Leases

12 Months Ended

Dec. 31, 2021

We primarily lease to or from third parties various office facilities, colocation facilities and equipment. 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. Operating lease assets are included in Other, net under goodwill and other assets on our consolidated balance sheets. Current operating lease liabilities are included in Other under accrued expenses and other liabilities on our consolidated balance sheets. Noncurrent operating lease liabilities are included in Other under deferred credits and other liabilities on our consolidated balance sheets.

Some of our lease arrangements contain lease components, non-lease components (including common-area maintenance costs) and executory costs (including real estate taxes and insurance 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:


	Years Ended December 31,
	2021		2020
	(Dollars in millions)
Operating and short-term lease cost	$	26	67
Finance lease cost:
Amortization of right-of-use assets	1		5
Interest on lease liability	—		—
Total finance lease cost	1		5
Total lease cost	$	27	72

We lease various equipment, office facilities, retail outlets, and other network sites. These leases, with few exceptions, provide for renewal options and escalations that are either fixed or based on the consumer price index. Any rent abatements, along with rent escalations, are included in the computation of rent expense calculated on a straight-line basis over the lease term. The lease term for most leases includes the initial non-cancelable term plus any term under renewal options that are reasonably assured. For the years ended December 31, 2021, 2020 and 2019, our gross rental expense was $27 million, $72 million and $53 million, respectively. We also received sublease rental income for the years ended December 31, 2021, 2020 and 2019 of $10 million, $12 million and $10 million, respectively.

Supplemental consolidated balance sheet information and other information related to leases is included below:


		As of December 31,
Leases (Dollars in millions)	Classification on the Balance Sheet	2021			2020
Assets
Operating lease assets	Other, net	$	69		67
Finance lease assets	Property, plant and equipment, net of accumulated depreciation	5			8
Total leased assets		$	74		75

Liabilities
Current
Operating	Other	$	33		28
Finance	Current maturities of long-term debt	1			1
Noncurrent
Operating	Other	63			76
Finance	Long-term debt	1			4
Total lease liabilities		$	98		109

Weighted-average remaining lease term (years)
Operating leases		4.2			4.4
Finance leases		6.3			6.3
Weighted-average discount rate
Operating leases		3.97		%	4.71	%
Finance leases		6.21		%	6.62	%

Supplemental consolidated cash flow statement information related to leases is included below:


	Years Ended December 31,
	2021		2020
	(Dollars in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	36	32
Operating cash flows for financing leases	—		5
Financing cash flows for finance leases	1		—
Supplemental lease cash flow disclosures
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities	$	18	19

As of December 31, 2021, maturities of lease liabilities were as follows:


	Operating Leases		Finance Leases
	(Dollars in millions)
2022	$	36	1
2023	23		—
2024	18		—
2025	12		—
2026	6		—
Thereafter	9		1
Total lease payments	104		2
Less: interest	(8)		—
Total	96		2
Less: current portion	(33)		(1)
Long-term portion	$	63	1

As of December 31, 2021, we had less than $1 million of operating or finance leases that had not yet commenced.

Operating Lease Income

We lease various data transmission capacity, 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 years ended December 31, 2021, 2020 and 2019, our gross rental income was $324 million, $312 million and $320 million, respectively which represents 5%, 4% and 4%, respectively, of our operating revenue for the years ended December 31, 2021, 2020 and 2019.

Leases