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Leases

12 Months Ended

Dec. 31, 2019

Financial position for reporting periods beginning on or after January 1, 2019 are presented under the new guidance, while prior periods amounts are not adjusted and continue to be reported in accordance with previous guidance, as discussed in Note 1—Background and Summary of Significant Accounting Policies.

We primarily lease various office facilities, switching and colocation facilities, equipment and dark fiber. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

We determine if an arrangement is a lease at inception and whether that lease meets the classification criteria of a finance or operating lease. Lease-related assets, or right-of-use assets, are recognized at the lease commencement date at amounts equal to the respective lease liabilities. Lease-related liabilities are recognized at the present value of the remaining contractual fixed lease payments, discounted using our incremental borrowing rates. As part of the present value calculation for the lease liabilities, we use an incremental borrowing rate as the rates implicit in the leases are not readily determinable. The incremental borrowing rates used for lease accounting are based on our unsecured rates, adjusted to approximate the rates at which we could borrow on a collateralized basis over a term similar to the recognized lease term. We apply the incremental borrowing rates to lease components using a portfolio approach based upon the length of the lease term and the reporting entity in which

the lease resides. Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.

Some of our lease arrangements contain lease components (including fixed payments, such as rent, real estate taxes and insurance costs) and non-lease components (including common-area maintenance costs). We generally account for each component separately based on the estimated standalone price of each component. For colocation leases, we account for the lease and non-lease components as a single lease component.

Many of our lease agreements contain renewal options; however, we do not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that we are reasonably certain of renewing the lease at inception or when a triggering event occurs. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain to be exercised. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Lease expense consisted of the following:



	Year Ended December 31, 2019
	(Dollars in millions)
Operating and short-term lease cost	388
Finance lease cost:
Amortization of right-of-use assets	14
Interest on lease liability	10
Total finance lease cost	24
Total lease cost	412

We lease various equipment, office facilities, retail outlets, switching facilities 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, 2019 and December 31, 2018, the successor period ended December 31, 2017 and the predecessor period ended October 31, 2017, our gross rental expense was $412 million, $524 million, $95 million and $447 million, respectively. We also received sublease rental income for the years ended December 31, 2019 and December 31, 2018, the successor period ended December 31, 2017 and the predecessor period ended October 31, 2017 of $9 million, $9 million, $2 million and $7 million, respectively.

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



		December 31
Leases (millions)	Classification on the Balance Sheet	2019
Assets
Operating lease assets	Operating lease assets	$	1,060
Finance lease assets	Property, plant and equipment, net of accumulated depreciation	154
Total leased assets		$	1,214

Liabilities
Current
Operating	Current operating lease liabilities	$	249
Finance	Current portion of long-term debt	11
Noncurrent
Operating	Noncurrent operating lease liabilities	854
Finance	Long-term debt	160
Total lease liabilities		$	1,274

Weighted-average remaining lease term (years)
Operating leases		7.5
Finance leases		13.1
Weighted-average discount rate
Operating leases		6.19		%
Finance leases		5.60		%

Supplemental unaudited consolidated cash flow statement information related to leases:



	Year Ended December 31, 2019
	(Dollars in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	387
Operating cash flows from finance leases	11
Financing cash flows from finance leases	5
Supplemental lease cash flow disclosures
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities	206
Right-of-use assets obtained in exchange for new finance lease liabilities	12

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



	Operating Leases			Finance Leases
	(Dollars in millions)
2020	$	276		21
2021	231			17
2022	199			18
2023	166			18
2024	113			18
Thereafter	437			154
Total lease payments	1,422			246
Less: interest	(319		)	(75		)
Total	1,103			$	171
Less: current portion	(249		)	(11		)
Long-term portion	$	854		$	160

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

Operating Lease Income

We lease various IRUs, office facilities, switching facilities and other network sites to third parties under operating leases. Lease and sublease income are included in operating revenue in the consolidated statements of operations.

For the years ended December 31, 2019 and December 31, 2018, the successor period ended December 31, 2017 and the predecessor period ended October 31, 2017, our gross rental income was $798 million or 10%, $192 million or 2%, $28 million or 2%, and $138 million or 2% respectively, of our operating revenue.

Disclosures under ASC 840

We adopted ASU 2016-02 on January 1, 2019 as noted above, and as required, the following disclosure is provided for periods prior to adoption.

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



	Future Minimum Payments
	(Dollars in millions)
Capital lease obligations:
2019	$	16
2020	15
2021	16
2022	16
2023	17
2024 and thereafter	164
Total minimum payments	244
Less: amount representing interest and executory costs	(81		)
Present value of minimum payments	163
Less: current portion	(6		)
Long-term portion	$	157

At December 31, 2018, our future rental commitments for operating leases were as follows:



	Operating Leases
	(Dollars in millions)
2019	$	396
2020	259
2021	219
2022	164
2023	137
2024 and thereafter	613
Total future minimum payments ⁽¹⁾	$	1,788

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(1)

Minimum payments have not been reduced by minimum sublease rentals of $29 million due in the future under non-cancelable subleases.

Leases