QWEST CORP filed on Mon, May 13 10-Q

QWEST CORP filed 10-Q with SEC. Read ‘s full filing at 000006862219000007.

As of March 31, 2019, our estimated revenue expected to be recognized in the future related to performance obligations associated with customer contracts that are unsatisfied (or partially satisfied) is approximately $166 million. We expect to recognize approximately 100% of this revenue through 2021, with the balance recognized thereafter.

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 March 31, 2019, the amended and restated revolving promissory note had an outstanding balance of $1.038 billion and bore interest at a weighted-average interest rate of 5.945%. As of March 31, 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 March 31, 2019, $73 million of such interest has been capitalized. As of March 31, 2019, $15 million of accrued interest is reflected in other current liabilities on our consolidated balance sheet.

As of March 31, 2019, approximately 44% of our employees were members of various bargaining units represented by the Communication Workers of America and the International Brotherhood of Electrical Workers. We believe that relations with our employees continue to be generally good.

Total operating revenue decreased by $75 million, or 4%, for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The change in operating revenue was primarily due to declines in voice and collaboration and transport and infrastructure offset by an increase in affiliate services driven by new circuits which were partially offset by a decrease in allocated affiliate revenue. 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) and broadband.

Cost of services and products (exclusive of depreciation and amortization) decreased $100 million, or 14%, for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The decrease in our cost of services and products (exclusive of depreciation and amortization) was primarily due to lower salaries and wages and employee related expenses from lower headcount, reduced customer premises equipment costs and lower network expense and USF rates, which were slightly offset by higher right of way and dark fiber expenses.

Selling, general and administrative expenses decreased by $58 million, or 27%, for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The decrease in our selling, general and administrative expenses was primarily due to lower salaries and wages and employee related expenses from lower headcount, a decline in contract labor costs and internal commissions, lower professional fees, hardware and software expenses, a decline in bad debt expense and a reduction in marketing and advertising expenses.

Operating expenses – affiliates decreased by $21 million, or 10%, for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The decrease in operating expenses – affiliates was primarily due to the decline in the level of services provided to us by our affiliates.

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 $12 million, or 6%, for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The decline in depreciation expense is primarily due to the impact of annual rate depreciable life changes partially offset by a net increase in depreciable assets.

Amortization expense decreased by $12 million, or 8%, for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The decrease in amortization expense was primarily due to the use of accelerated amortization methods for a portion of our customer relationship assets, decreases associated with software amortization and partially offset by net growth in amortizable assets. The effect of using an accelerated amortization method results in an incremental decline in expense each period as the intangible assets amortize.

Interest expense decreased by $23 million, or 19%, for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018 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.

Affiliate interest expense increased by $3 million, or 23%, for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The increase in affiliate interest expense was primarily due to an increase in the weighted average interest rate from 5.466% in the first quarter of 2018 to 5.945% in the first quarter of 2019.

Income tax expense for the three months ended March 31, 2019 was $171 million, or an effective tax rate of 26.0%, compared to $130 million, or an effective tax rate of 25.5%, for the three months ended March 31, 2018.

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 March 31, 2019 and December 31, 2018, the outstanding principal balance on this term loan was $100 million.

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 March 31, 2019, the weighted average interest rate was 5.945%. As of March 31, 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 March 31, 2019, $15 million of accrued interest is reflected in other current liabilities on our consolidated balance sheets.

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.

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