Leases (Tables)

9 Months Ended

Sep. 30, 2019

Leases [Abstract]

Lease, Cost

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	$	157	492
Finance lease cost:
Amortization of right-of-use assets	11		34
Interest on lease liability	2		9
Total finance lease cost	13		43
Total lease cost	$	170	535

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	$	508
Operating cash flows from finance leases	11
Financing cash flows from finance leases	24

Assets And Liabilities, Lessee

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

		September 30,
Leases (Dollars in millions)	Classification on the Balance Sheet	2019
Assets
Operating lease assets	Operating lease assets	$	1,721
Finance lease assets	Property, plant and equipment, net of accumulated depreciation	253
Total leased assets		$	1,974
Liabilities
Current
Operating	Current operating lease liabilities	$	419
Finance	Current portion of long-term debt	30
Noncurrent
Operating	Noncurrent operating lease liabilities	1,351
Finance	Long-term debt	182
Total lease liabilities		$	1,982
Weighted-average remaining lease term (years)
Operating leases		9.5
Finance leases		11.2
Weighted-average discount rate
Operating leases		6.78		%
Finance leases		5.49		%

Lessee, Operating Lease, Liability, Maturity

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

	Operating Leases			Finance Leases
	(Dollars in millions)
2019 (remaining three months)	$	136		11
2020	453			36
2021	355			25
2022	305			23
2023	262			20
Thereafter	1,004			179
Total lease payments	2,515			294
Less: interest	(745		)	(82	)
Total	$	1,770		212
Less: current portion	(419		)	(30	)
Long-term portion	$	1,351		182

Finance Lease, Liability, Maturity

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

	Operating Leases			Finance Leases
	(Dollars in millions)
2019 (remaining three months)	$	136		11
2020	453			36
2021	355			25
2022	305			23
2023	262			20
Thereafter	1,004			179
Total lease payments	2,515			294
Less: interest	(745		)	(82	)
Total	$	1,770		212
Less: current portion	(419		)	(30	)
Long-term portion	$	1,351		182

Schedule of Future Minimum Lease Payments for Capital Leases

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

	Capital Lease Obligations
	(Dollars in millions)
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

Schedule of Future Minimum Rental Payments for Operating Leases

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.

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	$	157	492
Finance lease cost:
Amortization of right-of-use assets	11		34
Interest on lease liability	2		9
Total finance lease cost	13		43
Total lease cost	$	170	535

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

		September 30,
Leases (Dollars in millions)	Classification on the Balance Sheet	2019
Assets
Operating lease assets	Operating lease assets	$	1,721
Finance lease assets	Property, plant and equipment, net of accumulated depreciation	253
Total leased assets		$	1,974
Liabilities
Current
Operating	Current operating lease liabilities	$	419
Finance	Current portion of long-term debt	30
Noncurrent
Operating	Noncurrent operating lease liabilities	1,351
Finance	Long-term debt	182
Total lease liabilities		$	1,982
Weighted-average remaining lease term (years)
Operating leases		9.5
Finance leases		11.2
Weighted-average discount rate
Operating leases		6.78		%
Finance leases		5.49		%

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	$	508
Operating cash flows from finance leases	11
Financing cash flows from finance leases	24

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

	Operating Leases			Finance Leases
	(Dollars in millions)
2019 (remaining three months)	$	136		11
2020	453			36
2021	355			25
2022	305			23
2023	262			20
Thereafter	1,004			179
Total lease payments	2,515			294
Less: interest	(745		)	(82	)
Total	$	1,770		212
Less: current portion	(419		)	(30	)
Long-term portion	$	1,351		182

As of September 30, 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 are 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 $202 million and $606 million, respectively, which represents 4% and 4%, respectively, of our operating revenue for the three and nine months ended September 30, 2019. For the three and nine months ended September 30, 2018, our gross rental income was $221 million and $693 million, respectively, which represents 4% and 4%, respectively, of our operating revenue for the three and nine months ended September 30, 2018.

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	$	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 operating leases were as follows:

	Operating Leases
	(Dollars in millions)
2019	$	675
2020	443
2021	355
2022	279
2023	241
2024 and thereafter	969
Total future minimum payments (1)	$	2,962

_______________________________________________________________________________

(1)

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