Leases

12 Months Ended

Dec. 31, 2022

Leases [Abstract]

Leases

Leases

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

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

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

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

Lease expense consisted of the following:

	Years Ended December 31,
	2022		2021	2020
	(Dollars in millions)
Operating and short-term lease cost	$	348	368	440
Finance lease cost:
Amortization of right-of-use assets	25		24	19
Interest on lease liability	11		12	11
Total finance lease cost	36		36	30
Total lease cost	$	384	404	470

We lease various equipment, office facilities, retail outlets, switching facilities and other network sites or components. These leases, with few exceptions, provide for renewal options and rent 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.

During the year ended December 31, 2021 we rationalized our lease footprint and ceased using 13 underutilized leased property locations. We determined that we no longer needed the leased space and, due to the limited remaining term on the contracts, concluded that we had neither the intent nor ability to sublease the properties. For the year ended December 31, 2021 we incurred accelerated lease costs of approximately $15 million. We did not further rationalize our lease footprint or incur material accelerated lease costs during the year ended December 31, 2022. However, in conjunction with our plans to continue to reduce costs, we expect to continue our real estate rationalization efforts and expect to incur additional accelerated lease costs in future periods.

For the years ended December 31, 2022, 2021 and 2020, our gross rental expense, including the accelerated lease costs discussed above, was $384 million, $404 million and $470 million, respectively. We also received sublease rental income for the years ended December 31, 2022, 2021 and 2020 of $14 million, $12 million and $8 million, respectively.

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

		Years Ended December 31,
Leases	Classification on the Balance Sheet	2022			2021
		(Dollars in millions)
Assets
Operating lease assets	Other, net (1)	$	1,168		1,182
Finance lease assets	Property, plant and equipment, net of accumulated depreciation	241			231
Total leased assets		$	1,409		1,413
Liabilities
Current
Operating	Current operating lease liabilities (2)	$	326		299
Finance	Current maturities of long-term debt	14			16
Noncurrent
Operating	Operating lease liabilities (3)	922			953
Finance	Long-term debt	210			226
Total lease liabilities		$	1,472		1,494
Weighted-average remaining lease term (years)
Operating leases		6.7			6.9
Finance leases		10.9			11.1
Weighted-average discount rate
Operating leases		5.23		%	4.79	%
Finance leases		4.97		%	4.81	%

_______________________________________________________________________________

(1) Includes affiliate operating lease assets of $391 million and $294 million as of December 31, 2022 and 2021, respectively.

(2) Includes current portion of affiliate operating lease liabilities of $125 million and $82 million as of December 31, 2022 and 2021, respectively.

(3) Includes noncurrent portion of affiliate operating lease liabilities of $286 million and $224 million as of December 31, 2022 and 2021, respectively.

At December 31, 2022, we classified certain operating lease assets and liabilities related to the EMEA business as held for sale and discontinued recording amortization on the related right-of-use assets upon this classification. These operating and finance lease assets and liabilities held for sale are not reflected in the above or throughout the disclosures within this note. See Note 2—Completed Divestiture of the Latin American Business and Planned Divestiture of European, Middle Eastern and African Business for more information.

Supplemental unaudited consolidated cash flow statement information related to leases:

	Years Ended December 31,
	2022		2021
	(Dollars in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	346	360
Operating cash flows for finance leases	11		12
Financing cash flows for finance leases	84		38
Supplemental lease cash flow disclosures:
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities	381		380
Right-of-use assets obtained in exchange for new finance lease liabilities	$	70	28

As of December 31, 2022, maturities of lease liabilities were as follows:

	Operating Leases		Finance Leases
	(Dollars in millions)
2023	$	379	25
2024	274		25
2025	228		26
2026	168		26
2027	92		27
Thereafter	359		164
Total lease payments	1,500		293
Less: interest	(252)		(69)
Total	1,248		224
Less: current portion	(326)		(14)
Long-term portion	$	922	210

As of December 31, 2022, we had no material operating or finance leases that had not yet commenced.

Operating Lease Income

We lease various office facilities, colocation facilities and dark fiber to third parties under operating leases. Lease and sublease income are included in operating revenue in the consolidated statements of operations. See "Revenue Recognition" in Note 1—Background and Summary of Significant Accounting Policies.

For the years ended December 31, 2022, 2021 and 2020 our gross rental income was $746 million, $802 million and $760 million, respectively, which represents 10% of our operating revenue for each of the years ended December 31, 2022, 2021 and 2020.

Leases

Leases

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

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

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

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

Lease expense consisted of the following:

	Years Ended December 31,
	2022		2021	2020
	(Dollars in millions)
Operating and short-term lease cost	$	348	368	440
Finance lease cost:
Amortization of right-of-use assets	25		24	19
Interest on lease liability	11		12	11
Total finance lease cost	36		36	30
Total lease cost	$	384	404	470

We lease various equipment, office facilities, retail outlets, switching facilities and other network sites or components. These leases, with few exceptions, provide for renewal options and rent 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.

During the year ended December 31, 2021 we rationalized our lease footprint and ceased using 13 underutilized leased property locations. We determined that we no longer needed the leased space and, due to the limited remaining term on the contracts, concluded that we had neither the intent nor ability to sublease the properties. For the year ended December 31, 2021 we incurred accelerated lease costs of approximately $15 million. We did not further rationalize our lease footprint or incur material accelerated lease costs during the year ended December 31, 2022. However, in conjunction with our plans to continue to reduce costs, we expect to continue our real estate rationalization efforts and expect to incur additional accelerated lease costs in future periods.

For the years ended December 31, 2022, 2021 and 2020, our gross rental expense, including the accelerated lease costs discussed above, was $384 million, $404 million and $470 million, respectively. We also received sublease rental income for the years ended December 31, 2022, 2021 and 2020 of $14 million, $12 million and $8 million, respectively.

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

		Years Ended December 31,
Leases	Classification on the Balance Sheet	2022			2021
		(Dollars in millions)
Assets
Operating lease assets	Other, net (1)	$	1,168		1,182
Finance lease assets	Property, plant and equipment, net of accumulated depreciation	241			231
Total leased assets		$	1,409		1,413
Liabilities
Current
Operating	Current operating lease liabilities (2)	$	326		299
Finance	Current maturities of long-term debt	14			16
Noncurrent
Operating	Operating lease liabilities (3)	922			953
Finance	Long-term debt	210			226
Total lease liabilities		$	1,472		1,494
Weighted-average remaining lease term (years)
Operating leases		6.7			6.9
Finance leases		10.9			11.1
Weighted-average discount rate
Operating leases		5.23		%	4.79	%
Finance leases		4.97		%	4.81	%

_______________________________________________________________________________

(1) Includes affiliate operating lease assets of $391 million and $294 million as of December 31, 2022 and 2021, respectively.

(2) Includes current portion of affiliate operating lease liabilities of $125 million and $82 million as of December 31, 2022 and 2021, respectively.

(3) Includes noncurrent portion of affiliate operating lease liabilities of $286 million and $224 million as of December 31, 2022 and 2021, respectively.

At December 31, 2022, we classified certain operating lease assets and liabilities related to the EMEA business as held for sale and discontinued recording amortization on the related right-of-use assets upon this classification. These operating and finance lease assets and liabilities held for sale are not reflected in the above or throughout the disclosures within this note. See Note 2—Completed Divestiture of the Latin American Business and Planned Divestiture of European, Middle Eastern and African Business for more information.

Supplemental unaudited consolidated cash flow statement information related to leases:

	Years Ended December 31,
	2022		2021
	(Dollars in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	346	360
Operating cash flows for finance leases	11		12
Financing cash flows for finance leases	84		38
Supplemental lease cash flow disclosures:
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities	381		380
Right-of-use assets obtained in exchange for new finance lease liabilities	$	70	28

As of December 31, 2022, maturities of lease liabilities were as follows:

	Operating Leases		Finance Leases
	(Dollars in millions)
2023	$	379	25
2024	274		25
2025	228		26
2026	168		26
2027	92		27
Thereafter	359		164
Total lease payments	1,500		293
Less: interest	(252)		(69)
Total	1,248		224
Less: current portion	(326)		(14)
Long-term portion	$	922	210

As of December 31, 2022, we had no material operating or finance leases that had not yet commenced.

Operating Lease Income

We lease various office facilities, colocation facilities and dark fiber to third parties under operating leases. Lease and sublease income are included in operating revenue in the consolidated statements of operations. See "Revenue Recognition" in Note 1—Background and Summary of Significant Accounting Policies.

For the years ended December 31, 2022, 2021 and 2020 our gross rental income was $746 million, $802 million and $760 million, respectively, which represents 10% of our operating revenue for each of the years ended December 31, 2022, 2021 and 2020.

Leases

Leases

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

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

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

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

Lease expense consisted of the following:

	Years Ended December 31,
	2022		2021	2020
	(Dollars in millions)
Operating and short-term lease cost	$	348	368	440
Finance lease cost:
Amortization of right-of-use assets	25		24	19
Interest on lease liability	11		12	11
Total finance lease cost	36		36	30
Total lease cost	$	384	404	470

We lease various equipment, office facilities, retail outlets, switching facilities and other network sites or components. These leases, with few exceptions, provide for renewal options and rent 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.

During the year ended December 31, 2021 we rationalized our lease footprint and ceased using 13 underutilized leased property locations. We determined that we no longer needed the leased space and, due to the limited remaining term on the contracts, concluded that we had neither the intent nor ability to sublease the properties. For the year ended December 31, 2021 we incurred accelerated lease costs of approximately $15 million. We did not further rationalize our lease footprint or incur material accelerated lease costs during the year ended December 31, 2022. However, in conjunction with our plans to continue to reduce costs, we expect to continue our real estate rationalization efforts and expect to incur additional accelerated lease costs in future periods.

For the years ended December 31, 2022, 2021 and 2020, our gross rental expense, including the accelerated lease costs discussed above, was $384 million, $404 million and $470 million, respectively. We also received sublease rental income for the years ended December 31, 2022, 2021 and 2020 of $14 million, $12 million and $8 million, respectively.

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

		Years Ended December 31,
Leases	Classification on the Balance Sheet	2022			2021
		(Dollars in millions)
Assets
Operating lease assets	Other, net (1)	$	1,168		1,182
Finance lease assets	Property, plant and equipment, net of accumulated depreciation	241			231
Total leased assets		$	1,409		1,413
Liabilities
Current
Operating	Current operating lease liabilities (2)	$	326		299
Finance	Current maturities of long-term debt	14			16
Noncurrent
Operating	Operating lease liabilities (3)	922			953
Finance	Long-term debt	210			226
Total lease liabilities		$	1,472		1,494
Weighted-average remaining lease term (years)
Operating leases		6.7			6.9
Finance leases		10.9			11.1
Weighted-average discount rate
Operating leases		5.23		%	4.79	%
Finance leases		4.97		%	4.81	%

_______________________________________________________________________________

(1) Includes affiliate operating lease assets of $391 million and $294 million as of December 31, 2022 and 2021, respectively.

(2) Includes current portion of affiliate operating lease liabilities of $125 million and $82 million as of December 31, 2022 and 2021, respectively.

(3) Includes noncurrent portion of affiliate operating lease liabilities of $286 million and $224 million as of December 31, 2022 and 2021, respectively.

At December 31, 2022, we classified certain operating lease assets and liabilities related to the EMEA business as held for sale and discontinued recording amortization on the related right-of-use assets upon this classification. These operating and finance lease assets and liabilities held for sale are not reflected in the above or throughout the disclosures within this note. See Note 2—Completed Divestiture of the Latin American Business and Planned Divestiture of European, Middle Eastern and African Business for more information.

Supplemental unaudited consolidated cash flow statement information related to leases:

	Years Ended December 31,
	2022		2021
	(Dollars in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	346	360
Operating cash flows for finance leases	11		12
Financing cash flows for finance leases	84		38
Supplemental lease cash flow disclosures:
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities	381		380
Right-of-use assets obtained in exchange for new finance lease liabilities	$	70	28

As of December 31, 2022, maturities of lease liabilities were as follows:

	Operating Leases		Finance Leases
	(Dollars in millions)
2023	$	379	25
2024	274		25
2025	228		26
2026	168		26
2027	92		27
Thereafter	359		164
Total lease payments	1,500		293
Less: interest	(252)		(69)
Total	1,248		224
Less: current portion	(326)		(14)
Long-term portion	$	922	210

As of December 31, 2022, we had no material operating or finance leases that had not yet commenced.

Operating Lease Income

We lease various office facilities, colocation facilities and dark fiber to third parties under operating leases. Lease and sublease income are included in operating revenue in the consolidated statements of operations. See "Revenue Recognition" in Note 1—Background and Summary of Significant Accounting Policies.

For the years ended December 31, 2022, 2021 and 2020 our gross rental income was $746 million, $802 million and $760 million, respectively, which represents 10% of our operating revenue for each of the years ended December 31, 2022, 2021 and 2020.