Leases

3 Months Ended

Mar. 31, 2019

Effective January 1, 2019, we adopted ASC 842 using the non-comparative transition option of applying the new standard at the adoption date. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard. This allowed us to carry forward the historical lease classification. Adoption of the new standard resulted in the recording of additional operating lease right of use assets and operating lease liabilities of approximately $2.1 billion and $2.2 billion, respectively, as of January 1, 2019. The difference is driven principally by the netting of our existing real estate restructure reserve against the corresponding operating lease right of use asset. In addition, we recorded a $115 million cumulative adjustment, net of deferred taxes, to accumulated deficit as of January 1, 2019, for the impact of the new accounting standard. The adjustment to accumulated deficit was driven by the derecognition of our prior failed sales leaseback transaction discussed in our prior periodic reports. The standard did not materially impact our consolidated net earnings or our cash flows in the first quarter of 2019. Financial position for reporting periods beginning on or after January 1, 2019 are presented under the new guidance, while prior periods amounts are not adjusted and continue to be reported in accordance with previous guidance.

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. 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 including 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 Month Ended March 31, 2019
	(Dollars in millions)
Operating and short-term lease cost	$	169
Finance lease cost:
Amortization of right-of-use assets	12
Interest on lease liability	4
Total finance lease cost	16
Total lease cost	$	185

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



		March 31,
Leases (millions)	Classification on the Balance Sheet	2019
Assets
Operating lease assets	Operating lease assets	$	1,952
Finance lease assets	Property, plant and equipment, net of accumulated depreciation	$	271
Total leased assets		$	2,223

Liabilities
Current
Operating	Other current liabilities	$	561
Finance	Current portion of long-term debt	$	36
Noncurrent
Operating	Noncurrent operating lease liabilities	$	1,501
Finance	Long-term debt	$	190
Total lease liabilities		$	2,288

Weighted-average remaining lease term (years)
Operating leases		8.1
Finance leases		11.1
Weighted-average discount rate
Operating leases		6.73		%
Finance leases		5.45		%

Supplemental unaudited consolidated cash flow statement information related to leases:



	Three Month Ended March 31, 2019
	(Dollars in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	182
Operating cash flows from finance leases	3
Finance cash flows from finance leases	8

As of March 31, 2019, maturities of lease liabilities were as follows:



	Operating Leases			Finance Leases
	(Dollars in millions)
2019 (remaining nine months)	$	463		38
2020	462			35
2021	381			22
2022	301			20
2023	260			19
Thereafter	878			179
Total lease payments	2,745			313
Less: interest	(683		)	(87	)
Total	$	2,062		226
Less: current portion	(561		)	(36	)
Long-term portion	$	1,501		190

As of March 31, 2019, we had no material operating or finance leases that had not yet commenced.

Operating Lease Income

CenturyLink leases various IRUs, 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 months ended March 31, 2019 and 2018, our gross rental income was $199 million and $219 million, respectively.

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:



	(Dollars in millions)
Capital lease obligations:
2019	$	51
2020	36
2021	23
2022	21
2023	20
2024 and thereafter	183
Total minimum payments	334
Less: amount representing interest and executory costs	(100		)
Present value of minimum payments	234
Less: current portion	(38		)
Long-term portion	$	196

At December 31, 2018, our future rental commitments for Right-of-Way agreements and operating leases were as follows:



	Right-of-Way Agreements		Operating Leases	Total
	(Dollars in millions)
2019	$	157	675	832
2020	134		443	577
2021	112		355	467
2022	120		279	399
2023	115		241	356
2024 and thereafter	755		969	1,724
Total future minimum payments ⁽¹⁾	$	1,393	2,962	4,355

_______________________________________________________________________________


(1)	Minimum payments have not been reduced by minimum sublease rentals of $101 million due in the future under non-cancelable subleases.

Leases