and amortization	$	344	360	(16	)	(4	)%



	Nine Months Ended September 30,			Increase/ (Decrease)		% Change
	2019		2018	Increase/ (Decrease)		% Change
	(Dollars in millions)
Depreciation	$	613	641	(28	)	(4	)%
Amortization	404		440	(36	)	(8	)%
Total depreciation and amortization	$	1,017	1,081	(64	)	(6	)%

Depreciation expense is impacted by several factors, including changes in our depreciable cost basis, changes in our estimates of the remaining economic life of certain network assets and the addition of new plant. Depreciation expense decreased by $5 million, or 2%, and $28 million, or 4%, respectively, for the three and nine months ended September 30, 2019 as compared to the three and nine months ended September 30, 2018. The decline in depreciation expense for both periods was primarily due to the impact of annual rate depreciable life changes partially offset by a net increase in depreciable assets.

Amortization expense decreased by $11 million, or 8%, and $36 million, or 8%, respectively, for the three and nine months ended September 30, 2019 as compared to the three and nine months ended September 30, 2018. The decrease in amortization expense for both periods was primarily due to the effect of using an accelerated amortization method resulting in an incremental decline in expense each period as the intangible assets amortize.

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Other Consolidated Results

The following tables summarize our total other expense, net and income tax expense:



	Three Months Ended September 30,					Change		% Change
	2019			2018		Change		% Change
	(Dollars in millions)
Interest expense	$	(95	)	(112	)	(17	)	(15	)%
Interest expense - affiliates, net	(15		)	(15	)	—		—	%
Other income, net	5			(26	)	31		119	%
Total other expense, net	$	(105	)	(153	)	(48	)	(31	)%
Income tax expense	$	166		111		55		50	%



	Nine Months Ended September 30,					Change		% Change
	2019			2018		Change		% Change
	(Dollars in millions)
Interest expense	$	(286	)	(350	)	(64	)	(18	)%
Interest expense - affiliates, net	(46		)	(42	)	4		10	%
Other income, net	19			(1	)	20		nm
Total other expense, net	$	(313	)	(393	)	(80	)	(20	)%
Income tax expense	$	504		322		182		57	%

_______________________________________________________________________________

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

Interest Expense

Interest expense decreased by $17 million, or 15%, and $64 million, or 18%, for the three and nine months ended September 30, 2019 as compared to the three and nine months ended September 30, 2018. The decrease for both periods was primarily due to the redemption of approximately $1.3 billion of senior notes in the third quarter of 2018. See Note 5—Long-Term Debt and Revolving Promissory Note to our consolidated financial statements in Item 1 of Part I of this report and Liquidity and Capital Resources below for additional information about our debt.

Interest Expense - Affiliates, Net

Affiliate interest expense remained substantially unchanged for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. Affiliated interest expense increased by $4 million, or 10%, for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The increase in affiliate interest expense was primarily due to an increase in the principal balance of the note payable - affiliate resulting from the capitalization of interest in Q3 2019.

Other Income, Net

Other income, net reflects certain items not directly related to our core operations, including interest income, gains and losses from non-operating asset dispositions and components of net periodic pension and post-retirement benefit costs. Other income, net increased by $31 million and $20 million, for the three and nine months ended September 30, 2019 as compared to the three and nine months ended September 30, 2018. The increase in other income, net for both periods was primarily due to the $34 million loss on debt redemption during the third quarter of 2018.

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Income Tax Expense

Income tax expense for the three and nine months ended September 30, 2019 was $166 million and $504 million, or effective tax rates of 25.8% and 25.9%, respectively, compared to $111 million and $322 million, or effective tax rates of 19.7% and 20.4%, respectively, for the three and nine months ended September 30, 2018. The change in the effective tax rate for the nine months ended September 30, 2019 was primarily due to favorable accounting elections made in 2018. These positions created a favorable 5.1% impact to the rate for the nine months ended September 30, 2019.

Liquidity and Capital Resources

Overview of Sources and Uses of Cash

We are an indirectly wholly-owned subsidiary of CenturyLink. As such, factors relating to, or affecting, CenturyLink's liquidity and capital resources could have material impacts on us, including impacts on our credit ratings, our access to capital markets and changes in the financial market's perception of us.

CenturyLink has cash management arrangements between certain of its subsidiaries that include lines of credit, affiliate advances and obligations, capital contributions and dividends. As part of these cash management arrangements, affiliates provide 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 advanced on a daily basis for centralized management by CenturyLink. From time to time we may declare and pay dividends to our stockholder, QSC, sometimes in excess of our earnings to the extent permitted by applicable law, using cash owed to us under these advances, which has the net effect of reducing the amount of these advances. Our debt covenants do not currently limit the amount of dividends we can pay to QSC. Given our cash management arrangement with our ultimate parent, CenturyLink, and the resulting amounts due to us from CenturyLink, a significant component of our liquidity is dependent upon CenturyLink's ability to repay its obligation to us.

We anticipate that our future liquidity needs will be met through (i) our cash provided by our operating activities, (ii) amounts due to us from CenturyLink, (iii) our ability to refinance QC's debt securities at maturity and (iv) capital contributions, advances or loans from CenturyLink or its affiliates if and to the extent they have available funds or access to available funds that they are willing and able to contribute, advance or loan.

Capital Expenditures

We incur capital expenditures on an ongoing basis in order to enhance and modernize our networks, compete effectively in our markets and expand and improve our service offerings. CenturyLink evaluates capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and the expected return on investment. The amount of CenturyLink’s consolidated capital investment is influenced by, among other things, demand for CenturyLink’s services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations (such as CenturyLink's CAF II infrastructure buildout requirements). For more information on CenturyLink’s total capital expenditures, please see its annual and quarterly reports filed with the SEC.

For more information on our capital spending, see "Historical Information—Investing Activities" below and Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2018.

Debt and Other Financing Arrangements

Subject to market conditions, and to the extent feasible, we expect to continue to issue debt securities, under Qwest Corporation, from time to time in the future to refinance a substantial portion of our maturing debt. The availability, interest rate and other terms of any new borrowings will depend on the ratings assigned to Qwest Corporation by credit rating agencies, among other factors. We have no debt maturities due in 2019.

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As of the date of this report, the credit ratings for Qwest Corporation's senior unsecured debt were as follows:



Agency	Credit Ratings
Standard & Poor's	BBB-
Moody's Investors Service, Inc.	Ba2
Fitch Ratings	BB+

CenturyLink, Inc.'s and Qwest Corporation's credit ratings are reviewed and adjusted from time to time by the rating agencies. For additional information regarding CenturyLink's and Qwest Corporation's funding arrangements, see "Risk Factors—Risk Related to CenturyLink's Recently-Completed Acquisition of Level 3" and "Risks Affecting Liquidity and Capital Resources" in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2018.

Term Loan

In 2015, we entered into a term loan in the amount of $100 million with CoBank, ACB. The outstanding unpaid principal amount of this term loan plus any accrued and unpaid interest is due on February 20, 2025. Interest is paid monthly based upon either the London Interbank Offered Rate (“LIBOR”) or the base rate (as defined in the credit agreement) plus an applicable margin between 1.50% to 2.50% per annum for LIBOR loans and 0.50% to 1.50% per annum for base rate loans depending on our then current senior unsecured long-term debt rating. At both September 30, 2019 and December 31, 2018, the outstanding principal balance on this term loan was $100 million.

Revolving Promissory Note

On September 30, 2017, Qwest Corporation entered into an amended and restated revolving promissory note in the amount of $965 million with an affiliate of our ultimate parent company, CenturyLink, Inc. This note replaced and amended the original $1.0 billion revolving promissory note Qwest Corporation entered into on April 18, 2012 with the same affiliate. The outstanding principal balance owed by us under this revolving promissory note and the accrued interest thereon is due and payable on demand, but if no demand is made, then on June 30, 2022. Interest is accrued on the outstanding balance during an interest period using a weighted average per annum interest rate on the consolidated outstanding debt of CenturyLink and its subsidiaries. As of September 30, 2019, the weighted average interest rate was 5.843%. As of September 30, 2019 and December 31, 2018, the amended and restated revolving promissory note and the original revolving promissory note, respectively, are reflected on our consolidated balance sheets as a current liability under note payable - affiliate. As of September 30, 2019, $16 million of accrued interest is reflected in other current liabilities on our consolidated balance sheets.

For additional information about our indebtedness, see Note 5—Long-Term Debt and Revolving Promissory Note.

Dividends

We periodically pay dividends to our direct parent company. See Note 9—Dividends and the discussion above under the heading "Overview".

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Pension and Post-retirement Benefit Obligations

CenturyLink is subject to material obligations under its existing defined benefit pension plans and post-retirement benefit plans. At December 31, 2018, the accounting unfunded status of CenturyLink's qualified and non-qualified defined benefit pension plans and qualified post-retirement benefit plans was approximately $1.6 billion and approximately $3.0 billion, respectively. For additional information about CenturyLink's pension and post-retirement benefit arrangements, see "Critical Accounting Policies and Estimates—Pensions and Post-Retirement Benefits" in Item 7 of CenturyLink's annual report on Form 10-K for the year ended December 31, 2018 and see Note 10—Employee Benefits to the consolidated financial statements in Item 8 of Part II of the same report.

A substantial portion of our active and retired employees participate in CenturyLink's qualified pension plan and post-retirement benefit plans. On December 31, 2014, the Qwest Communications International Inc. ("QCII") pension plan and a pension plan of an affiliate were merged into the CenturyLink Retirement Plan, which was renamed the CenturyLink Combined Pension Plan. Our contributions are not segregated or restricted to pay amounts due to our employees and may be used to provide benefits to other employees of our affiliates. Prior to the pension plan merger, the above-noted employees participated in the QCII pension plan.

Benefits paid by CenturyLink's qualified pension plan are paid through a trust that holds all of the plan's assets. Based on current laws and circumstances, CenturyLink does not expect any contributions to be required for their qualified pension plan during 2019. The amount of required contributions to CenturyLink's qualified pension plan in 2020 and beyond will depend on a variety of factors, most of which are beyond their control, including earnings on plan investments, prevailing interest rates, demographic experience, changes in plan benefits and changes in funding laws and regulations. CenturyLink occasionally makes voluntary contributions in addition to required contributions. CenturyLink does not currently expect to make a voluntary contribution to the trust for its qualified pension plan in 2019.

Substantially all of CenturyLink's post-retirement health care and life insurance benefits plans are unfunded. Several trusts hold assets that have been used to help cover the health care costs of certain retirees. As of December 31, 2018, assets in the post-retirement trusts had been substantially depleted and had a fair value of $18 million (a portion of which was comprised of investments with restricted liquidity), which has significantly limited CenturyLink's ability to continue paying benefits from the trusts; however, CenturyLink will continue to pay certain benefits through the trusts. Benefits not paid from the trusts are expected to be paid directly by CenturyLink with available cash.

The affiliate obligations, net in current and noncurrent liabilities on our consolidated balance sheets primarily represents the cumulative allocation of expenses, net of payments, associated with QCII's pension plans and post-retirement benefits plans prior to the plan mergers. In 2015, we agreed to a plan to settle the outstanding pension and post-retirement affiliate obligations, net balance with QCII over a 30 year term. Under the plan, payments are scheduled to be made on a monthly basis. For the nine months ended September 30, 2019, we made settlement payments of $56 million to QCII in accordance with the plan. Changes in the affiliate obligations, net are reflected in operating activities on our consolidated statements of cash flows. For 2019, we expect to make aggregate settlement payments of $79 million to QCII under the plan.

For 2019, CenturyLink's estimated annual long-term rates of return, net of administrative costs, are 6.5% and 4.0% for the pension plan trust assets and post-retirement plans trust assets, respectively, based on the assets currently held. However, actual returns could be substantially different.

For additional information, see “Risk Factors—Risks Affecting Our Liquidity and Capital Resources—Adverse changes in the value of assets or obligations associated with CenturyLink’s qualified pension plan could negatively impact CenturyLink’s liquidity, which may in turn affect our business and liquidity” in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2018.

Future Contractual Obligations

For information regarding our estimated future contractual obligations, see the MD&A discussion included in Item 7 of Part II of our annual report on Form 10-K for the year ended December 31, 2018.

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Connect America Fund

As a result of accepting CAF II support payments, we must meet certain specified infrastructure buildout requirements in 13 states over the next several years. In order to meet these specified infrastructure buildout requirements, we anticipate making substantial capital expenditures. See "Capital Expenditures" above.

For additional information on the FCC's CAF order and the USF program, see "Business—Regulation" in Item 1 of Part I of our annual report on Form 10-K for the year ended December 31, 2018 and see "Risk Factors—Risks Affecting our Liquidity and Capital Resources" in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2018. The FCC released a Notice of Proposed Rulemaking on August 1, 2019 to begin the process of developing rules for the Rural Digital Opportunity Fund which is expected to ultimately succeed CAF Phase 2. The content, timing and final implementation rules and the impact on CenturyLink are not known at this time.

Historical Information

The following table summarizes our consolidated cash flow activities:



	Nine Months Ended September 30,					Change
	2019			2018		Change
	(Dollars in millions)
Net cash provided by operating activities	$	2,317		2,652		(335	)
Net cash used in investing activities	(1,209		)	(367	)	842
Net cash used in financing activities	(1,110		)	(2,280	)	(1,170	)

Operating Activities

Net cash provided by operating activities decreased by $335 million for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 primarily due to a decrease in deferred revenue and other long-term liabilities. Cash provided by operating activities is subject to variability period over period as a result of the timing of the collection of receivables and payments related to interest expense, accounts payable and bonuses.

Investing Activities

Net cash used in investing activities increased by $842 million for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 primarily due to an increase in advances to affiliates.

Financing Activities

Net cash used in financing activities decreased by $1.2 billion for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 primarily due to the decrease in payments of debt during the nine months ended September 30, 2019. In the third quarter of 2018, Qwest Corporation redeemed $1.3 billion of notes payable.

See Note 5—Long-Term Debt and Revolving Promissory Note, for additional information on our outstanding debt securities and financing activities.

Other Matters

We are subject to various legal proceedings and other contingent liabilities that individually or in the aggregate could materially affect our financial condition, future results of operations or cash flows. See Note 8—Commitments, Contingencies and Other Items for additional information.

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CenturyLink is involved in several legal proceedings to which we are not a party that, if resolved against it, could have a material adverse effect on its business and financial condition. As a wholly owned subsidiary of 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 these matters.

Market Risk

As of September 30, 2019, we were exposed to market risk from changes in interest rates on our variable rate long-term debt obligations, amended and restated revolving promissory note and fluctuations in certain foreign currencies. We seek to maintain a favorable mix of fixed and variable rate debt in an effort to limit interest costs and cash flow volatility resulting from changes in rates.

Management periodically reviews our exposure to interest rate fluctuations and periodically implements strategies to manage the exposure. From time to time, we have used derivative instruments to (i) lock-in or swap our exposure to changing or variable interest rates for fixed interest rates or (ii) to swap obligations to pay fixed interest rates for variable interest rates. As of September 30, 2019, we had no such instruments outstanding nor held or issued derivative financial instruments for trading or speculative purposes.

We do not believe that there were any material changes to market risks arising from changes in interest rates for the nine months ended September 30, 2019, when compared to the disclosures provided in our annual report on Form 10-K for the year ended December 31, 2018.

Certain shortcomings are inherent in the method of analysis presented in the computation of exposures to market risks. Actual values may differ materially from those disclosed by us from time to time if market conditions vary from the assumptions used in the analyses performed. These analyses only incorporate the risk exposures that existed at September 30, 2019.

Off-Balance Sheet Arrangements

As of September 30, 2019, we had no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support, and we did not engage in leasing, hedging or other similar activities that expose us to any significant liabilities that are not (i) reflected on the face of the consolidated financial statements, (ii) disclosed in Note 15—Commitments, Contingencies and Other Items to our consolidated financial statements in Item 8 of Part II of our annual report on Form 10-K for the year ended December 31, 2018, or in the Future Contractual Obligations table included in Item 7 of Part II of the same report, or (iii) discussed under the heading "Market Risk" above.

Other Information

CenturyLink's and our website is www.centurylink.com. We routinely post important investor information in the "Investor Relations" section of our website at ir.centurylink.com. The information contained on, or that may be accessed through, our website is not part of this quarterly report. You may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports in the "Investor Relations" section of our website (ir.centurylink.com) under the heading "SEC Filings." These reports are available on our website as soon as reasonably practicable after we electronically file them with the SEC.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Omitted pursuant to General Instruction H(2).

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or furnishes under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of our Chief Executive Officer, Jeff K. Storey, and our Executive Vice President and Chief Financial Officer, Indraneel Dev, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2019. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective, as of September 30, 2019, due to the material weakness in internal control over financial reporting that was disclosed in our Annual Report on Form 10-K for the fiscal year ended in December 31, 2018 related to the existence and accuracy of our revenue transactions.

Remediation Plans

As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, we began implementing remediation plans to address the material weakness mentioned above. The material weakness will not be considered remediated until we have designed and implemented sufficient process level controls and the applicable controls operate for a sufficient period of time such that management has concluded, through testing, that these controls are operating effectively. Based on our progress to date, we expect that the remediation of the material weakness will be completed as of December 31, 2019.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the third quarter of 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. We currently expect, however, to implement changes in our internal control over financial reporting during the fourth quarter of 2019 in connection with the remediation efforts discussed above.

Inherent Limitations of Internal Controls

The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events and the inability to eliminate misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will detect all errors or fraud. By their nature, our or any system of disclosure controls and procedures can provide only reasonable assurance regarding management's control objectives.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information contained in Note 8—Commitments, Contingencies and Other Items included in Item 1 of Part I of this report is incorporated herein by reference. The ultimate outcome of the matters described in Note 8 may differ materially from the outcomes anticipated, estimated, projected or implied by us in certain of our statements appearing in such Note, and proceedings currently viewed as immaterial by us may ultimately materially impact us. For more information, see “Risk Factors—Risks Relating to Legal and Regulatory Matters—Our pending legal proceedings could have a material adverse impact on our financial condition and operating results, on the trading price of our securities and on our ability to access the capital markets” in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, 2018.

ITEM 1A. RISK FACTORS

Our operations and financial results are subject to various risks and uncertainties, which could adversely affect our business, financial condition or future results. In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.

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ITEM 6. EXHIBITS

Exhibits identified in parentheses below are on file with the SEC and are incorporated herein by reference. All other exhibits are provided as part of this electronic submission.



Exhibit Number		Description
31.1*		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*		Financial statements from the Quarterly Report on Form 10-Q of Qwest Corporation for the period ended September 30, 2019, formatted in Inline XBRL: (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Stockholder's Equity and (v) the Notes to the Consolidated Financial Statements.
104*		Cover page formatted as Inline XBRL and contained in Exhibit 101.

_______________________________________________________________________________


*	Exhibit filed herewith.

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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 8, 2019.



	QWEST CORPORATION
	By:	/s/ Eric J. Mortensen
	By:	Eric J. Mortensen Senior Vice President - Controller (Principal Accounting Officer)