0000794323-18-000016.txt : 20181109 0000794323-18-000016.hdr.sgml : 20181109 20181109165720 ACCESSION NUMBER: 0000794323-18-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 74 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181109 DATE AS OF CHANGE: 20181109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Level 3 Parent, LLC CENTRAL INDEX KEY: 0000794323 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 470210602 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-35134 FILM NUMBER: 181173801 BUSINESS ADDRESS: STREET 1: 1025 ELDORADO BOULEVARD STREET 2: BLDG 2000 CITY: BROOMFIELD STATE: CO ZIP: 80021 BUSINESS PHONE: 7208881000 MAIL ADDRESS: STREET 1: 1025 ELDORADO BOULEVARD STREET 2: BLDG 2000 CITY: BROOMFIELD STATE: CO ZIP: 80021 FORMER COMPANY: FORMER CONFORMED NAME: LEVEL 3 COMMUNICATIONS INC DATE OF NAME CHANGE: 19980331 FORMER COMPANY: FORMER CONFORMED NAME: KIEWIT PETER SONS INC DATE OF NAME CHANGE: 19920703 10-Q 1 lvlt-093018_10q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2018
or
o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-35134
 

LEVEL 3 PARENT, LLC
(Exact name of registrant as specified in its charter)
 
Delaware
 
47-0210602
(State of Incorporation)
 
(I.R.S. Employer
 
 
Identification No.)
 
 
 
1025 Eldorado Blvd., Broomfield, CO
 
80021-8869
(Address of principal executive offices)
 
(Zip Code)
(720) 888-1000
(Registrant’s telephone number,
including area code)
 

THE REGISTRANT, A WHOLLY OWNED 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 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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
 
 
Emerging growth company o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o
No x

All of the limited liability company interest in the registrant is held by an affiliate of the registrant. None of the interest is publicly traded.

 



TABLE OF CONTENTS

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



2


Special Note Regarding Forward-Looking Statements

All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q are “forward-looking” statements, as defined by (and subject to the “safe harbor” protections under) the federal securities laws. When used herein, the words “anticipates,” “expects,” “believes,” “seeks,” “hopes,” “intends,” “plans,” “projects,” “will” and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements are based on a number of judgments and assumptions as of the date such statements are made about future events, many of which are beyond our control. These forward-looking statements, and the assumptions on which they are based, (i) are not guarantees of future events, (ii) are inherently speculative and (iii) are subject to significant 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 certain important 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 cause our results to differ materially from the expectations expressed in such forward-looking statements include but are not limited to the following:
the effects of competition from a wide variety of competitive providers, including decreased demand for our traditional wireline 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;
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, universal service, broadband deployment, data protection and net neutrality;
the ability of our parent company, CenturyLink, Inc. ("CenturyLink") to timely realize the anticipated benefits of its recently-completed combination with us, including its ability to attain anticipated cost savings, to use our net operating loss carryforwards in the amounts projected, to retain key personnel and to avoid unanticipated integration disruptions;
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;
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 broadband service;
our ability to successfully maintain the quality and profitability of our existing product and service offerings, to provision them successfully to our customers 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, dividends and other benefits payments;
changes in our operating plans, corporate strategies, dividend payment plans or other capital allocation 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;
increases in the costs of CenturyLink's health or other benefits, including those caused by changes in markets, interest rates, mortality rates, demographics or regulations, which may in turn impact our business and liquidity;

3


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 and financial institutions;
our ability to effectively manage our network buildout project and our other expansion opportunities;
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 or practices, 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, or in general market, labor, economic or geo-political conditions; and
other risks identified in our "Risk Factors" disclosures included in our annual report on Form 10-K for the year ended December 31, 2017.
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.

PART I-FINANCIAL INFORMATION

Effective November 1, 2017, Level 3 Communications, Inc. became a wholly owned subsidiary of CenturyLink, Inc. Upon completion of the acquisition, Level 3 Communications, Inc.’s name changed to Level 3 Parent, LLC. Unless the context requires otherwise, references in this report to “Level 3 Communications, Inc.,” "Level 3," “we,” “us,” "its," the “Company” and “our” refer to Level 3 Parent, LLC and its consolidated subsidiaries. The Level 3 logo and Level 3 are registered service marks of our wholly owned subsidiary, Level 3 Communications, LLC, in the United States and other countries. All rights are reserved. This Form 10-Q refers to trade names and trademarks of other companies. The mention of these trade names and trademarks in this Form 10-Q is made with due recognition of the rights of these companies and without any intent to misappropriate those names or marks. All other trade names and trademarks appearing in this Form 10-Q are the property of their respective owners.



4


ITEM 1. FINANCIAL STATEMENTS

LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

 
Successor
 
 
Predecessor
 
Three Months Ended
 
Nine Months Ended
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2018
 
September 30, 2018
 
 
September 30, 2017
 
September 30, 2017
 
(Dollars in millions)
OPERATING REVENUES
 
 
 
 
 
 
 
 
Operating revenues
$
1,984

 
6,071

 
 
2,059

 
6,169

Operating revenues - affiliates
26

 
78

 
 

 

Total operating revenues
2,010

 
6,149

 
 
2,059

 
6,169

OPERATING EXPENSES
 
 
 
 
 
 
 
 
Cost of services and products (exclusive of depreciation and amortization)
976

 
2,954

 
 
1,046

 
3,132

Selling, general and administrative
311

 
1,043

 
 
354

 
1,085

Operating expenses - affiliates
65

 
173

 
 

 

Depreciation and amortization
431

 
1,295

 
 
310

 
913

Total operating expenses
1,783


5,465

 
 
1,710

 
5,130

OPERATING INCOME
227

 
684

 
 
349

 
1,039

OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
 
Interest income
(1
)
 

 
 
6

 
11

Interest income - affiliate
18

 
50

 
 

 

Interest expense
(137
)
 
(381
)
 
 
(134
)
 
(399
)
Loss on modification and extinguishment of debt

 

 
 

 
(44
)
Other income, net
19

 
21

 
 
12

 
14

Total other expense, net
(101
)
 
(310
)
 
 
(116
)
 
(418
)
INCOME BEFORE INCOME TAX EXPENSE
126

 
374

 
 
233

 
621

   Income tax expense
(38
)
 
(184
)
 
 
(76
)
 
(215
)
NET INCOME
$
88

 
190

 
 
157

 
406


See accompanying notes to consolidated financial statements.



5



LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

 
Successor
 
 
Predecessor
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
 
(Dollars in millions)
NET INCOME
$
88

 
190

 
 
157

 
406

OTHER COMPREHENSIVE (LOSS) INCOME
 
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of ($1), $29, ($18) and ($55) tax
(1
)
 
(164
)
 
 
44

 
106

Other comprehensive (loss) income, net of tax
(1
)
 
(164
)
 
 
44

 
106

COMPREHENSIVE INCOME
$
87

 
26

 
 
201

 
512


See accompanying notes to consolidated financial statements.


6


                                               
LEVEL 3 PARENT, LLC
CONSOLIDATED BALANCE SHEETS

 
Successor
 
Successor
 
September 30,
2018
 
December 31,
2017
 
(Unaudited)
 
 
 
(Dollars in millions)
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
188

 
297

Restricted cash and securities
3

 
5

Assets held for sale
15

 
140

Accounts receivable, less allowance of $10 and $3
715

 
748

Accounts receivable - affiliate

 
13

Note receivable - affiliate
1,825

 
1,825

Other
290

 
117

Total current assets
3,036

 
3,145

Property, plant and equipment, net of accumulated depreciation of $798 and $143
9,274

 
9,412

Restricted cash and securities
25

 
29

GOODWILL AND OTHER ASSETS
 
 
 
Goodwill
11,132

 
10,837

Customer relationships, net
7,801

 
8,845

Other intangibles, net
401

 
378

Deferred tax assets
463

 
426

Other, net
132

 
63

Total goodwill and other assets
19,929

 
20,549

TOTAL ASSETS
$
32,264

 
33,135

LIABILITIES AND MEMBER'S EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Current maturities of long-term debt
$
6

 
8

Accounts payable
619

 
695

Accounts payable - affiliate
88

 
41

Accrued expenses and other liabilities
 
 
 
Income and other taxes
114

 
100

Salaries and benefits
233

 
136

Interest
96

 
109

Current portion of deferred revenue
288

 
260

Other
72

 
57

Total current liabilities
1,516

 
1,406

LONG-TERM DEBT
10,848

 
10,882

DEFERRED REVENUE AND OTHER LIABILITIES
 
 
 
Deferred revenue
1,181

 
1,099

Deferred income taxes
189

 
212

Other
358

 
264

Total deferred revenue and other liabilities
1,728

 
1,575

COMMITMENTS AND CONTINGENCIES (Note 9)


 


MEMBER'S EQUITY
 
 
 
Member's equity
18,312

 
19,254

Accumulated other comprehensive (loss) income
(140
)
 
18

Total member's equity
18,172

 
19,272

TOTAL LIABILITIES AND MEMBER'S EQUITY
$
32,264

 
33,135


See accompanying notes to consolidated financial statements.


7


LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Successor
 
 
Predecessor
 
Nine Months Ended 
 September 30, 2018
 
 
Nine Months Ended 
 September 30, 2017
 
(Dollars in millions)
OPERATING ACTIVITIES
 
 
 
 
Net income
$
190

 
 
406

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
1,295

 
 
913

Deferred income taxes
175

 
 
189

Share-based compensation
82

 
 
120

Loss on modification and extinguishment of debt

 
 
44

Net long-term debt issuance costs and premium amortization
(23
)
 
 
13

Accrued interest on long-term debt, net
(13
)
 
 
(34
)
Loss on sale of property, plant and equipment and other assets
1

 
 
6

Other, net
(41
)
 
 
75

Changes in current assets and liabilities:
 
 
 
 
Accounts receivable
51

 
 
(34
)
Accounts payable
(64
)
 
 
(10
)
Deferred revenue
37

 
 
134

Other assets and liabilities, net
(118
)
 
 
(31
)
Other assets and liabilities, affiliate
55

 
 

Net cash provided by operating activities
1,627

 
 
1,791

INVESTING ACTIVITIES
 
 
 
 
Capital expenditures
(726
)
 
 
(1,018
)
Proceeds from sale of property, plant and equipment and other assets
119

 
 
1

Purchase of marketable securities

 
 
(1,127
)
Maturity of marketable securities

 
 
1,127

Net cash used in investing activities
(607
)
 
 
(1,017
)
FINANCING ACTIVITIES
 
 
 
 
Net proceeds from issuance of long-term debt

 
 
4,569

Payments of long-term debt
(5
)
 
 
(4,917
)
Distributions
(1,130
)
 
 

Net cash used in financing activities
(1,135
)
 
 
(348
)
Effect of exchange rates on cash, cash equivalents and restricted cash and securities

 
 
3

Net (decrease) increase in cash, cash equivalents and restricted cash and securities
(115
)
 
 
429

Cash, cash equivalents and restricted cash and securities at beginning of period
331

 
 
1,857

Cash, cash equivalents and restricted cash and securities at end of period
$
216

 
 
2,286

Supplemental cash flow information
 
 
 
 
Interest paid
$
404

 
 
412

Income taxes paid, net
$
24

 
 
47

See accompanying notes to consolidated financial statements.

8


LEVEL 3 PARENT, LLC
CONSOLIDATED STATEMENTS OF MEMBER'S/STOCKHOLDERS' EQUITY
(UNAUDITED)
 
Successor
 
 
Predecessor
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
 
(Dollars in millions)
MEMBER'S EQUITY
 
 
 
 
 
 
 
 
Balance at beginning of period
$
18,749

 
19,254

 
 

 

Net income
88

 
190

 
 

 

Cumulative net effect of adoption of ASU 2014-09, Revenue from Contracts with Customers, net of $-, $3, $-, $- tax

 
9

 
 

 

Cumulative effect of adoption of ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

 
(6
)
 
 

 

Purchase price accounting adjustments

 
(5
)
 
 

 

Distributions to CenturyLink
(525
)
 
(1,130
)
 
 

 

Balance at end of period
18,312

 
18,312

 
 

 

COMMON STOCK
 
 
 
 
 
 
 
 
Balance at beginning of period

 

 
 
4

 
4

Balance at end of period

 

 
 
4

 
4

ADDITIONAL PAID-IN CAPITAL
 
 
 
 
 
 
 
 
Balance at beginning of period

 

 
 
19,887

 
19,800

Common stock issued under employee stock benefit plans and other

 

 
 
8

 
27

Share-based compensation

 

 
 
26

 
94

Balance at end of period

 

 
 
19,921

 
19,921

ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
 
 
 
 
 
 
 
 
Balance at beginning of period
(139
)
 
18

 
 
(325
)
 
(387
)
Other comprehensive (loss) income
(1
)
 
(164
)
 
 
44

 
106

Cumulative effect of adoption of ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

 
6

 
 

 

Balance at end of period
(140
)
 
(140
)
 
 
(281
)
 
(281
)
ACCUMULATED DEFICIT
 
 
 
 
 
 
 
 
Balance at beginning of period

 

 
 
(8,251
)
 
(8,500
)
Net income

 

 
 
157

 
406

Balance at end of period

 

 
 
(8,094
)
 
(8,094
)
TOTAL MEMBER'S/STOCKHOLDERS' EQUITY
$
18,172

 
18,172

 
 
11,550

 
11,550


See accompanying notes to consolidated financial statements.


9


LEVEL 3 PARENT, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Background

General

We are an international facilities-based communications company engaged in providing a broad array of integrated communication services to our business customers. We created our communications network by constructing our own assets and through a combination of purchasing other companies and purchasing or leasing facilities from others. We designed our network to provide communications services that employ and take advantage of rapidly improving underlying optical, Internet Protocol, computing and storage technologies.

On October 31, 2016, we entered into an agreement and plan of merger (the "Merger Agreement") with CenturyLink, Inc., a Louisiana corporation ("CenturyLink"), Wildcat Merger Sub 1 LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of CenturyLink ("Merger Sub 1"), and WWG Merger Sub LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of CenturyLink ("Merger Sub 2"), pursuant to which, effective November 1, 2017, we were acquired by CenturyLink in a cash and stock transaction, including the assumption of our debt (the "CenturyLink Merger"). See Note 2 - CenturyLink Merger.

Basis of Presentation

Our consolidated balance sheet as of December 31, 2017, 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, 2017.

On November 1, 2017, we became a wholly owned subsidiary of CenturyLink. On the date of the acquisition, our assets and liabilities were recognized at CenturyLink's preliminary estimates of fair value. This revaluation has been reflected in our financial statements and, therefore, has resulted in a new basis of accounting for the successor period beginning on November 1, 2017. This new basis of accounting means that our financial statements for the successor periods are not comparable to our previously reported financial statements, including the predecessor period financial statements in this report.

The consolidated financial statements include our accounts and the accounts of our subsidiaries in which we have a controlling interest. All significant intercompany accounts and transactions have been eliminated. Transactions with our non-consolidated affiliates (CenturyLink and its other subsidiaries, referred to herein as affiliates) have not been eliminated. As part of our consolidation policy, we consider our controlled subsidiaries, investments in businesses in which we are not the primary beneficiary or do not have effective control but have the ability to significantly influence operating and financial policies, and variable interests resulting from economic arrangements that give us rights to economic risks or rewards of a legal entity. We do not have variable interests in a variable interest entity where we are required to consolidate the entity as the primary beneficiary. Due to exchange restrictions and other conditions, effective at the end of the third quarter of 2015, we deconsolidated our Venezuelan subsidiary. The factors that led to our conclusions at the end of the third quarter of 2015 continued to exist through the third quarter of 2018.


10


In conjunction with our acquisition on November 1, 2017, we changed the definitions we use to classify expenses as cost of services and products and selling, general and administrative, and as a result, we reclassified previously reported amounts to conform to the current period presentation. We revised our definitions so that our expense classifications are more consistent with the expense classifications used by our new ultimate parent company, CenturyLink. These revisions resulted in the reclassification of $70 million from depreciation and amortization to cost of services and products for the predecessor nine months ended September 30, 2017. Although we continued as a surviving corporation and legal entity after the acquisition, the accompanying consolidated statements of operations, comprehensive income, member's/stockholders' equity and cash flows are presented for two periods: predecessor and successor, which relates to the period preceding the acquisition and the period succeeding the acquisition. Our current definitions are as follows:
Cost of services and products (exclusive of depreciation and amortization) are expenses incurred in providing products and services to our customers. These expenses include: employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages, benefits and professional fees); facilities expenses (which are third-party telecommunications expenses we incur for using other carriers' networks to provide services to our customers); rents and utilities expenses; costs for universal service funds ("USF") (which are federal and state funds that are established to promote the availability of telecommunications services to all consumers at reasonable and affordable rates, among other things, and to which we are often required to contribute); taxes (such as property and other taxes); and other expenses directly related to our network.
Selling, general and administrative expenses are expenses incurred in selling products and services to our customers, corporate overhead and other operating expenses. These expenses include: employee-related expenses (such as salaries, wages, internal commissions, benefits and professional fees) directly attributable to selling products or services and employee-related expenses for administrative functions; marketing and advertising; taxes (such as state and local franchise taxes and sales and use taxes) and fees; external commissions; bad debt expense; and other selling, general and administrative expenses.
Segments

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

Income Taxes

As of September 30, 2018, we had not completed our accounting for the tax effects of the Tax Cuts and Jobs Act (the "Act"), which was signed into law in late December 2017. In order to complete our accounting for the impact of the Act, we continue to obtain, analyze and interpret additional guidance as such guidance becomes available from the U.S. Treasury Department, the Internal Revenue Service (“IRS”), state taxing jurisdictions, the Financial Accounting Standards Board ("FASB"), and other standard-setting and regulatory bodies. Guidance issued by these bodies to date does not allow us to definitively calculate the tax effects of the Act. New guidance or interpretations may materially impact our provision for income taxes in future periods.

Additional information that is needed to complete the analysis but is currently unavailable includes, but is not limited to, the amount of earnings of foreign subsidiaries, the final determination of certain net deferred tax assets subject to remeasurement due to purchase accounting adjustments and other matters and the tax treatment of such provisions of the Act by various state tax authorities. We have provisionally recognized the tax impacts related to the remeasurement of deferred tax assets and liabilities. The ultimate impact may differ from our current provisional estimate due to additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Act. The change from our current provisional estimates will be reflected in our fourth quarter 2018 statement of operations and could be material. We expect to complete the accounting in the fourth quarter of 2018.

11


The Act reduced the U.S. corporate income tax rate from a maximum of 35% to 21% for all C corporations, effective January 1, 2018, introduced further limitations on the deductibility of interest expense, made certain changes to capital expenditures and various other items, and imposed a one-time repatriation tax on certain earnings of certain foreign subsidiaries. In addition, the Tax Act introduces additional base-broadening measures, including Global Intangible Low-Taxed Income and the Base-Erosion Anti-Abuse Tax. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21%, we provisionally re-measured our net deferred tax assets at December 31, 2017 and recognized a tax expense of $195 million in our consolidated statement of operations for the year ended December 31, 2017. During the first nine months of 2018, we increased the tax expense from tax reform by $83 million due to changes in certain purchase accounting adjustments related to CenturyLink’s acquisition of us.

During the third quarter of 2018, we continued to evaluate and analyze the tax impacts of the Act. While we have not finalized our analysis, we do not expect the provisions of the Act, exclusive of the rate reduction, to materially impact us in 2018. However, we cannot provide any assurance that, upon completion of our analysis, the impact will not be material or that there will not be material tax impacts in future years. Accordingly, we have not made any additional adjustments related to the Act in our financial statements.

Based on current circumstances, we do not expect to experience a material near term reduction in the amount of cash income taxes paid by us from the Act due to utilization of net operating loss carryforwards. However, we anticipate that the provisions of the Act may reduce our cash income taxes in future years.

Recently Adopted Accounting Pronouncements

In the first quarter of 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”, ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory” and ASU 2018-02, “Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”.

Each of these is described further below.

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09 which replaces virtually all existing generally accepted accounting principles on revenue recognition and replaces them with a principles-based approach for determining revenue recognition using a new five step model. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes new accounting principles related to the deferral and amortization of contract acquisition and fulfillment costs.

We adopted the new revenue recognition standard under the modified retrospective transition method. On January 1, 2018, we recorded a cumulative catch-up adjustment that increased our retained earnings by $9 million, net of $3 million of income taxes.

Under ASU 2014-09, we are now deferring (i.e. capitalizing) incremental contract acquisition and fulfillment costs and are recognizing (or amortizing) such costs over either the initial contract (plus and anticipated renewal contracts to which the costs relate) or the average customer life. Our deferred contract costs for our customers have average amortization periods of approximately 30 months. These deferred costs are monitored every period to reflect any significant change in assumptions.

See Note 4 - Revenue Recognition for additional information.


12


Comprehensive Income

ASU 2018-02 provides an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Act (or portion thereof) is recorded. If an entity elects to reclassify the income tax effects of the Act, the amount of that reclassification shall include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of enactment of the Act related to items remaining in accumulated other comprehensive income. The effect of the change in the U.S. federal corporate income tax rate on gross valuation allowances that were originally charged to income from continuing operations shall not be included. ASU 2018-02 is effective January 1, 2019, but early adoption is permitted and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized. We early adopted ASU 2018-02 in the first quarter of 2018 and applied it in the period of adoption. The adoption of ASU 2018-02 resulted in a $6 million decrease to member's equity and increase to accumulated other comprehensive income. See Note 11 - Accumulated Other Comprehensive Loss for additional information.

Income Taxes

On October 24, 2016, FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory” ("ASU 2016-16"). ASU 2016-16 eliminates the current prohibition on the recognition of the income tax effects on the transfer of assets among our subsidiaries. After adoption of ASU 2016-16, the income tax effects associated with these asset transfers, except for the transfer of inventory, will be recognized in the period the asset is transferred versus the current deferral and recognition upon either the sale of the asset to a third party or over the remaining useful life of the asset. We adopted ASU 2016-16 on January 1, 2018. The adoption of ASU 2016-16 did not have a material impact to our consolidated financial statements.

Recently Issued Accounting Pronouncements

Goodwill Impairment

On January 26, 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the impairment testing for goodwill by changing the measurement for goodwill impairment. Under current rules, we are required to compute the implied fair value of goodwill to measure the impairment amount if the carrying value of a reporting unit exceeds its fair value. Under ASU 2017-04, the goodwill impairment charge will equal the excess of the reporting unit carrying value above its fair value, limited to the amount of goodwill assigned to the reporting unit.

We are required to adopt the provisions of ASU 2017-04 for any goodwill impairment tests, including our required annual test, occurring after January 1, 2020, but have the option to early adopt for any impairment test that we are required to perform. We have not determined if we will elect to early adopt the provisions of ASU 2017-04. The provisions of ASU 2017-04 would not have affected our last goodwill impairment assessment, but no assurance can be provided that the simplified testing methodology will not affect our goodwill impairment assessment in the future.

Financial Instruments

On June 16, 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). 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 currently reviewing the requirements of the standard and evaluating the impact on our consolidated financial statements.


13


We are required to adopt the provisions of ASU 2016-13 effective January 1, 2020 but could elect to early adopt the provisions as of January 1, 2019. We expect to recognize the impacts of adopting ASU 2016-13 through a cumulative adjustment to retained earnings as of the date of adoption. As of the date of this report, we have not yet determined the date we will adopt ASU 2016-13.

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). The core principle of ASU 2016-02 will require lessees to present right-of-use assets and lease liabilities on their balance sheets for operating leases, which are currently not reflected on their balance sheets.

ASU 2016-02 is effective for annual and interim periods beginning January 1, 2019. Upon adoption of ASU 2016-02, we are required to recognize and measure leases at the beginning of the earliest period presented in our consolidated financial statements using a modified retrospective approach. The modified retrospective transition approach includes a number of optional practical expedients that we may elect to apply.

In January 2018, the FASB issued ASU 2018-01, “Leases: Land Easement Practical Expedient for Transition to ASU 2016-02". ASU 2018-01 permits the election of an optional transition practical expedient to not evaluate land easements that exist or expired before the entity’s adoption of ASC 2016-02 and that were not previously accounted for as leases. We plan to adopt ASU 2018-01 at the same time we adopt ASU 2016-02.

In July 2018, the FASB issued ASU 2018-11, "Leases: Targeted Improvements" ("ASU 2018-11"). ASU 2018-11 provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We have not yet determined whether we will use ASU 2018-11's newly permitted adoption method.

We are in the process of implementing a new lease administration and accounting system. We plan to adopt ASU 2016-02 and ASU 2018-01 effective January 1, 2019. The adoption of ASU 2016-02 and ASU 2018-01 will result in our recognition of right of use assets and lease liabilities that we have not previously recorded. Although we believe it is premature as of the date of this report to provide any estimate of the impact of adopting ASU 2016-02 and ASU 2018-01, we do expect that it will have a material impact on our consolidated financial statements.
 
(2) CenturyLink Merger

On November 1, 2017, CenturyLink acquired us through successive merger transactions, including a merger of Level 3 with and into a merger subsidiary, which survived such merger as CenturyLink's indirect wholly-owned subsidiary under the name of Level 3 Parent, LLC. Our results of operations have been included in the consolidated results of operations of CenturyLink since November 1, 2017.

As of September 30, 2018, the preliminary estimated amount of aggregate consideration was $19.6 billion.

The U.S. Department of Justice approved the acquisition subject to conditions of a consent decree on October 2, 2017, which required the combined company to divest (i) certain Level 3 metro network assets in the markets located in Albuquerque, New Mexico; Boise, Idaho; and Tucson, Arizona and (ii) 24 strands of dark fiber connecting 30 specified city-pairs across the United States in the form of an indefeasible right of use agreement.


14


During the second quarter of 2018, we sold network assets in Boise, Idaho and Albuquerque, New Mexico that we were required to divest as a condition of the merger. The proceeds from these sales were included in the proceeds from sale of property, plant and equipment in our consolidated statements of cash flows. No gain or loss was recognized with these transactions. All of the metro network assets were classified as assets held for sale on our consolidated balance sheet as of December 31, 2017. The Tucson, Arizona assets continued to be classified as assets held for sale on our consolidated balance sheet as of September 30, 2018. In October 2018, we sold the Tucson, Arizona assets for its net book value.

CenturyLink recognized our assets and liabilities based on CenturyLink’s preliminary estimates of the fair value of the acquired tangible and intangible assets and assumed liabilities of us as of November 1, 2017, the consummation date of the acquisition, with the excess aggregate consideration recorded as goodwill. The final determination of the allocation of the aggregate consideration paid by CenturyLink in the combination is based on the fair value of such assets and liabilities as of the acquisition date with any excess aggregate consideration to be recorded as goodwill. The estimation of such fair values and the estimation of lives of depreciable tangible assets and amortizable intangible assets require significant judgment. CenturyLink is reviewing its valuation analysis along with the related allocation to goodwill. CenturyLink expects to complete its final fair value determinations during the fourth quarter of 2018. CenturyLink is also reviewing its calculations of the estimates of the fair value of Level 3’s deferred tax assets acquired and liabilities assumed and performing related final controls. CenturyLink’s final fair value determinations may be different than those reflected in our consolidated financial statements at September 30, 2018, however we do not expect that any subsequent modifications to the preliminary purchase price allocation will be material. The recognition of assets and liabilities at fair value are reflected in our financial statements and result in a new basis of accounting for the “successor period” beginning on November 1, 2017. This new basis of accounting means that our financial statements for the successor periods will not be comparable to our previously reported financial statements, including the financial statements in this report.

Based solely on CenturyLink’s preliminary estimates through September 30, 2018, the aggregate consideration exceeds the aggregate estimated fair value of the acquired assets and assumed liabilities by $11.2 billion, which we have recognized as goodwill. The goodwill is attributable to strategic benefits, including enhanced financial and operational scale, market diversification and leveraged combined networks that CenturyLink expects to realize. None of the goodwill associated with this acquisition is deductible for income tax purposes.

15



As of September 30, 2018, the following is our updated assignment of the preliminary estimated aggregate consideration:
 
Adjusted November 1, 2017
Balance as of December 31, 2017
 
Purchase Price Adjustments(3)
 
Adjusted November 1, 2017
Balance as of September 30, 2018
 
(Dollars in millions)
Cash, accounts receivable and other current assets (1)
$
3,317

 
(25
)
 
3,292

Property, plant and equipment
9,311

 
86

 
9,397

Identifiable intangible assets (2)
 
 
 
 


Customer relationships
8,964

 
(476
)
 
8,488

Other
391

 
(13
)
 
378

Other noncurrent assets
782

 
203

 
985

Current liabilities, excluding current maturities of long-term debt
(1,461
)
 
(31
)
 
(1,492
)
Current maturities of long-term debt
(7
)
 

 
(7
)
Long-term debt
(10,888
)
 

 
(10,888
)
Deferred revenue and other liabilities
(1,613
)
 
(102
)
 
(1,715
)
Goodwill
10,837

 
353

 
11,190

Total estimated aggregate consideration
$
19,633

 
(5
)
 
19,628


(1) Includes accounts receivable, which had a gross contractual value of $884 million on November 1, 2017 and September 30, 2018.
(2) The preliminary estimate of the weighted-average amortization period for the acquired intangible assets is approximately 12.0 years.
(3) All purchase price adjustments occurred during the nine months ended September 30, 2018.

Acquisition-Related Expenses

We have incurred acquisition-related expenses related to our activities surrounding the CenturyLink Merger. The table below summarizes our acquisition-related expenses, which consist of integration-related expenses, including severance and retention compensation expenses, and transaction-related expenses:
 
Successor
 
 
Predecessor
 
Three Months Ended September 30, 2018
Nine Months Ended September 30, 2018
 
 
Three Months Ended September 30, 2017
Nine Months Ended September 30, 2017
 
(Dollars in millions)
Transaction-related expenses
$


 
 
7

12

Integration-related expenses
16

94

 
 
24

62

Total acquisition-related expenses
$
16

94

 
 
31

74



16


(3) Goodwill, Customer Relationships and Other Intangible Assets
Goodwill, customer relationships and other intangible assets consisted of the following:
 
September 30, 2018
 
December 31, 2017
 
(Dollars in millions)
Goodwill
$
11,132

 
10,837

Customer relationships, less accumulated amortization of $659 and $126
$
7,801

 
8,845

Other intangible assets subject to amortization:
 
 
 
  Trade names, less accumulated amortization of $24 and $4
106

 
126

  Developed technology, less accumulated amortization of $51 and $9
295

 
252

Total other intangible assets, net
$
401

 
378


Our goodwill balance at December 31, 2017 includes $16 million of goodwill that was allocated to us from CenturyLink associated with differences in the deferred state income taxes that CenturyLink expects to realize due to its consolidation of our results of operations into its state tax returns.

Total amortization expense for intangible assets for the successor three and nine months ended September 30, 2018 was $204 million and $595 million, respectively, and the predecessor three and nine months ended September 30, 2017 was $49 million and $153 million, respectively. As of the successor date of September 30, 2018, the gross carrying amount of goodwill, customer relationships, indefinite-life and other intangible assets was $20.1 billion.

We estimate that total amortization expense for intangible assets for the successor years ending December 31, 2018 through 2022 will be as follows:
 
(Dollars in millions)
2018 (remaining three months)
$
202

2019
805

2020
805

2021
805

2022
794


The following table shows the rollforward of goodwill from December 31, 2017 through September 30, 2018:
 
(Dollars in millions)
As of December 31, 2017
$
10,837

Purchase accounting and other adjustments
353

Effect of foreign currency rate change
(58
)
As of September 30, 2018
$
11,132


(4) Revenue Recognition

We earn most of our consolidated revenue from contracts with customers, primarily through the provision of telecommunications and other services. Revenue from contracts with customers is accounted for under Accounting Standards Codification ("ASC") 606, which we adopted on January 1, 2018 using the modified retrospective approach. We also earn revenues from leasing arrangements (primarily fiber capacity agreements) and governmental subsidy payments, neither of which are accounted for under ASC 606.

Under ASC 606, revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. Revenue is recognized based on the following five-step model:

17


Identification of the contract with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and,
Recognition of revenue when, or as, we satisfy a performance obligation.
We provide an array of communications services, including local voice, VPN, Ethernet, data, broadband, private line (including special access), network access, Ethernet, transport, voice, information technology, video and other ancillary services. We provide these services to a wide range of businesses, including global/international, enterprise, wholesale, government, small and medium business customers. Certain contracts also include the sale of equipment, which is not significant to our business.

For access services, we generally bill fixed monthly charges one month in advance to customers and recognize revenue as service is provided over the contract term in alignment with the customer's receipt of service. For usage, installation and other ancillary services, we generally bill in arrears and recognize revenue as usage or delivery occurs. In most cases, the amount invoiced for our service offerings constitutes the price that would be billed on a standalone basis.

Under ASC 606, we recognize revenue for services when we provide the applicable service or when control is transferred. Recognition of certain payments received in advance of services being provided is deferred until the service is provided. These advance payments include certain activation and certain installation charges. If the activation and installation charges are not separate performance obligations, we recognize them as revenue over the actual or expected contract term using historical experience, which ranges from one year to seven years depending on the service. A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer. We recognize revenue for services when we satisfy our performance obligation. In most cases, termination fees or other fees on existing contracts that are negotiated in conjunction with new contracts are deferred and recognized over the new contract term.

A performance obligation is a promise in a contract with a customer to provide a good or service to the customer. We recognize revenue for services when we satisfy our performance obligation.

Promotional or performance-based incentive payments are estimated at contract inception (and updated on a periodic basis as needed) and accounted for as variable consideration. In certain cases, customers may be permitted to modify their contracts without incurring a penalty. We evaluate the change in scope or price to identify whether the modification should be treated as a separate contract, whether the modification is a termination of the existing contract and creation of a new contract, or if it is a change to the existing contract. The impact of contract modifications has not been significant to our results in 2018.

Customer contracts are evaluated to determine whether the performance obligations are separable. If the performance obligations are deemed separable and separate earnings processes exist, the total transaction price that we expect to receive with the customer is allocated to each performance obligation based on its relative standalone selling price. The standalone selling price is the price we sell to similar customers. The revenue associated with each performance obligation is then recognized as earned. The portion of any advance payment allocated to the service based upon its relative selling price is recognized ratably over the contract term.


18


We periodically sell optical capacity on our network. These transactions are structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically 10 - 20 years. In most cases, we account for the cash consideration received on transfers of optical capacity as ASC 606 revenue which we recognize ratably over the term of the agreement. Cash consideration received on transfers of dark fiber is accounted for as non-ASC 606 lease revenue, which we also recognize ratably over the term of the agreement. We do not recognize revenue on any contemporaneous exchanges of our optical capacity assets for other non-owned optical capacity assets.

In connection with offering products and services provided to the end user by third-party vendors, we review the relationship between us, the vendor and the end user to assess whether revenue should be reported on a gross or net basis. In assessing whether revenue should be reported on a gross or net basis, we consider whether we act as a principal in the transaction and control the goods and services used to fulfill the performance obligations associated with the transaction.

We have service level commitments pursuant to contracts with certain of our customers. To the extent that such service levels are not achieved or are otherwise disputed due to performance or service issues or other service interruptions or conditions, we will estimate the amount of credits to be issued and record a corresponding reduction to revenues in the period that the service level commitment was not met.

Customer payments are made based on billing schedules included in our customer contracts, which is typically on a monthly basis. For certain products or services and customer types, payment is required before products or services are provided.

Comparative Results

The following tables present our reported results under ASC 606 and a reconciliation to results using the historical accounting method:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
(Dollars in millions)
 
Reported Balances as of September 30, 2018
 
Impact of ASC 606
 
ASC 605
Historical Adjusted Balances
 
Reported Balances as of September 30, 2018
 
Impact of ASC 606
 
ASC 605
Historical Adjusted Balances
Operating revenues
$
2,010

 
(4
)
 
2,006

 
6,149

 
(4
)
 
6,145

Cost of services and products (exclusive of depreciation and amortization)
976

 

 
976

 
2,954

 

 
2,954

Selling, general and administrative
311

 
12

 
323

 
1,043

 
32

 
1,075

Interest expense
137

 
(7
)
 
130

 
381

 
(7
)
 
374

Income tax expense
38

 
(2
)
 
36

 
184

 
(8
)
 
176

Net income
88

 
(7
)
 
81

 
190

 
(21
)
 
169


19


The following table presents a reconciliation of certain consolidated balance sheet captions under ASC 606 to the balance sheet results using the historical accounting method:
 
September 30, 2018
 
(Dollars in millions)
 
Reported Balances as of September 30, 2018
 
Impact of ASC 606
 
ASC 605
Historical Adjusted Balances
Other current assets
$
290

 
(22
)
 
268

Other long-term assets, net
132

 
(22
)
 
110

Deferred revenue
1,469

 
(3
)
 
1,466

Deferred income tax assets, net
274

 
10

 
284

Member's equity
18,312

 
(31
)
 
18,281

Disaggregated Revenue by Service Offering

The following table provides disaggregation of revenue from contracts with customers based on service offering for the three and nine months ended September 30, 2018, respectively. It also shows the amount of revenue that is not subject to ASC 606, but is instead governed by other accounting standards.
 
Successor
 
Successor
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
(Dollars in millions)
 
(Dollars in millions)
 
Total Revenues
 
Adjustments(7)
 
Total Revenue from Contracts with Customers
 
Total Revenues
 
Adjustments(7)
 
Total Revenue from Contracts with Customers
IP & Data Services (1)
$
969

 

 
969

 
2,959

 

 
2,959

Transport & Infrastructure (2)
664

 
(45
)
 
619

 
2,012

 
(140
)
 
1,872

Voice & Collaboration (3)
349

 

 
349

 
1,093

 

 
1,093

IT and Managed Services (4)
1

 

 
1

 
3

 

 
3

Other revenues (5)
1

 
(1
)
 

 
4

 
(3
)
 
1

Affiliate revenues (6)
26

 
(26
)
 

 
78

 
(78
)
 

Total revenues
$
2,010

 
(72
)
 
1,938

 
6,149

 
(221
)
 
5,928

 
 
 
 
 
 
 
 
 
 
 
 
Timing of revenue
 
 
 
 


 
 
 
 
 


Goods transferred at a point in time
 
 
 
 
$

 
 
 
 
 
$

Services performed over time
 
 
 
 
1,938

 
 
 
 
 
5,928

Total revenue from contracts with customers


 


 
$
1,938

 
 
 
 
 
$
5,928


(1) Includes primarily VPN data network, Ethernet, IP, video and ancillary revenues.
(2) Includes primarily broadband and equipment sales and professional services revenues.
(3) Includes local, long-distance and other ancillary revenues.
(4) Includes IT services and managed services revenues.
(5) Includes sublease rental income.
(6) Includes telecommunications and data services we bill to our affiliates.
(7) Includes sublease rental income and revenue from fiber capacity lease arrangements which are not within the scope of ASC 606.

20


Customer Receivables and Contract Balances

The following table provides balances of customer receivables and contract liabilities as of September 30, 2018 and January 1, 2018:
 
Successor
 
September 30, 2018
 
January 1, 2018
 
(Dollars in millions)
Customer receivables (1)
$
715

 
748

Contract liabilities
413

 
353

(1)
Gross customer receivables of $725 and $751, net of allowance for doubtful accounts of $10 and $3, at September 30, 2018 and January 1, 2018, respectively.
Contract liabilities are consideration we have received from our customers in advance of providing the goods or services promised in the contract. We defer recognizing this consideration 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 sheet.

The following table provides information about revenues recognized for the three and nine months ended September 30, 2018:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
(Dollars in millions)
Revenue recognized in the period from:
 
 
 
Amounts included in contract liability at the beginning of the period (January 1, 2018)
$
22

 
135

Performance obligations satisfied in previous periods

 

Performance Obligations

As of September 30, 2018, our estimated revenue expected to be recognized in the future related to performance obligations associated with customer contracts (including affiliates) that are unsatisfied (or partially satisfied) is approximately $6.3 billion. We expect to recognize approximately 67% of this revenue through 2020, with the balance recognized thereafter.

We do not disclose the amount of unsatisfied performance obligations for contracts under which we are contractually entitled to bill pre-determined amounts for future services (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.


21


Contract Costs

The following table provides changes in our contract acquisition costs and fulfillment costs for the three and nine months ended September 30, 2018:
 
Successor
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
(Dollars in millions)
 
Acquisition Costs
 
Fulfillment Costs
 
Acquisition Costs
 
Fulfillment Costs
Beginning of period balance
$
34

 
52

 
13

 
14

Costs incurred
16

 
22

 
42

 
70

Amortization
(5
)
 
(8
)
 
(10
)
 
(18
)
End of period balance
$
45

 
66

 
45

 
66

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 telecommunications services to customers, including labor and materials consumed for these activities. Acquisition and fulfillment costs are amortized based on the transfer of services on a straight-line basis to which the assets relate and are included in cost of services and products and selling, general and administrative expenses in our consolidated statement of operations. A portion of these costs are amortized on a portfolio basis using an average expected contract term of 30 months. The amounts of these capitalized costs that are anticipated to be amortized in the next twelve months are included in other current assets on our consolidated balance sheets. We recognize incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets is less than one year. Deferred acquisition and fulfillment costs are assessed for impairment on a quarterly basis.

(5) Long-Term Debt

The following table summarizes our long-term debt:
 
Interest Rates
 
Maturities
 
September 30, 2018
 
December 31, 2017
 
 
 
 
 
(Dollars in millions)
Level 3 Parent, LLC
 
 
 
 
 
 
 
Senior notes (1)
5.750%
 
2022
 
$
600

 
600

Subsidiaries

 
 
 
 
 
 
Level 3 Financing, Inc.

 
 
 
 
 
 
Senior notes (2)
5.125%-6.125%
 
2021 - 2026
 
5,315

 
5,315

Term loan (3)
LIBOR + 2.25%
 
2024
 
4,611

 
4,611

Capital leases
Various
 
Various
 
165

 
179

Total long-term debt, excluding unamortized premiums
 
 
 
 
10,691

 
10,705

Unamortized premiums, net
 
 
 
 
163

 
185

Total long-term debt
 
 
 
 
10,854

 
10,890

Less current maturities
 
 
 
 
(6
)
 
(8
)
Long-term debt, excluding current maturities
 
 
 
 
$
10,848

 
10,882


(1) The notes are not guaranteed by any of Level 3 Parent, LLC's subsidiaries.

22


(2) The notes are fully and unconditionally guaranteed on an unsubordinated unsecured basis by Level 3 Parent, LLC and Level 3 Communications, LLC.    
(3) The Tranche B 2024 Term Loan is a secured obligation and is guaranteed by Level 3 Parent, LLC and certain other subsidiaries. The Tranche B 2024 Term Loan had an interest rate of 4.432% as of September 30, 2018 and 3.557% as of December 31, 2017. The interest rate on the Tranche B 2024 Term Loan is set with a minimum London Interbank Offered Rate ("LIBOR") of zero percent.

Long-Term Debt Maturities

Set forth below is the aggregate principal amount of our long-term debt and capital leases (excluding unamortized premiums) maturing during the following years:
 
(Dollars in millions)
2018 (remaining three months)
$
2

2019
6

2020
6

2021
647

2022
1,609

2023 and thereafter
8,421

Total long-term debt
$
10,691


Covenants

The senior notes of Level 3 Parent, LLC and term loan and senior notes of Level 3 Financing, Inc. contain extensive affirmative and negative covenants. Such covenants include, among other things and subject to certain significant exceptions, restrictions on their ability to declare or pay dividends, repay certain other indebtedness, create liens, incur additional indebtedness, make investments, engage in transactions with their affiliates including CenturyLink and its other subsidiaries, dispose of assets and merge or consolidate with any other person. Also, Level 3 Parent, LLC, as well as Level 3 Financing, Inc., will be required to offer to purchase certain of its long-term debt securities under certain circumstances in connection with a "change of control" of Level 3 Parent, LLC.

Certain of CenturyLink's and our debt instruments contain cross acceleration provisions.

Compliance

At September 30, 2018, we were in compliance with the provisions and financial covenants contained in our respective material debt agreements.

Other

For additional information on our long-term debt, see Note 4 - Long Term Debt 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, 2017.


23


(6)  Severance and Restructuring Costs

Changes in our accrued liabilities for severance expenses and restructuring costs were as follows:
 
Successor
 
Severance
 
Restructuring
 
(Dollars in millions)
Balance at January 1, 2018
$
5

 
4

Accrued to expense
15

 
48

Payments, net
(18
)
 
(5
)
Balance at September 30, 2018
$
2

 
47


(7) Products and Services Revenues

We categorize our products, services and revenues among the following six categories:
IP and data services, which include primarily VPN data networks, Ethernet, IP, video (including our facilities-based video services, CDN services and Vyvx broadcast services) and other ancillary services;
Transport and infrastructure, which include broadband, private line (including business data services), data center facilities and services, including cloud, hosting and application management solutions, wavelength, equipment sales and professional services, network security services, dark fiber 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;
Other, which includes sublease rental income; and
Affiliates 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.

24



Our operating revenues for our products and services consisted of the following categories:
 
Successor
 
 
Predecessor
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
 
(Dollars in millions)
IP and data services
$
969

 
2,959

 
 
988

 
2,947

Transport and infrastructure
664

 
2,012

 
 
677

 
2,042

Voice and collaboration
349

 
1,093

 
 
392

 
1,174

IT and managed services
1

 
3

 
 

 

Other
1

 
4

 
 
2

 
6

Affiliate
26

 
78

 
 

 

Total revenues
$
2,010

 
6,149

 
 
2,059

 
6,169


We recognize revenues 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 total amount of such surcharges and transaction taxes that we included in revenues aggregated $96 million and $97 million for the successor three months ended September 30, 2018 and the predecessor three months ended September 30, 2017, respectively, and $301 million and $295 million for the successor nine months ended September 30, 2018 and the predecessor nine months ended September 30, 2017, respectively. These USF surcharges, where we record revenue and transaction taxes, are assigned to the products and services categories based on the underlying revenues. 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.

(8) Fair Value of Financial Instruments

The following table presents the carrying amounts and estimated fair values of our long-term debt, excluding capital lease and other obligations, as well as the input level used to determine the fair values indicated below:
 
 
 
September 30, 2018
 
December 31, 2017
 
Input Level
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
 
 
(Dollars in millions)
Liabilities-Long-term debt, excluding capital lease and other obligations
2
 
$
10,689

 
10,538

 
10,711

 
10,528


(9) 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.


25


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 contingencies at September 30, 2018 aggregated to approximately $80 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.

Peruvian Tax Litigation

In 2005, the Peruvian tax authorities ("SUNAT") issued tax assessments against one of our Peruvian subsidiaries asserting $26 million of additional income tax withholding and value-added taxes ("VAT"), penalties and interest for calendar years 2001 and 2002 on the basis that the Peruvian subsidiary incorrectly documented its importations. After taking into account the developments described below, as well as the accrued interest and foreign exchange effects, we believe the total amount of exposure is $13 million at September 30, 2018.

We challenged the assessments via administrative and then judicial review processes. In October 2011, the highest administrative review tribunal (the "Tribunal") decided the central issue underlying the 2002 assessments in SUNAT's favor. We appealed the Tribunal's decision to the first judicial level, which decided the central issue in favor of Level 3. SUNAT and we filed cross-appeals with the court of appeal. In May 2017, the court of appeal issued a decision reversing the first judicial level. In June 2017, we filed an appeal of the decision to the Supreme Court of Justice, the final judicial level. Oral argument was held before the Supreme Court of Justice in October 2018. A decision on this case is pending.

In October 2013, the Tribunal decided the central issue underlying the 2001 assessments in SUNAT’s favor. We appealed that decision to the first judicial level in Peru, which decided the central issue in favor of SUNAT. In June 2017, we filed an appeal with the court of appeal. In November 2017, the court of appeals issued a decision affirming the first judicial level and we filed an appeal of the decision to the Supreme Court of Justice. That appeal is pending.

Employee Severance and Contractor Termination Disputes

A number of former employees and third-party contractors have asserted a variety of claims in litigation against certain of our Latin American subsidiaries for separation pay, severance, commissions, pension benefits, unpaid vacation pay, breach of employment contracts, unpaid performance bonuses, property damages, moral damages and related statutory penalties, fines, costs and expenses (including accrued interest, attorneys' fees and statutorily mandated inflation adjustments) as a result of their separation from us or termination of service relationships. We are vigorously defending ourselves against the asserted claims, which aggregate to approximately $30 million at September 30, 2018.


26


Brazilian Tax Claims

In December 2004, March 2009, April 2009 and July 2014, the São Paulo state tax authorities issued tax assessments against one of our Brazilian subsidiaries for the Tax on Distribution of Goods and Services (“ICMS”) with respect to revenue from leasing certain assets (in the case of the December 2004, March 2009 and July 2014 assessments) and revenue from the provision of Internet access services (in the case of the April 2009 and July 2014 assessments), by treating such activities as the provision of communications services, to which the ICMS tax applies. In September 2002, July 2009 and May 2012, the Rio de Janeiro state tax authorities issued tax assessments to the same Brazilian subsidiary on similar issues.

We have filed objections to these assessments, arguing that the lease of assets and the provision of Internet access are not communication services subject to ICMS. The objections to the September 2002, December 2004 and March 2009 assessments were rejected by the respective state administrative courts, and we have appealed those decisions to the judicial courts. In October 2012 and June 2014, we received favorable rulings from the lower court on the December 2004 and March 2009 assessments regarding equipment leasing, but those rulings are subject to appeal by the state. No ruling has been obtained with respect to the September 2002 assessment. The objections to the April and July 2009 and May 2012 assessments are still pending final administrative decisions. The July 2014 assessment was confirmed during the fourth quarter of 2014 at the first administrative level, and we appealed this decision to the second administrative level.

We are vigorously contesting all such assessments in both states and, in particular, view the assessment of ICMS on revenue from equipment leasing to be without merit. These assessments, if upheld, could result in a loss of up to $34 million at September 30, 2018 in excess of the accruals established for these matters.

Qui Tam Action

We were notified in late 2017 of a qui tam action pending against Level 3 Communications, Inc. and others in the United States District Court for the Eastern District of Virginia, captioned United States of America ex rel., Stephen Bishop v. Level 3 Communications, Inc. et al. The original qui tam complaint was filed under seal on November 26, 2013, and an amended complaint was filed under seal on June 16, 2014. The court unsealed the complaints on October 26, 2017.

The amended complaint alleges that we, principally through two former employees, submitted false claims and made false statements to the government in connection with two government contracts. The relator seeks damages in this lawsuit of approximately $50 million, subject to trebling, plus statutory penalties, pre-and-post judgment interest, and attorney’s fees. The case is currently stayed.

We are evaluating our defenses to the claims. At this time, we do not believe it is probable we will incur a material loss. If, contrary to our expectations, the plaintiff prevails in this matter and proves damages at or near $50 million, and is successful in having those damages trebled, the outcome could have a material adverse effect on our results of operations in the period in which a liability is recognized and on our cash flows for the period in which any damages are paid.

Several people, including two former Level 3 employees, were indicted in the United States District Court for the Eastern District of Virginia on October 3, 2017, and charged with, among other things, accepting kickbacks from a subcontractor, who was also indicted, for work to be performed under a prime government contract. Of the two former employees, one entered a plea agreement, and the other is deceased. We are fully cooperating in the government’s investigations in this matter.


27


Letters of Credit

It is customary for us to use various financial instruments in the normal course of business. These instruments include letters of credit which are conditional commitments issued on our behalf in accordance with specified terms and conditions. As of both September 30, 2018 and December 31, 2017, we had outstanding letters of credit or other similar obligations of approximately $31 million and $36 million, respectively, of which $26 million and $30 million are collateralized by cash that is reflected on the consolidated balance sheets as restricted cash and securities.

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 or proceedings 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 foreign, 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 individually is reasonably expected to exceed $100,000 in fines and penalties.

The outcome of these other proceedings 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 14 - 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, 2017. 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.


28


(10) Other Financial Information

Other Current Assets

The following table presents details of other current assets reflected in our consolidated balance sheets:
 
Successor
 
September 30, 2018
 
December 31, 2017
 
(Dollars in millions)
Prepaid expenses
$
146

 
68

Material, supplies and inventory
34

 
3

Deferred charges
24

 
17

Deferred commissions
22

 

Other
64

 
29

Total other current assets
$
290

 
117


(11) Accumulated Other Comprehensive Loss

The tables below summarize changes in accumulated other comprehensive loss recorded on our consolidated balance sheets by component for the successor nine months ended September 30, 2018:
 
Foreign Currency Translation Adjustment and Other
 
Total
 
(Dollars in millions)
Balance at December 31, 2017
$
18

 
18

Other comprehensive loss before reclassifications, net of tax
(164
)
 
(164
)
Cumulative effect of adoption of ASU 2018-02, Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
6

 
6

Net other comprehensive loss
(158
)
 
(158
)
Balance at September 30, 2018
$
(140
)
 
(140
)

The table below summarizes changes in accumulated other comprehensive loss recorded on our consolidated balance sheets by component for the predecessor nine months ended September 30, 2017:
 
Pension Plans
 
Foreign Currency Translation Adjustment and Other
 
Total
 
(Dollars in millions)
Balance at December 31, 2016
$
(34
)
 
(353
)
 
(387
)
Other comprehensive income before reclassifications, net of tax
1

 
106

 
107

Amounts reclassified from accumulated other comprehensive loss
(1
)
 

 
(1
)
Net other comprehensive income

 
106

 
106

Balance at September 30, 2017
$
(34
)
 
(247
)
 
(281
)


29


(12) Condensed Consolidating Financial Information

Level 3 Financing, Inc., a wholly owned subsidiary, has issued Senior Notes that are unsecured obligations of Level 3 Financing, Inc.; however, they are also fully and unconditionally and jointly and severally guaranteed on an unsecured senior basis by Level 3 Parent, LLC and Level 3 Communications, LLC.

In conjunction with the registration of the Level 3 Financing, Inc. Senior Notes, the accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial statements of guarantors and affiliates whose securities collateralize an issue registered or being registered."

The operating activities of the separate legal entities included in our consolidated financial statements are interdependent. The accompanying condensed consolidating financial information presents the statements of comprehensive income (loss), balance sheets and statements of cash flows of each legal entity and, on an aggregate basis, the other non-guarantor subsidiaries based on amounts incurred by such entities and is not intended to present the operating results of those legal entities on a stand-alone basis. Level 3 Communications, LLC leases equipment and certain facilities from other wholly owned subsidiaries of Level 3 Parent, LLC. These transactions are eliminated in our consolidated results.

30


Condensed Consolidating Statements of Comprehensive Income (Loss)
Three Months Ended September 30, 2018 (Successor)

 
Level 3 Parent, LLC
 
Level 3 Financing, Inc.
 
Level 3 Communications, LLC
 
Other Non-Guarantor Subsidiaries
 
Eliminations
 
Total
 
(Dollars in millions)
OPERATING REVENUES
 
 
 
 
 
 
 
 
 
 
 
Operating revenues
$

 

 
951

 
1,033

 

 
1,984

Operating revenues - affiliate

 

 
50

 
47

 
(71
)
 
26

Total operating revenues

 

 
1,001

 
1,080

 
(71
)
 
2,010

OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
 
 
Cost of services and products (exclusive of depreciation and amortization)

 

 
538

 
438

 

 
976

Selling, general and administrative

 

 
333

 
49

 
(71
)
 
311

Operating expenses - affiliates

 

 
50

 
15

 

 
65

Depreciation and amortization

 

 
176

 
255

 

 
431

Total operating expenses

 

 
1,097

 
757

 
(71
)
 
1,783

OPERATING INCOME (LOSS)

 

 
(96
)
 
323

 

 
227

OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
 
 
 
 
Interest income

 

 

 
(2
)
 
1

 
(1
)
Interest income - affiliate
16

 

 

 
2

 

 
18

Interest expense
(8
)
 
(118
)
 
(2
)
 
(8
)
 
(1
)
 
(137
)
Interest income (expense) - intercompany, net
771

 
234

 
(997
)
 
(8
)
 

 

Equity in net earnings (losses) of subsidiaries
(690
)
 
(834
)
 
452

 

 
1,072

 

Other income, net
(3
)
 

 
(1
)
 
23

 

 
19

Total other income (expense)
86

 
(718
)
 
(548
)
 
7

 
1,072

 
(101
)
INCOME (LOSS) BEFORE INCOME TAXES
86

 
(718
)
 
(644
)
 
330

 
1,072

 
126

Income tax benefit (expense)
2

 
28

 
18

 
(86
)
 

 
(38
)
NET INCOME (LOSS)
88

 
(690
)
 
(626
)
 
244

 
1,072

 
88

Other comprehensive income (loss), net of income taxes
(1
)
 

 

 
(1
)
 
1

 
(1
)
COMPREHENSIVE INCOME (LOSS)
$
87

 
(690
)
 
(626
)
 
243

 
1,073

 
87




31


Condensed Consolidating Statements of Comprehensive Income (Loss)
Nine Months Ended September 30, 2018 (Successor)

 
Level 3 Parent, LLC
 
Level 3 Financing, Inc.
 
Level 3 Communications, LLC
 
Other Non-Guarantor Subsidiaries
 
Eliminations
 
Total
 
(Dollars in millions)
OPERATING REVENUES
 
 
 
 
 
 
 
 
 
 
 
Operating revenues
$

 

 
2,884

 
3,187

 

 
6,071

Operating revenues - affiliate

 

 
81

 
151

 
(154
)
 
78

Total operating revenues

 

 
2,965

 
3,338

 
(154
)
 
6,149

OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
 
 
Cost of services and products (exclusive of depreciation and amortization)

 

 
1,727

 
1,227

 

 
2,954

Selling, general and administrative

 
3

 
878

 
234

 
(72
)
 
1,043

Operating expenses - affiliate

 

 
140

 
115

 
(82
)
 
173

Depreciation and amortization

 

 
520

 
775

 

 
1,295

Total operating expenses

 
3

 
3,265

 
2,351

 
(154
)
 
5,465

OPERATING INCOME (LOSS)

 
(3
)
 
(300
)
 
987

 

 
684

OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
 
 
 
 
Interest income

 

 
1

 
(1
)
 

 

Interest income - affiliate
48

 

 

 
2

 

 
50

Interest expense
(24
)
 
(339
)
 
(3
)
 
(15
)
 

 
(381
)
Interest income (expense) - intercompany, net
1,474

 
1,446

 
(2,756
)
 
(164
)
 

 

Equity in net earnings (losses) of subsidiaries
(1,321
)
 
(2,505
)
 
451

 

 
3,375

 

Other income, net
(3
)
 

 
2

 
22

 

 
21

Total other income (expense)
174

 
(1,398
)
 
(2,305
)
 
(156
)
 
3,375

 
(310
)
INCOME (LOSS) BEFORE INCOME TAXES
174

 
(1,401
)
 
(2,605
)
 
831

 
3,375

 
374

Income tax benefit (expense)
16

 
80

 
(16
)
 
(264
)
 

 
(184
)
NET INCOME (LOSS)
190

 
(1,321
)
 
(2,621
)
 
567

 
3,375

 
190

Other comprehensive income (loss), net of income taxes
(164
)
 

 

 
(164
)
 
164

 
(164
)
COMPREHENSIVE INCOME (LOSS)
$
26

 
(1,321
)
 
(2,621
)
 
403

 
3,539

 
26



32


Condensed Consolidating Statements of Comprehensive Income (Loss)
Three Months Ended September 30, 2017 (Predecessor)

 
Level 3 Parent, LLC
 
Level 3 Financing, Inc.
 
Level 3 Communications, LLC
 
Other Non-Guarantor Subsidiaries
 
Eliminations
 
Total
 
(Dollars in millions)
OPERATING REVENUES
 
 
 
 
 
 
 
 
 
 
 
Operating revenues
$

 

 
932

 
1,168

 
(41
)
 
2,059

Operating revenues - affiliate

 

 

 

 

 

Total operating revenues

 

 
932

 
1,168

 
(41
)
 
2,059

OPERATING EXPENSES

 
 
 
 
 
 
 
 
 
 
Cost of services and products (exclusive of depreciation and amortization)

 

 
600

 
487

 
(41
)
 
1,046

Selling, general and administrative expenses
2

 
1

 
272

 
79

 

 
354

Operating expenses - affiliate

 

 

 

 

 

Depreciation and amortization

 

 
97

 
213

 

 
310

Total operating expenses
2

 
1

 
969

 
779

 
(41
)
 
1,710

OPERATING INCOME (LOSS)
(2
)
 
(1
)
 
(37
)
 
389

 

 
349

OTHER INCOME (EXPENSE)

 
 
 
 
 
 
 
 
 
 
Interest income

 

 
6

 

 

 
6

Interest income - affiliate

 

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