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style="padding-left:0px;text-indent:0px;line-height:normal;padding-top:10px;"><table cellpadding="0" cellspacing="0" style="font-family:Times New Roman;font-size:10pt;margin-left:auto;margin-right:auto;width:98.2421875%;border-collapse:collapse;text-align:left;"><tr><td colspan="21" rowspan="1"></td></tr><tr><td style="width:35%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:10%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:10%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:10%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:10%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td><td style="width:10%;" rowspan="1" colspan="1"></td><td style="width:1%;" rowspan="1" colspan="1"></td></tr><tr><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="6" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">(dollars in millions)</font></div></td><td style="vertical-align:bottom;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td></tr><tr><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="7" style="vertical-align:bottom;border-bottom:1px solid #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:center;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">Additions</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">&#160;</font></div></td></tr><tr><td style="vertical-align:bottom;border-bottom:1px solid #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">Description</font></div></td><td style="vertical-align:bottom;border-bottom:1px solid #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;border-bottom:1px solid 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style="vertical-align:bottom;border-bottom:1px solid #000000;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:top;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">Allowance for Uncollectible Accounts Receivable:</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td></tr><tr><td style="vertical-align:top;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">Year 2018</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" 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style="font-family:inherit;font-size:9pt;font-weight:bold;">$</font></div></td><td style="vertical-align:bottom;padding-top:2px;padding-bottom:2px;" rowspan="1" colspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">776</font></div></td><td style="vertical-align:bottom;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">$</font></div></td><td style="vertical-align:bottom;padding-top:2px;padding-bottom:2px;" rowspan="1" colspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">216</font></div></td><td style="vertical-align:bottom;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">$</font></div></td><td style="vertical-align:bottom;padding-top:2px;padding-bottom:2px;" rowspan="1" colspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">1,261</font></div></td><td style="vertical-align:bottom;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">$</font></div></td><td style="vertical-align:bottom;padding-top:2px;padding-bottom:2px;" rowspan="1" colspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">930</font></div></td><td style="vertical-align:bottom;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:top;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">Year 2017</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">1,146</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">1,167</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">205</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">1,319</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">1,199</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:top;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">Year 2016</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">1,037</font></div></td><td style="vertical-align:bottom;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">1,420</font></div></td><td style="vertical-align:bottom;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">150</font></div></td><td style="vertical-align:bottom;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">1,461</font></div></td><td style="vertical-align:bottom;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">1,146</font></div></td><td style="vertical-align:bottom;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;height:20px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;height:20px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="overflow:hidden;height:20px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;height:20px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="overflow:hidden;height:20px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;height:20px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="overflow:hidden;height:20px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;height:20px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="overflow:hidden;height:20px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;height:20px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="overflow:hidden;height:20px;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td></tr><tr><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="7" style="vertical-align:bottom;border-bottom:1px solid #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:center;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">Additions</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">&#160;</font></div></td></tr><tr><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;border-bottom:1px solid #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">Balance&#160;at<br clear="none"/>Beginning&#160;of<br clear="none"/>Period</font></div></td><td style="vertical-align:bottom;border-bottom:1px solid #000000;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;border-bottom:1px solid #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;border-bottom:1px solid #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;border-top:1px solid #000000;" rowspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">Charged&#160;to<br clear="none"/>Expenses</font></div></td><td style="vertical-align:bottom;border-bottom:1px solid #000000;border-top:1px solid #000000;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;border-bottom:1px solid #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;border-top:1px solid #000000;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;border-bottom:1px solid #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;border-top:1px solid #000000;" rowspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">Charged&#160;to Other&#160;Accounts Note (d)</font></div></td><td style="vertical-align:bottom;border-bottom:1px solid #000000;border-top:1px solid #000000;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;border-bottom:1px solid #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;border-bottom:1px solid #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">Deductions<br clear="none"/>Note (e)</font></div></td><td style="vertical-align:bottom;border-bottom:1px solid #000000;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;border-bottom:1px solid #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="2" style="vertical-align:bottom;border-bottom:1px solid #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">Balance at End of Period</font></div></td><td style="vertical-align:bottom;border-bottom:1px solid #000000;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:top;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;">Valuation Allowance for Deferred Tax Assets:</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td colspan="3" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td></tr><tr><td style="vertical-align:top;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">Year 2018</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">$</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-top:2px;padding-bottom:2px;" rowspan="1" colspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">3,293</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">$</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-top:2px;padding-bottom:2px;" rowspan="1" colspan="1"><div style="text-align:right;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">251</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;" 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style="vertical-align:bottom;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="overflow:hidden;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">&#160;</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:9pt;"><font style="font-family:inherit;font-size:9pt;font-weight:bold;">$</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;padding-top:2px;padding-bottom:2px;" rowspan="1" colspan="1"><div style="text-align:right;font-size:9pt;"><font 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________________________________________________________
FORM 8-K
 
 ______________________________________________________________________________
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: August 8, 2019
(Date of earliest event reported)
 ______________________________________________________________________________
Verizon Communications Inc.
(Exact name of registrant as specified in its charter)
 _______________________________________________________________________________  
 
 
 
 
Delaware
1-8606
23-2259884
(State or other jurisdiction
of incorporation)
(Commission File Number)
(I.R.S. Employer Identification No.)
 
 
 
 
1095 Avenue of the Americas
 
10036
New York
New York
 
 
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (212395-1000
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))


 


Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name of Exchange on Which Registered
Common Stock, par value $0.10
 
VZ
 
New York Stock Exchange
Common Stock, par value $0.10
 
VZ
 
The NASDAQ Global Select Market
2.375% Notes due 2022
 
VZ22A
 
New York Stock Exchange
0.500% Notes due 2022
 
VZ22B
 
New York Stock Exchange
1.625% Notes due 2024
 
VZ24B
 
New York Stock Exchange
4.073% Notes due 2024
 
VZ24C
 
New York Stock Exchange
0.875% Notes due 2025
 
VZ25
 
New York Stock Exchange
3.25% Notes due 2026
 
VZ26
 
New York Stock Exchange
1.375% Notes due 2026
 
VZ26B
 
New York Stock Exchange
0.875% Notes due 2027
 
VZ27E
 
New York Stock Exchange
1.375% Notes due 2028
 
VZ28
 
New York Stock Exchange
1.875% Notes due 2029
 
VZ29B
 
New York Stock Exchange
1.250% Notes due 2030
 
VZ30
 
New York Stock Exchange
2.625% Notes due 2031
 
VZ31
 
New York Stock Exchange
2.500% Notes due 2031
 
VZ31A
 
New York Stock Exchange
4.75% Notes due 2034
 
VZ34
 
New York Stock Exchange
3.125% Notes due 2035
 
VZ35
 
New York Stock Exchange
3.375% Notes due 2036
 
VZ36A
 
New York Stock Exchange
2.875% Notes due 2038
 
VZ38B
 
New York Stock Exchange
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period or complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 


Item 8.01. Other Events.
 
In November 2018, Verizon Communications Inc. (Verizon or the Company) announced a strategic reorganization of its business. Under the new structure, effective April 1, 2019, there are two reportable segments that Verizon operates and manages as strategic business units - Verizon Consumer Group and Verizon Business Group.

The Company is filing this Current Report on Form 8-K to recast certain financial and related information included in Verizon’s Annual Report on Form 10-K for the year ended December 31, 2018 (the 2018 Form 10-K) to reflect the new operating structure.

In Exhibit 99.1 to this Report, the Company has updated the following items contained in the 2018 Form 10-K:
Part I, Item 1. Business
Part I, Item 2. Properties
In Exhibit 99.2 to this Report, the Company has updated the following items contained in the 2018 Form 10-K:
Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Part II, Item 8. Financial Statements and Supplementary Data, including Report of Independent Registered Public Accounting Firm
     (on the Company's Consolidated Financial Statements)

This Report does not reflect events occurring after the February 15, 2019 filing date of the 2018 Form 10-K and does not modify or update the disclosures therein except to present the new operating structure. For developments since the filing of the 2018 Form 10-K, refer to the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019, and its Current Reports on Form 8-K filed subsequent to the 2018 Form 10-K.



 

 

Item 9.01. Financial Statements and Exhibits
(d) Exhibits.
 
 
 
 
Exhibit
Number
 
Description
 
 
23
 
Consent of Independent Registered Public Accounting Firm.
 
 
 
99.1
 
Revisions to Verizon's Annual Report on Form 10-K for the year ended December 31, 2018:
Revised Part I. Item 1. Business
Revised Part I. Item 2. Properties
 
 
 
99.2
 
Revisions to Verizon's Annual Report on Form 10-K for the year ended December 31, 2018:
Revised Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Revised Part II, Item 8. Financial Statements and Supplementary Data, including Report of Independent
Registered Public Accounting Firm (on the Company's Consolidated Financial Statements)
 
 
 
101.INS
 
XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
 
 
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document.
 
 
 
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document.
 
 
 
101.LAB
 
XBRL Taxonomy Label Linkbase Document.
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
104
 
Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101).




 

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
 
 
 
 
Verizon Communications Inc.
 
 
 
 
 
 
(Registrant)
 
 
 
 
 
Date:
 
August 8, 2019
 
 
 
/s/ Anthony T. Skiadas
 
 
 
 
 
 
     Anthony T. Skiadas
 
 
 
 
 
 
     Senior Vice President and Controller




 


EXHIBIT INDEX
 
 
 
Exhibit
Number
 
Description
 
 
23
 
Consent of Independent Registered Public Accounting Firm.
 
 
 
 
Revisions to Verizon's Annual Report on Form 10-K for the year ended December 31, 2018:
Revised Part I. Item 1. Business
Revised Part I. Item 2. Properties
 
 
 
 
Revisions to Verizon's Annual Report on Form 10-K for the year ended December 31, 2018:
Revised Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Revised Part II, Item 8. Financial Statements and Supplementary Data, including Report of Independent
Registered Public Accounting Firm (on the Company's Consolidated Financial Statements)
 
 
 
101.INS
 
XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
 
 
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document.
 
 
 
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document.
 
 
 
101.LAB
 
XBRL Taxonomy Label Linkbase Document.
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
104
 
Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101).




EXHIBIT 23
Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements:   
      
Form S-4, No. 333-11573; Form S-8, No. 333-41593; Form S-8, No. 333-50146; Form S-4, No. 333-76171; Form S-8, No. 333-76171; Form S-8, No. 333-53830; Form S-8, No. 333-82690; Form S-4, No. 333-124008; Form S-8, No. 333-124008; Form S-4, No. 333-132651; Form S-8, No. 333-172501; Form S-8, No. 333-172999; Form S-8, No. 333-200398; Form S-3, No. 333-213439; Form S-8, No. 333-217717; Form S-8, No. 333-223523; and Form S-4, No. 333-232064.

of our report dated February 15, 2019 (except for Notes 1 and 13, as to which the date is August 8, 2019), with respect to the consolidated financial statements of Verizon Communications Inc., included in this Current Report on Form 8-K.

 
 
/s/     Ernst & Young LLP
 
New York, New York
 
 
 
August 8, 2019
 


Table of Contents

EXHIBIT 99.1
PART I
Item 1.    Business
General
Verizon Communications Inc. (Verizon or the Company) is a holding company that, acting through its subsidiaries, is one of the world’s leading providers of communications, information and entertainment products and services to consumers, businesses and government entities. With a presence around the world, we offer voice, data and video services and solutions on our networks that are designed to meet customers’ demand for mobility, reliable network connectivity, security and control. Formerly known as Bell Atlantic Corporation (Bell Atlantic), we were incorporated in 1983 under the laws of the State of Delaware. We began doing business as Verizon on June 30, 2000 following our merger with GTE Corporation. We have a highly diverse workforce of approximately 144,500 employees as of December 31, 2018.

Our principal executive offices are located at 1095 Avenue of the Americas, New York, New York 10036 (telephone number 212-395-1000).

In November 2018, we announced a strategic reorganization of our business. Under the new structure, effective April 1, 2019, there are two reportable segments that we operate and manage as strategic business unitsVerizon Consumer Group (Consumer) and Verizon Business Group (Business). In conjunction with the new reporting structure, we recast our segment disclosures for all periods presented.

Verizon Consumer Group
Our Consumer segment provides consumer-focused wireless and wireline communications services and products. Our wireless services are provided across one of the most extensive wireless networks in the United States (U.S.) under the Verizon Wireless brand and through wholesale and other arrangements. Our wireline services are provided in nine states in the Mid-Atlantic and Northeastern U.S., as well as Washington D.C., over our 100% fiber-optic network under the Fios brand and over a traditional copper-based network to customers who are not served by Fios. In 2018, the Consumer segment’s revenues were $89.8 billion, representing approximately 69% of Verizon’s consolidated revenues. As of December 31, 2018, Consumer had approximately 95 million wireless retail connections, 6 million broadband connections and 4 million Fios video connections.

Verizon Business Group
Our Business segment provides wireless and wireline communications services and products, video and data services, corporate networking solutions, security and managed network services, local and long distance voice services and network access to deliver various Internet of Things (IoT) services and products. We provide these products and services to businesses, government customers and wireless and wireline carriers across the U.S. and select products and services to customers around the world. In 2018, the Business segment's revenues were $31.5 billion, representing approximately 24% of Verizon’s consolidated revenues. As of December 31, 2018, Business had approximately 23 million wireless retail postpaid connections and 501 thousand broadband connections.

Additional discussion of our reportable segments is included in Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview" and - "Segment Results of Operations" and in Note 13 to the consolidated financial statements of Verizon Communications Inc. and Subsidiaries filed herewith.

Service and Product Offerings
Our Consumer segment's wireless and wireline products and services are available to our retail customers, as well as resellers that purchase wireless network access from us on a wholesale basis. Our Business segment’s wireless and wireline products and services are organized by the primary customer groups targeted by these offerings: Global Enterprise; Small and Medium Business; Public Sector and Other; and Wholesale.

Wireless
We offer wireless services and equipment to customers of both Consumer and Business.

Wireless Services
Our Consumer and Business segments provide a wide variety of wireless services accessible on a broad range of devices. Customers can obtain our wireless services on a postpaid or prepaid basis. Retail (non-wholesale) postpaid accounts primarily represent retail customers that are directly served and managed by Verizon and use Verizon Wireless branded services. A single account may include monthly wireless services for a variety of connected devices. A retail postpaid connection represents an individual line of service for a wireless device for which a customer is generally billed one month in advance for a monthly access charge in return for access to and usage of network services. Our prepaid service is offered only to Consumer customers and enables individuals to obtain wireless services without credit verification by paying for all services in advance. Approximately 95% of our Consumer retail connections were postpaid connections as of December 31, 2018.

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We offer various postpaid and prepaid service plans tailored to the needs of our customers. Depending on those needs at a particular time, our plans may include features related to, among other things: unlimited or metered domestic or international voice, data, and texting; the ability to share data allowances and/or use data allowances in different periods; high definition voice and video features; the ability to use a device as a Wi-Fi hotspot; and varying data rates depending on the plan and usage on that plan. Our service offerings vary from time to time based on customer needs, technology changes and market conditions and may be provided as standard plans or as part of limited time promotional offers.

Access to the Internet is available on all smartphones and nearly all basic phones. In addition, our customers can access the Internet at broadband speeds on notebook computers and tablets that are either wireless-enabled or that are used in conjunction with separate dedicated devices that provide a mobile Wi-Fi connection.

As of January 2017, we no longer offer Consumer customers new fixed-term, subsidized service plans for phones; however, we continue to offer subsidized plans to our Business customers. We also continue to service existing fixed-term subsidized plans for Consumer customers who have not yet purchased and activated devices under the Verizon device payment program.

Wireless Equipment
Consumer and Business offer several categories of wireless equipment to customers, including a variety of smartphone and other handsets, wireless-enabled Internet devices, such as tablets, laptop computers and netbooks, and other wireless-enabled connected devices, such as smart watches and other wearables. In certain cases, we permit customers to acquire equipment from us using device payment plans, which permit the customer to pay for the device in installments over time.
Verizon Consumer Group
In addition to the wireless services and equipment discussed above, Consumer sells residential fixed connectivity solutions, including Internet, video and voice services, and wireless network access to resellers on a wholesale basis.

Residential Fixed Services. We provide residential fixed connectivity solutions to customers over our 100% fiber-optic network under the Fios brand, and over a traditional copper-based network to customers who are not served by Fios. We have also started to provide residential connectivity using our Ultra Wideband 5G fixed wireless service, which we launched in four cities as of December 31, 2018.

We offer residential fixed services tailored to the needs of our customers. Depending on those needs at a particular time, our services may include features related to, among other things: Internet access at different speed tiers using fiber-optic, copper or wireless technology; video services that may feature a variety of channel options, video on demand products, cloud-based services and digital video recording capabilities; over-the-top video services; and voice services.

Network Access Services. We sell network access to mobile virtual network operators (MVNOs) on a wholesale basis, who in turn resell such wireless service under their own brand(s) to consumers.

Verizon Business Group
In addition to the wireless services and equipment discussed above, our Business segment provides communications products and enhanced services, including video and data services, corporate networking solutions, security and managed network services, local and long distance voice services and network access to deliver various Internet of Things products and services.

Global Enterprise
The Global Enterprise group offers services to large businesses, which are identified based on their size and volume of business with Verizon, as well as non-U.S. public sector customers. In 2018, Global Enterprise revenues were $11.2 billion, representing approximately 36% of Business’s total revenues.

Global Enterprise offers a broad portfolio of connectivity, security and professional services designed to enable our customers to optimize their business operations, mitigate business risks and capitalize on data. These services include the following:

Network Services. We offer a portfolio of network connectivity products to help our customers connect with their employees, partners, vendors, and customers. These products include private networking services, virtual and software defined networking services, and Internet access services.

Advanced Communications Services. We offer a suite of services to our customers to help them communicate with their employees, partners, vendors, constituents and customers. These products include Internet Protocol (IP)-based voice services, unified communications and collaboration tools and customer contact center solutions.

Security services. We offer a suite of management and data security services that help our customers protect, detect and respond to security threats to their networks, data, applications and infrastructure.

Core services. We provide a portfolio of domestic and global voice and data solutions utilizing traditional telecommunications technology, including voice calling, messaging services, conferencing, contact center solutions and private line and data access networks. Core services also include the provision of customer premises equipment, and installation, maintenance and site services.


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IoT services. IoT services provide the network access required to deliver various IoT products and services. We work with various companies that purchase network access from us to connect their Open Development-certified devices, bundled together with their own solutions, which they sell to end users. We are building IoT capabilities by leveraging business models that monetize usage on our networks at the connectivity, platform and solution layers.

Small and Medium Business
The Small and Medium Business group offers wireless services and equipment, tailored voice and networking products, Fios services, IP Networking, advanced voice solutions, security, and managed information technology (IT) services to our U.S.-based customers that do not meet the requirements to be categorized as Global Enterprise. In 2018, Small and Medium Business revenues were $10.8 billion, representing approximately 34% of Business’s total revenues.

In addition to the wireless services and equipment discussed above, the Small and Medium Business group provides fixed connectivity solutions comparable to the Residential Fixed Services provided by Consumer, as well as business services and connectivity similar to the products and services offered by the Global Enterprise group, in each case with features and pricing designed to address the needs of small and medium businesses.

Public Sector and Other
The Public Sector and Other group offers wireless products and services, as well as wireline connectivity solutions, to U.S. federal, state and local governments and educational institutions. These services include the services offered by Consumer discussed above and business services and connectivity similar to the products and services offered by the Global Enterprise group, in each case, with features and pricing designed to address the needs of governments and educational institutions. In 2018, Public Sector and Other revenues were $5.8 billion, representing approximately 18% of Business’s total revenues.

Public Sector and Other also includes Verizon Connect’s solutions, which support fleet tracking management, compliance management, field service management, asset tracking and other types of mobile resource management.

Wholesale
The Wholesale group offers wireline communications services including data, voice, local dial tone and broadband services primarily to local, long distance, and wireless carriers that use our facilities to provide services to their customers. In 2018, Wholesale revenues were $3.7 billion, representing approximately 12% of Business’s total revenues. A portion of Wholesale revenues are generated by a few large telecommunications companies, most of which compete directly with us. Wholesale's services include:

Data services. We offer a portfolio of data services with varying speeds and options to enhance our wholesale customers’ networks and provide connections to their end-users and subscribers.

Voice services. We provide switched access services that allow carriers to complete their end-user calls that originate or terminate within our territory. In addition, we provide originating and terminating voice services throughout the U.S. and globally utilizing our TDM and VoIP networks.

Local services. We offer an array of local dial tone and broadband services to competitive local exchange carriers, some of which are offered to comply with telecommunications regulations. In addition, we offer services such as colocation, resale and unbundled network elements in compliance with applicable regulations.
Distribution
We use a combination of direct, indirect and alternative distribution channels to market and distribute our products and services to Consumer customers.

Our direct channel, including our company-operated stores, is a core component of our distribution strategy. Our sales and service centers also represent a significant distribution channel for our services.

Our indirect/digital partners channel includes agents that sell our wireless and wireline products and services at retail locations throughout the U.S., as well as through the Internet. The majority of these sales are made under exclusive selling arrangements with us. We also have relationships with high-profile national retailers that sell our wireless and wireline products and services, as well as convenience store chains that sell our wireless prepaid products and services.

Our Business segment has additional distribution channels that include business solution fulfillment provided by resellers, non-stocked device fulfillment performed by distributors and integrated mobility services provided by system integrators and resellers.

Competition and Related Trends
The telecommunications industry is highly competitive. We expect competition to intensify further with traditional and non-traditional participants seeking increased market share.


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With respect to our wireless connectivity products and services, we compete against other national wireless service providers, including AT&T Inc., Sprint Corporation and T-Mobile USA, Inc., as well as various regional wireless service providers. We also compete for retail activations with resellers that buy bulk wholesale service from wireless service providers for resale, including resellers that buy from us. Competition remains intense as a result of high rates of smartphone penetration in the wireless market, increased network investment by our competitors, the development and deployment of new technologies, the introduction of new products and services, offerings that include additional premium content, new market entrants, the availability of additional licensed and unlicensed spectrum, and regulatory changes. Competition may also increase as smaller, stand-alone wireless service providers merge or transfer licenses to larger, better capitalized wireless service providers and as MVNOs resell wireless communication services.

We also face competition from other communications and technology companies seeking to increase their brand recognition and capture customer revenue with respect to the provision of wireless products and services, in addition to non-traditional offerings in mobile data. For example, Microsoft Corporation, Alphabet Inc., Apple Inc. and others are offering alternative means for making wireless voice calls that, in certain cases, can be used in lieu of the wireless provider’s voice service, as well as alternative means of accessing video content.

With respect to our wireline connectivity services, we compete against cable companies, wireless service providers, domestic and foreign telecommunications providers, satellite television companies, Internet service providers, over-the-top (OTT) providers and other companies that offer network services and managed enterprise solutions. Cable operators have increased the size and capacity of their networks in order to deliver digital products and services. We continue to market competitive bundled offerings that include Fios Internet, video and voice services. Several major cable operators also offer bundles with wireless services through strategic relationships. Customers have more choices for obtaining video content from various online services. We expect the market will continue to shift from traditional linear video to OTT offerings. We expect customer migration from traditional voice services to wireless services to continue as a growing number of customers place greater value on mobility and wireless companies position their services as a landline alternative. We also face increasing competition from cable operators and other providers of VoIP services, as well as Internet portal providers.

We believe that the following are the most important competitive factors and trends in the telecommunications industry:

Network reliability, speed and coverage. We consider networks that consistently provide high-quality, fast and reliable service to be a key differentiator in the market and driver of customer satisfaction. Lower prices, improved service quality and new service offerings, which in many cases include video content, have led to increased customer usage of connectivity services. We and other network-based providers must ensure that our networks can meet these increasing capacity usage requirements and offer highly reliable national coverage.

Pricing. With respect to wireless services and equipment, pricing plays an important role in the wireless competitive landscape. As the demand for wireless services continues to grow, wireless service providers are offering a range of service plans at competitive prices. Many wireless service providers also bundle wireless service offerings with other products and offer promotional pricing and incentives, some of which may be targeted specifically to customers of Verizon Wireless. We and other wireless service providers, as well as equipment manufacturers, offer device payment options, which provide customers with the ability to pay for their device over a period of time, and some providers offer device leasing arrangements. In addition, aggressive device promotions have become more common in an effort to gain a greater share of subscribers interested in changing carriers. With respect to wireline services, pricing is used by competitors to capture market share from incumbents, and it is a significant factor as non-traditional modes of providing communication services emerge and new entrants compete for customers. For example, VoIP and portal-based voice and video calling is often free or nearly free to customers and is often supported by advertising revenues.

Customer service. We believe that high-quality customer service is a key factor in retaining customers and attracting new customers, including those of other providers. Our customer service, retention and satisfaction programs are based on providing customers with convenient and easy-to-use products and services and focusing on their needs in order to promote long-term relationships and minimize churn. The Verizon Up program, for example, was launched to promote long-term relationships with our Consumer customers. The program offers a variety of rewards to customers in exchange for points they earn in connection with their account-related transactions.

Customer service is very important to our Business customers. We provide Global Enterprise and Public Sector and Other customers with ready access to their system and performance information, and we conduct proactive testing of our networks to identify issues before they affect our customers. We service our Small and Medium Business customers through service representatives and online support, as well as through store-based representatives for small business customers. For Wholesale customers, we pursue service improvement through continued system automation initiatives.

Product differentiation. Customer and revenue growth are increasingly dependent on the development of new and enhanced products and services, as the delivery of new and innovative products and services has been accelerating. Customers are shifting their focus from access to applications and are seeking ways to leverage their broadband, video and wireless connections. To compete effectively, providers need to continuously review, improve and refine their product portfolio and develop and rapidly deploy new products and services tailored to the needs of customers. We continue to pursue the development and rapid deployment of new and innovative products and services, both independently and in collaboration with application providers, content providers and device manufacturers. Features such as wireless and wireline inter-operability are becoming increasingly important, driven by both customer demand and technological advancement.


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Sales and distribution. A key to achieving sales success in the consumer and small and medium business sectors of the wireless industry is the reach and quality of sales channels and distribution points. We seek to optimally vary distribution channels among our company-operated stores selling wireless products and services, outside sales teams and telemarketing, web-based sales and fulfillment capabilities, our extensive indirect distribution network of retail outlets and our sale of wireless service to resellers, which resell wireless services to their end-users.

In addition to these competitive factors and trends, companies with a global presence are increasingly competing with us in our Business segment. A relatively small number of telecommunications and integrated service providers with global operations serve customers in the global enterprise market and, to a lesser extent, the global wholesale market. We compete with these providers for large contracts to provide integrated services to global enterprises. Many of these companies have strong market presence, brand recognition and existing customer relationships, all of which contribute to intensifying competition that may affect our future revenue growth.

In the Global Enterprise and Public Sector and Other markets, competition remains high, primarily as a result of increased industry focus on technology convergence. We compete in this area with system integrators, carriers, and hardware and software providers. In addition, some of the largest information technology services companies are making strategic acquisitions, divesting non-strategic assets and forging new alliances to improve their cost structure. Many new alliances and acquisitions have focused on emerging fields, such as cloud computing, software delivery, communication applications and other computing tasks via networks, rather than by the use of in-house machines.

In the Small and Medium Business market, customer purchasing behaviors and preferences continue to evolve. Solution speed and simplicity with user interfaces that have a consumer-like "look and feel" are becoming key differentiators for customers who are seeking full life-cycle offers that simplify the process of starting, running and growing their businesses. Several major cable operators also offer bundles with wireless services through strategic relationships.

Our Wholesale group competes with traditional carriers for long-haul, voice and IP services. In addition, mobile video and data needs are driving a greater need for wireless backhaul. Network providers, cable companies and niche players are competitors for this business opportunity.

Verizon Media
Our media business, Verizon Media Group (Verizon Media), which operated under the "Oath" brand until January 2019, includes diverse media and technology brands that serve both consumers and businesses. Verizon Media provides consumers with owned and operated search properties and finance, news, sports and entertainment offerings, and provides other businesses and partners access to consumers through digital advertising platforms. In 2018, Verizon Media's revenues were $7.7 billion.

Verizon Media Products and Solutions
Ad Platform
Our Verizon Media Ad Platform provides advertisers with a simplified suite of intelligent advertising, video and broadcast publishing solutions across desktop, mobile and television devices. Verizon Media's business is comprised primarily of search advertising, display advertising, Ecommerce and subscriptions.

Search platforms. Our search properties serve as a guide for users to discover information on the Internet. Verizon Media serves click-based search advertisements generated by proprietary algorithmic technology, as well as advertisements from partners. Verizon Media provides the underlying search products that facilitate user searches within Verizon Media and third-party partner properties.

Display advertising. Display advertising is made up of both graphical and performance-based advertising and takes the form of impression-based contracts, time-based contracts and performance-based contracts. Verizon Media display ads leverage proprietary data signals to identify and engage users on Verizon Media properties and across the web. Through Verizon Media Ad Platform, we provide customers the ability to buy advertising inventory, measure campaigns across screens and advertising formats using self-serve technology or our managed services.

Ecommerce. Our Ecommerce offering includes Business-to-Consumer, Business-to-Business-to-Consumer and Consumer-to-Consumer business models to serve our customers.

Subscription memberships. Our paid subscription offerings include premium content and services across our mail, news, finance and sports properties, privacy and security solutions and computer protection.

Verizon Digital Media Services
As the digital platform reshapes the delivery of media and entertainment content, there is an increasing need for stable, high-quality video delivery platforms. Verizon Digital Media Services (VDMS) offers a scalable platform for delivering content, including live broadcasts, video on demand, games, software and websites to our customers on their devices at any time. This platform is targeted at media and entertainment companies and other businesses that deliver their digital products and services through the Internet.

We have invested in converging technologies and services involving content delivery networks, video streaming and related consumer hardware to leverage new content models. We have also begun using Multimedia Broadcast Multicast Service (MBMS) technology to develop our LTE

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Multicast service. MBMS has the potential to enhance the efficiency of our networks and provide our customers with access to high-quality live streaming video content.

Global Network and Technology
Our global network architecture is used by both Consumer and Business. Our network technology platforms include both wireless and wireline technologies.

Network Evolution
We are evolving the architecture of our networks to a next-generation multi-use platform, providing improved efficiency and virtualization, increased automation and opportunities for edge computing services that will support both our fiber-based and radio access network technologies. We call this the Intelligent Edge Network. We expect that this new architecture will simplify operations by eliminating legacy network elements, improve our fourth-generation (4G) Long-Term Evolution (LTE) wireless coverage, speed the deployment of fifth-generation (5G) wireless technology, and create new opportunities in the business market.

5G Deployment
Over the past several years, we have been leading the development of 5G wireless technology industry standards and the ecosystems for fixed and mobile 5G wireless services. In late 2015, we launched the Verizon 5G Technology Forum with key industry partners to develop 5G requirements and standards and conduct testing to accelerate the introduction of 5G technology. We expect that 5G technology will provide higher throughput and lower latency than the current 4G LTE technology and enable our networks to handle more traffic as the number of Internet-connected devices grows. During 2018, we commercially launched 5G Home on proprietary standards in four U.S. markets: Sacramento, Los Angeles, Houston and Indianapolis. We are the first company to bring 5G broadband Internet service to consumers, and we expect to expand coverage as we transition to global standards in 2019.

4G LTE
Our primary wireless network technology platform is 4G LTE, which provides higher data throughput performance for data services at a lower cost compared to that offered by 3G technology. We have the largest 4G LTE network of any wireless service provider in the U.S., with licensed and operational coverage in all of the 100 most populous U.S. Metropolitan areas. Our 4G LTE network is available to over 99% of the U.S. population in more than 500 markets covering approximately 328 million people as of December 31, 2018, including those in areas served by our LTE in Rural America partners. Under this program, we have collaborated with wireless carriers in rural areas to build and operate a 4G LTE network using each carrier’s network assets and our core 4G LTE equipment and 700 MHz C Block and Advanced Wireless Services (AWS) spectrum.

Wireless Network Reliability and Build-Out
We consider the reliability, coverage and speed of our wireless network as key factors for our continued success. We believe that steady and consistent network and platform investments provide the foundation for innovative products and services. As we design and deploy our network, we focus on the number of successful data sessions the network enables, delivering on our advertised throughput speeds, and the number of calls that are connected on the first attempt and completed without being dropped. We utilize three strategies to maintain the quality of our network: increasing the density of our network elements, deploying new technologies as they are developed and putting additional wireless spectrum into service. We choose among these strategies based on the circumstances present at different times in each of our service areas.

We have been densifying our 4G LTE network by utilizing small cell technology, in-building solutions and distributed antenna systems. Network densification not only enables us to add capacity to address increasing mobile video consumption and the growing demand for IoT products and services, but it also positions us for the deployment of 5G technology. We are also utilizing existing network capabilities to handle increased traffic without interrupting the quality of the customer experience. We continue to deploy advanced technologies to increase both network capacity and data rates.

In order to build and upgrade our existing 4G LTE network and deploy our 5G network, we must complete a variety of steps, which can include securing rights to a large number of sites as well as obtaining zoning and other governmental approvals and fiber facilities, for our macro and small cells, in-building systems and antennas and related radio equipment that comprise distributed antenna systems. We have relationships with a wide variety of vendors that supply various products and services that support our wireless network operations. We utilize tower site management firms as lessors or managers of a portion of our existing leased and owned tower sites.

Our networks include various elements of redundancy designed to enhance the reliability of the services provided to our customers. To mitigate the impact of power disruptions on our operations, we have battery backup at every switch and every macro cell. We also utilize backup generators at a majority of our macro cells and at every switch location. In addition, we have a fleet of portable backup generators that can be deployed if needed. We further enhance reliability by using a fully redundant Multiprotocol Label Switching backbone network in critical locations.

In addition to our own network coverage, we have roaming agreements with a number of wireless service providers to enable our customers to receive wireless service in nearly all other areas in the U.S. where wireless service is available. We also offer a variety of international wireless voice and data services to our customers through roaming arrangements with wireless service providers outside the U.S.


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Fios
Residential broadband service has seen significant growth in bandwidth demand over the past several years, and we believe that demand will continue to grow. We expect the continued emergence of new video services, new data applications and the proliferation of IP devices in the home will continue to drive new network requirements for increased data speeds and throughput. We believe that the Passive Optical Network (PON) technology underpinning Fios positions us well to meet these demands in a cost-effective and efficient manner.

While deployed initially as a consumer broadband network, our PON infrastructure is also experiencing more widespread application in the Business segment, especially as businesses increasingly migrate to Ethernet-based access services.

Global IP
Verizon owns and operates one of the largest global fiber-optic networks in the world, providing connectivity to Business customers in more than 150 countries. Our global IP network includes long-haul, metro and submarine assets that span over 1 million route miles and enable and support international operations.

Global business is rapidly evolving to an "everything-as-a-service" model in which Business customers seek cloud-based, converged enterprise solutions delivered securely via managed and professional services. We are continuing to deploy packet optical transport technology in order to create a global network platform to meet this demand.

Spectrum
The spectrum licenses we hold can be used for mobile wireless voice, video and data communications services. We are licensed by the Federal Communications Commission (FCC) to provide these wireless services on portions of the 800 Megahertz (MHz) band, also known as cellular spectrum, the 1800-1900 MHz band, also known as Personal Communication Services (PCS) spectrum, portions of the 700 MHz upper C band and AWS 1 and 3 spectrum in the 1700 and 2100 MHz bands, in areas that, collectively, cover nearly all of the population of the U.S. This spectrum is collectively called low and mid-band spectrum. We are using our low and mid-band spectrum to provide both 3G and 4G LTE wireless services. However, we are increasingly reallocating spectrum previously used for 3G service to provide 4G LTE service.

In addition to our low and mid-band spectrum, we have spectrum licenses in the 28 and 39 Gigahertz (GHz) band, collectively called millimeter-wave spectrum. This spectrum is being used for our 5G technology deployment. We anticipate that we will need additional spectrum to meet future demand. This increasing demand is driven by growth in customer connections and the increased usage of wireless broadband services that use more bandwidth and require faster rates of speed, as well as the wider deployment of 5G mobile and fixed services. We can meet our future 4G and 5G spectrum needs by acquiring licenses or leasing spectrum from other licensees, or by acquiring new spectrum licenses from the FCC, if and when future FCC spectrum auctions occur.

From time to time we have exchanged spectrum licenses with other wireless service providers through secondary market swap transactions. We expect to continue to pursue similar opportunities to trade spectrum licenses in order to meet capacity and expansion needs in the future. In certain cases, we have entered into intra-market spectrum swaps designed to increase the amount of contiguous spectrum within frequency bands in a specific market. Contiguous spectrum improves network performance and efficiency. These swaps, as well as any spectrum purchases, require us to obtain governmental approvals.

Information regarding spectrum license transactions is included in Note 3 to the consolidated financial statements of Verizon Communications Inc. and Subsidiaries filed herewith.

Strategic Transactions
During March 2015, we completed a transaction with American Tower Corporation (American Tower) pursuant to which American Tower acquired the exclusive rights to lease and operate approximately 11,300 of our wireless towers and corresponding ground leases for an upfront payment of $5.0 billion. We have subleased capacity on the towers from American Tower for a minimum of 10 years at current market rates, with options to renew. Under the terms of the lease agreements, American Tower has exclusive rights to lease and operate towers over an average term of approximately 28 years. As the leases expire, American Tower has fixed-price purchase options to acquire these towers based on their anticipated fair market values at the end of the lease terms. As part of this transaction, we also sold 162 towers for $0.1 billion.

In April 2016, we completed the sale (Access Line Sale) of our local exchange business and related landline activities in California, Florida and Texas, including Fios Internet and video customers, switched and special access lines and high-speed Internet service and long distance voice accounts in these three states to Frontier Communications Corporation (Frontier) for approximately $10.5 billion (approximately $7.3 billion net of income taxes), subject to certain adjustments and including the assumption of $0.6 billion of indebtedness from Verizon by Frontier. The transaction included the acquisition by Frontier of the equity interests of Verizon’s incumbent local exchange carriers (ILECs) in California, Florida and Texas.

The transaction resulted in Frontier acquiring approximately 3.3 million voice connections, 1.6 million Fios Internet subscribers, 1.2 million Fios video subscribers and the related ILEC businesses from Verizon. Approximately 9,300 Verizon employees who served customers in California, Florida and Texas continued employment with Frontier.


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In December 2016, we entered into a definitive agreement, which was subsequently amended in March 2017, with Equinix, Inc. (Equinix) pursuant to which we agreed to sell 23 customer-facing data center sites in the U.S. and Latin America for approximately $3.6 billion, subject to certain adjustments (Data Center Sale). The transaction closed in May 2017.

In February 2016, we entered into a purchase agreement to acquire XO Holdings' wireline business (XO), which owned and operated one of the largest fiber-based IP and Ethernet networks in the U.S. Concurrently, we entered into a separate agreement to utilize certain wireless spectrum from a wholly-owned subsidiary of XO Holdings, NextLink, that held XO's millimeter-wave wireless spectrum. The agreement included an option, subject to certain conditions, to acquire NextLink. In February 2017, we completed our acquisition of XO for total cash consideration of approximately $1.5 billion, of which $0.1 billion was paid in 2015.

In April 2017, we exercised our option to buy NextLink for approximately $0.5 billion, subject to certain adjustments, of which $0.3 billion was prepaid in the first quarter of 2017. The transaction closed in January 2018. The acquisition of NextLink was accounted for as an asset acquisition, as substantially all of the value related to the acquired spectrum. Upon closing, we recorded approximately $0.7 billion of wireless licenses, $0.1 billion of a deferred tax liability and $0.1 billion of other liabilities.

In August 2017, we entered into a definitive agreement to purchase certain fiber-optic network assets in the Chicago market from WideOpenWest, Inc. (WOW!), a leading provider of communications services. The transaction closed in December 2017. In addition, the parties entered into a separate agreement pursuant to which WOW! will complete the build-out of the network assets in 2019. The total cash consideration for the transactions is approximately $0.3 billion, of which $0.2 billion was paid in December 2017.

In 2017, we entered into a transaction to acquire Straight Path Communications Inc., which held certain millimeter-wave spectrum licenses. The transaction closed in February 2018 and we are using the spectrum acquired for our 5G technology deployment.

Additional information regarding these strategic transactions is included in this report in Note 3 to the consolidated financial statements of Verizon Communications Inc. and Subsidiaries.

Patents, Trademarks and Licenses
We own or have licenses to various patents, copyrights, trademarks, domain names and other intellectual property rights necessary to conduct our business. We actively pursue the filing and registration of patents, copyrights, domain names, trademarks and service marks to protect our intellectual property rights within the United States and abroad. We also actively grant licenses, in exchange for appropriate fees or other consideration and subject to appropriate safeguards and restrictions, to other companies that enable them to utilize certain of our intellectual property rights and proprietary technology as part of their products and services. Such licenses enable the licensees to take advantage of the results of Verizon’s research and development efforts. While these licenses result in valuable consideration for Verizon, we do not believe that the loss of such consideration, or the expiration of any of our intellectual property rights, would have a material effect on our results of operations.

We periodically receive offers from third parties to purchase or obtain licenses for patents and other intellectual property rights in exchange for royalties or other payments. We also periodically receive notices alleging that our products or services infringe on third-party patents or other intellectual property rights. These claims, whether against us directly or against third-party suppliers of products or services that we sell to our customers, if successful, could require us to pay damages or royalties, or cease offering the relevant products or services.

Acquisitions and Divestitures
Information about our acquisitions and divestitures is included in Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Acquisitions and Divestitures" and in Note 3 to the consolidated financial statements of Verizon Communications Inc. and subsidiaries filed herewith.

Regulatory and Competitive Trends
Regulatory and Competitive Landscape
Verizon operates in a regulated and highly competitive market. Current and potential competitors include other voice and data service providers, such as other wireless companies, traditional telephone companies, cable companies, Internet service providers, software and application providers, and other non-traditional competitors. Many of these companies have strong market presence, brand recognition and existing customer relationships, all of which contribute to intensifying competition that may affect our future revenue growth. Some of our competitors also are subject to fewer regulatory constraints than Verizon. For many services offered by Verizon, the FCC is our primary regulator. The FCC has jurisdiction over interstate telecommunications services and other matters under the Communications Act of 1934, as amended (Communications Act or Act). Other Verizon services are subject to state and local regulation.

Federal Regulation
Wireless Services
The FCC regulates several aspects of our wireless operations. Generally, the FCC has jurisdiction over the construction, operation, acquisition and transfer of wireless communications systems. All wireless services require use of radio frequency spectrum, the assignment and distribution of which is subject to FCC oversight. Verizon anticipates that it will need additional spectrum to meet future demand. We can meet our needs for licensed spectrum by purchasing licenses or leasing spectrum from others, or by participating in a competitive bidding process to acquire new spectrum from the FCC. Those processes are subject to certain reviews, approvals and potential conditions.

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Today, Verizon holds FCC spectrum licenses that allow it to provide a wide range of mobile and fixed communications services, including both voice and data services. FCC spectrum licenses typically have a term of 10 years, at which time they are subject to renewal. While the FCC has routinely renewed all of Verizon’s wireless licenses, challenges could be raised in the future. If a wireless license was revoked or not renewed, Verizon would not be permitted to provide services on the spectrum covered by that license. Some of our licenses require us to comply with so-called "open access" FCC regulations, which generally require licensees of particular spectrum to allow customers to use devices and applications of their choice, subject to certain technical limitations. The FCC has also imposed certain specific mandates on wireless carriers, including construction and geographic coverage requirements, technical operating standards, provision of enhanced 911 services, roaming obligations and requirements for wireless tower and antenna facilities.

Broadband
Verizon offers many different broadband services. Traditionally, the FCC recognized broadband Internet access services as "information services" subject to a "light touch" regulatory approach rather than to the traditional, utilities-style regulations. In 2015, the FCC declared that broadband Internet access services are "telecommunications services" subject to common carriage regulation under Title II of the Communications Act. In December 2017, the FCC adopted an order reversing the 2015 Title II Order to return to "light touch" regulation of broadband Internet access services. This order is currently being challenged in the courts. Regardless of regulation, Verizon remains committed to the open Internet, which provides consumers with competitive choices and unblocked access to lawful websites and content, and our commitment to our customers can be found on our website at http://responsibility.verizon.com/broadband-commitment.

Wireline Voice
Verizon offers many different wireline voice services, including traditional telephone service and other services that rely on technologies such as VoIP. For regulatory purposes, legacy telephone services are generally considered to be "common carrier" services. Common carrier services are subject to heightened regulatory oversight with respect to rates, terms and conditions and other aspects of the services. The FCC has not decided the regulatory classification of VoIP but has said VoIP service providers must comply with certain rules, such as 911 capabilities and law enforcement assistance requirements.

Video
Verizon offers a multichannel video service that is regulated like traditional cable service. The FCC has a body of rules that apply to cable operators, and these rules also generally apply to Verizon. In areas where Verizon offers its facilities-based multichannel video services, Verizon has typically been required to obtain a franchise from local authorities.

Privacy and Data Security
We are subject to federal, state and international laws and regulations relating to privacy and data security that impact all parts of our business, including wireline, wireless, broadband and the development and roll out of new products, such as those in the media and IoT space. At the federal level, our voice business is subject to the FCC's privacy requirements. Oversight of broadband Internet access privacy and data security, which had shifted from the Federal Trade Commission (FTC) to the FCC following the FCC's adoption of its 2015 Title II Order, returned to the FTC as a result of the FCC's repeal of the 2015 Title II Order. Generally, attention to privacy and data security requirements is increasing at both the state and federal level, and several privacy-related bills have been introduced or are under considerations at each level. In addition, a new data protection regulation went into effect in Europe in May 2018 that includes significant penalties for non-compliance, and a new privacy law is scheduled to take effect in California in 2020. These laws could have a significant impact on certain of our businesses.

Public Safety and Cybersecurity
The FCC has played a role in addressing public safety concerns by regulating emergency communications services and mandating widespread availability of both media (broadcast/cable) and wireless emergency alerting services. In response to cyber attacks that have occurred or could occur in the future, however, the FCC or other regulators may attempt to increase regulation of the cybersecurity practices of providers.

Intercarrier Compensation and Network Access
The FCC regulates some of the rates that carriers pay each other for the exchange of voice traffic (particularly traditional wireline traffic) over different networks and other aspects of interconnection for some voice services. The FCC also regulates some of the rates and terms and conditions for certain wireline "business data services" and other services and network facilities. Verizon is both a seller and a buyer of these services, and both makes and receives interconnection payments. In April 2017, the FCC issued an order, which is currently under appeal, that revised the regulatory structure for business data services, eliminating tariffing obligations and ex ante price regulations in markets the FCC determined to be competitive. The FCC has focused in recent years on whether changes in the rates, terms and conditions for both the exchange of traffic and for business data services may be appropriate.

State Regulation and Local Regulation
Wireless Services
The Act generally preempts regulation by state and local governments of the entry of, or the rates charged by, wireless carriers. The Act does not prohibit states from regulating the other "terms and conditions" of wireless service. For example, some states attempt to regulate wireless customer billing matters and impose reporting requirements. Several states also have laws or regulations that address safety issues (e.g., use of

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wireless handsets while driving) and taxation matters. In addition, wireless tower and antenna facilities are often subject to state and local zoning and land use regulation, and securing approvals for new or modified facilities is often a lengthy and expensive process.

Wireline Services
State public utility commissions regulate Verizon’s telephone operations with respect to certain telecommunications intrastate matters. Verizon operates as an "incumbent local exchange carrier" in nine states and the District of Columbia. These incumbent operations are subject to various levels of pricing flexibility and other state oversight and requirements. Verizon also has other wireline operations that are more lightly regulated. In addition, as a video services operator in many states, Verizon has been required to obtain a cable franchise from local government entities, or in some cases a state-wide franchise, and comply with certain one-time and ongoing obligations as a result.

Environmental Matters
We have established reserves to cover environmental matters relating to discontinued businesses and past telecommunications activities. These reserves include funds to address contamination at the site of a former Sylvania facility in Hicksville, NY, which had processed nuclear fuel rods in the 1950s and 1960s. In September 2005, the Army Corps of Engineers (ACE) accepted the site into its Formerly Utilized Sites Remedial Action Program. As a result, ACE has taken primary responsibility for addressing the contamination at the site. An adjustment to the reserves may be made after a cost allocation is conducted with respect to the past and future expenses of all of the parties. Adjustments to the environmental reserve may also be made based upon the actual conditions found at other sites requiring remediation.

Executive Officers
See Part III, Item 10. "Directors, Executive Officers and Corporate Governance" of Verizon's 2018 Annual Report on Form 10-K for information about our executive officers.

Employees
As of December 31, 2018, Verizon and its subsidiaries had approximately 144,500 employees. Labor unions represent approximately 23% of our employees.

Information on Our Internet Website
We make available, free of charge on our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports at http://www.verizon.com/about/investors as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission (SEC).

Website references in this report are provided as a convenience and do not constitute, and should not be viewed as, incorporation by reference of the information contained on, or available through, the websites. Therefore, such information should not be considered part of this report.

Item 2.    Properties
Our principal properties do not lend themselves to simple description by character and location. Our total gross investment in property, plant and equipment was approximately $253 billion at December 31, 2018 and $246 billion at December 31, 2017, including the effect of retirements, but before deducting accumulated depreciation. Our gross investment in property, plant and equipment consisted of the following:
At December 31,
2018

 
2017

Network equipment
78.0
%
 
78.3
%
Land, buildings and building equipment
12.4
%
 
12.1
%
Furniture and other
9.6
%
 
9.6
%
 
100.0
%
 
100.0
%
Network equipment consists primarily of cable (aerial, buried, underground or undersea) and the related support structures of poles and conduit, wireless plant, switching equipment, network software, transmission equipment and related facilities. Land, buildings and building equipment consists of land and land improvements, central office buildings or any other buildings that house network equipment, and buildings that are used for administrative and other purposes. Substantially all the switching centers are located on land and in buildings we own due to their critical role in the networks and high set-up and relocation costs. We also maintain facilities throughout the U.S. comprised of administrative and sales offices, customer care centers, retail sales locations, garage work centers, switching centers, cell sites and data centers. Furniture and other consists of telephone equipment, furniture, data processing equipment, office equipment, motor vehicles, plant under construction and leasehold improvements.

10


EXHIBIT 99.2
PART II
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Verizon Communications Inc. (Verizon or the Company) is a holding company that, acting through its subsidiaries, is one of the world’s leading providers of communications, information and entertainment products and services to consumers, businesses and government entities. With a presence around the world, we offer voice, data and video services and solutions on our networks that are designed to meet customers’ demand for mobility, reliable network connectivity, security and control. We have a highly diverse workforce of approximately 144,500 employees as of December 31, 2018.

To compete effectively in today’s dynamic marketplace, we are focused on transforming around the capabilities of our high-performing networks to drive growth based on delivering what customers want and need in the new digital world. During 2018, we focused on leveraging our network leadership; retaining and growing our high-quality customer base while balancing profitability; enhancing ecosystems in growth businesses; and driving monetization of our networks and solutions. Our strategy requires significant capital investments primarily to acquire wireless spectrum, put the spectrum into service, provide additional capacity for growth in our networks, invest in the fiber that supports our businesses, evolve and maintain our networks and develop and maintain significant advanced information technology systems and data system capabilities. We believe that steady and consistent investments in our networks and platforms will drive innovative products and services and fuel our growth.

We are consistently deploying new network architecture and technologies to extend our leadership in both fourth-generation (4G) and fifth-generation (5G) wireless networks. We expect that our Intelligent Edge Network design will allow us to realize significant efficiencies by utilizing multi-purpose infrastructure utilizing common architecture within the core and providing flexibility to meet customer demands. In addition, protecting the privacy of our customers’ information and the security of our systems and networks continues to be a priority at Verizon. Our network leadership is the hallmark of our brand and the foundation for the connectivity, platform and solutions upon which we build our competitive advantage.

Highlights of Our 2018 Financial Results
(dollars in millions)
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Business Overview
In November 2018, we announced a strategic reorganization of our business. Under the new structure, effective April 1, 2019, there are two reportable segments that we operate and manage as strategic business units - Verizon Consumer Group (Consumer) and Verizon Business Group (Business). In conjunction with the new reporting structure, we recast our segment disclosures for all periods presented.

Revenue by Segment
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INFOGRAPHICLEGEND20.JPG
———
Note: Excludes eliminations.

Verizon Consumer Group
Our Consumer segment provides consumer-focused wireless and wireline communications services and products. Our wireless services are provided across one of the most extensive wireless networks in the United States (U.S.) under the Verizon Wireless brand and through wholesale and other arrangements. Our wireline services are provided in nine states in the Mid-Atlantic and Northeastern U.S., as well as Washington D.C., over our 100% fiber-optic network under the Fios brand and over a traditional copper-based network to customers who are not served by Fios. Our Consumer segment's wireless and wireline products and services are available to our retail customers, as well as resellers that purchase wireless network access from us on a wholesale basis.

Customers can obtain our wireless services on a postpaid or prepaid basis. A retail postpaid connection represents an individual line of service for a wireless device for which a customer is generally billed one month in advance for a monthly access charge in return for access to and usage of network services. Our prepaid service is offered only to Consumer customers and enables individuals to obtain wireless services without credit verification by paying for all services in advance. The Consumer segment also offers several categories of wireless equipment to customers, including a variety of smartphone and other handsets, wireless-enabled Internet devices, such as tablets, laptop computers and netbooks, and other wireless-enabled connected devices, such as smart watches and other wearables.

In addition to the wireless services and equipment discussed above, Consumer sells residential fixed connectivity solutions, including Internet, video and voice services, and wireless network access to resellers on a wholesale basis. Consumer segment operating revenues for the year ended December 31, 2018 totaled $89.8 billion, an increase of $2.7 billion, or 3.1%, compared to the year ended December 31, 2017. As of December 31, 2018, Consumer had approximately 95 million wireless retail connections, 6 million broadband connections and 4 million Fios video connections.

Verizon Business Group
Our Business segment provides wireless and wireline communications services and products, video and data services, corporate networking solutions, security and managed network services, local and long distance voice services and network access to deliver various Internet of Things (IoT) services and products, including Verizon Connect’s solutions which support fleet tracking management, compliance management, field service management, asset tracking and other types of mobile resource management. We provide these products and services to businesses, government customers and wireless and wireline carriers across the U.S. and select products and services to customers around the world. The Business segment's total operating revenues for the year ended December 31, 2018 totaled $31.5 billion, an increase of $0.6 billion, or 2.0%, compared to the year ended December 31, 2017. As of December 31, 2018, Business had approximately 23 million wireless retail postpaid connections and approximately 500 thousand broadband connections.

Corporate and Other
Corporate and other includes the results of our media business, Verizon Media Group (Verizon Media), which operated under the "Oath" brand until January 2019, and other businesses, investments in unconsolidated businesses, unallocated corporate expenses, certain pension and other employee benefit related costs and interest and financing expenses. Corporate and other also includes the historical results of divested businesses and other adjustments and gains and losses that are not allocated in assessing segment performance due to their nature. Although such transactions are excluded from the business segment results, they are included in reported consolidated earnings. Gains and losses from these transactions that are not individually significant are included in segment results as these items are included in the chief operating decision maker’s assessment of segment performance.






Verizon Media includes diverse media and technology brands that serve both consumers and businesses. Verizon Media provides consumers with owned and operated search properties and finance, news, sports and entertainment offerings, and provides other businesses and partners access to consumers through digital advertising platforms. Verizon Media's total operating revenues were $7.7 billion for the year ended December 31, 2018. This was an increase of 28.8% from the year ended December 31, 2017, primarily due to the acquisition of Yahoo's operating business in June of 2017.

Capital Expenditures and Investments
We continue to invest in our wireless networks, high-speed fiber and other advanced technologies to position ourselves at the center of growth trends for the future. During the year ended December 31, 2018, these investments included $16.7 billion for capital expenditures. See "Cash Flows Used in Investing Activities" and "Operating Environment and Trends" for additional information. We believe that our investments aimed at expanding our portfolio of products and services will provide our customers with an efficient, reliable infrastructure for competing in the information economy.

Global Network and Technology
We are focusing our capital spending on adding capacity and density to our 4G Long-Term Evolution (LTE) network. We are densifying our 4G LTE network by utilizing small cell technology, in-building solutions and distributed antenna systems. Network densification not only enables us to add capacity to address increasing mobile video consumption and the growing demand for IoT products and services, but it also positions us for the deployment of 5G technology. Over the past several years, we have been leading the development of 5G wireless technology industry standards and the ecosystems for fixed and mobile 5G wireless services. In late 2015, we launched the Verizon 5G Technology Forum with key industry partners to develop 5G requirements and standards and conduct testing to accelerate the introduction of 5G technology. We expect that 5G technology will provide higher throughput and lower latency than the current 4G LTE technology and enable our networks to handle more traffic as the number of Internet-connected devices grows. During 2018, we commercially launched 5G Home on proprietary standards in four U.S. markets: Sacramento, Los Angeles, Houston and Indianapolis.

To compensate for the shrinking market for traditional copper-based products, we continue to build our wireline business around fiber-based networks supporting data, video and advanced business services - areas where demand for reliable high-speed connections is growing. We are evolving the architecture of our networks to a next-generation multi-use platform, providing improved efficiency and virtualization, increased automation and opportunities for edge computing services that will support both our fiber-based and radio access network technologies. We call this the Intelligent Edge Network. We expect that this new architecture will simplify operations by eliminating legacy network elements, improve our 4G LTE wireless coverage, speed the deployment of 5G wireless technology, and create new opportunities in the business market.

Recent Developments
In September 2018, Verizon announced a voluntary separation program for select U.S.-based management employees which impacts approximately 10,400 eligible employees, with nearly half of these employees separating from the Company in December of 2018. Principally as a result of this program but also as a result of other headcount reduction initiatives, the Company recorded a severance charge of $1.8 billion ($1.4 billion after-tax) during the year ended December 31, 2018, which was recorded in Selling, general and administrative expense in our consolidated statement of income. During 2018, we also recorded $0.3 billion in severance costs under our other existing separation plans.

Consolidated Results of Operations
In this section, we discuss our overall results of operations and highlight special items that are not included in our segment results. In "Segment Results of Operations," we review the performance of our two reportable segments in more detail.

Consolidated Revenues
 
 
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2018

 
2017

 
2016

 
2018 vs. 2017
 
2017 vs. 2016
Consumer
$
89,762

 
$
87,054

 
$
89,501

 
$
2,708

 
3.1
 %
 
$
(2,447
)
 
(2.7
)%
Business
31,534

 
30,913

 
29,537

 
621

 
2.0

 
1,376

 
4.7

Corporate and other
9,936

 
8,466

 
7,287

 
1,470

 
17.4

 
1,179

 
16.2

Eliminations
(369
)
 
(399
)
 
(345
)
 
30

 
(7.5
)
 
(54
)
 
15.7

Consolidated Revenues
$
130,863

 
$
126,034

 
$
125,980

 
$
4,829

 
3.8

 
$
54

 


2018 Compared to 2017
Consolidated revenues increased $4.8 billion, or 3.8%, during 2018 compared to 2017, primarily due to increases in revenues at our Consumer and Business segments, as well as Corporate and other. In addition, $0.4 billion of the increase in consolidated revenues was attributable to the adoption of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), which was adopted on January 1, 2018, using a modified retrospective approach.






Revenues for our segments are discussed separately below under the heading "Segment Results of Operations."

Corporate and other revenues increased $1.5 billion, or 17.4%, during 2018 compared to 2017, primarily due to an increase of $1.7 billion in revenues within Verizon Media, as a result of the acquisition of Yahoo's operating business on June 13, 2017, partially offset by the sale of 23 customer-facing data center sites in the U.S. and Latin America (Data Center Sale) on May 1, 2017 and other insignificant transactions (see "Operating Results From Divested Businesses" below).

2017 Compared to 2016
Consolidated revenues remained consistent, during 2017 compared to 2016, primarily due to a decline in revenues at our Consumer segment, partially offset by an increase in revenues within our Business segment and Corporate and other.

Revenues for our segments are discussed separately below under the heading "Segment Results of Operations."

Corporate and other revenues increased $1.2 billion, or 16.2%, during 2017 compared to 2016 primarily due to an increase in revenue as a result of the acquisition of Yahoo's operating business on June 13, 2017. The increase was partially offset by the sale (Access Line Sale) of our local exchange business and related landline activities in California, Florida and Texas, including Fios Internet and video customers, switched and special access lines and DSL services and long distance voice accounts in these three states, to Frontier Communications Corporation (Frontier) on April 1, 2016 and the Data Center Sale on May 1, 2017, and other insignificant transactions (see "Operating Results From Divested Businesses" below). During 2017, Verizon Media generated $6.0 billion in revenues which represented approximately 71% of revenues in Corporate and Other.

Consolidated Operating Expenses
 
 
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2018

 
2017

 
2016

 
2018 vs. 2017
 
2017 vs. 2016
Cost of services
$
32,185

 
$
30,916

 
$
30,463

 
$
1,269

 
4.1
%
 
$
453

 
1.5
 %
Cost of wireless equipment
23,323

 
22,147

 
22,238

 
1,176

 
5.3

 
(91
)
 
(0.4
)
Selling, general and administrative expense
31,083

 
28,592

 
28,102

 
2,491

 
8.7

 
490

 
1.7

Depreciation and amortization expense
17,403

 
16,954

 
15,928

 
449

 
2.6

 
1,026

 
6.4

Oath goodwill impairment
4,591

 

 

 
4,591

 
nm

 

 

Consolidated Operating Expenses
$
108,585

 
$
98,609

 
$
96,731

 
$
9,976

 
10.1

 
$
1,878

 
1.9


nm - not meaningful

Operating expenses for our segments are discussed separately below under the heading "Segment Results of Operations."

2018 Compared to 2017
Cost of Services
Cost of services includes the following costs directly attributable to a service: salaries and wages, benefits, materials and supplies, content costs, contracted services, network access and transport costs, customer provisioning costs, computer systems support, and costs to support our outsourcing contracts and technical facilities. Aggregate customer care costs, which include billing and service provisioning, are allocated between Cost of services and Selling, general and administrative expense.

Cost of services increased $1.3 billion, or 4.1%, during 2018 compared to 2017, primarily due to higher rent expense as a result of adding capacity to the networks to support demand, increases in content costs associated with continued increases in the cost of programming license fees, new pricing and a volume-driven increase in costs related to the wireless device protection package offered to our customers at our Consumer segment, as well as other direct costs at our Business segment.

Cost of Wireless Equipment
Cost of wireless equipment increased $1.2 billion, or 5.3%, during 2018 compared to 2017, primarily as a result of shifts to higher priced units in the mix of devices sold within our Consumer segment, as well as an increase in the number of smartphone units sold within our Business segment.

Selling, General and Administrative Expense
Selling, general and administrative expense includes: salaries and wages and benefits not directly attributable to a service or product, bad debt charges, taxes other than income taxes, advertising and sales commission costs, customer billing costs, call center and information technology costs, regulatory fees, professional service fees, and rent and utilities for administrative space. Also included is a portion of the aggregate customer care costs as discussed in "Cost of Services" above.






Selling, general and administrative expense increased $2.5 billion, or 8.7%, during 2018 primarily due to a net gain on the sale of divested businesses in 2017 (see "Special Items"), as well as an increase in severance expenses in 2018 primarily a result of the voluntary separation program for selected U.S.-based management employees (see "Severance, pension and benefit charges (credits)" under "Special Items"). These increases were partially offset by a decrease in acquisition and integration related charges primarily related to the acquisition of Yahoo's operating business (see "Special Items") and a decrease in commission expense following the adoption of Topic 606.
 
Depreciation and Amortization Expense
Depreciation and amortization expense increased $0.4 billion, or 2.6%, during 2018 primarily due to an increase in depreciable assets.

Oath Goodwill Impairment
The goodwill impairment charge recorded in 2018 related to Verizon Media, and was a result of the Company's annual goodwill impairment test performed in the fourth quarter (see "Critical Accounting Estimates").

2017 Compared to 2016
Cost of Services
Cost of services increased $0.5 billion, or 1.5%, during 2017 primarily due to an increase in expenses as a result of the acquisition of Yahoo's operating business, an increase in content costs associated with continued programming license fee increases and an increase in access costs as a result of the acquisition of XO Holdings' business (XO) at our Business segment. These increases were partially offset by the completion of the Access Line Sale on April 1, 2016, the Data Center Sale on May 1, 2017 and other insignificant transactions (see "Operating Results From Divested Businesses"), and the fact that we incurred incremental costs in 2016 as a result of the union work stoppage that commenced on April 13, 2016 and ended on June 1, 2016 (2016 Work Stoppage), which did not recur in 2017.

Cost of Wireless Equipment
Cost of wireless equipment decreased $0.1 billion, or 0.4%, during 2017 primarily as a result of a decline in the number of smartphone and Internet units sold, substantially offset by a shift to higher priced units in the mix of wireless devices sold.

Selling, General and Administrative Expense
Selling, general and administrative expense increased $0.5 billion, or 1.7%, during 2017 primarily due to an increase in expenses as a result of the acquisition of Yahoo's operating business on June 13, 2017, acquisition and integration charges primarily in connection with the acquisition of Yahoo's operating business, product realignment charges (see "Special Items") and an increase in expenses as a result of the acquisition of XO. These increases were partially offset by an increase in the net gain on sale of divested businesses (see "Special Items"), a decline at our Consumer segment in sales commission expense, employee related costs, bad debt expense, and advertising expense, a decrease due to the Access Line Sale on April 1, 2016 and the Data Center Sale on May 1, 2017, and other insignificant transactions (see "Operating Results From Divested Businesses").

Depreciation and Amortization Expense
Depreciation and amortization expense increased $1.0 billion, or 6.4%, during 2017 primarily due to the acquisitions of Yahoo's operating business and XO.

Operating Results From Divested Businesses
In April 2016, we completed the Access Line Sale. In May 2017, we completed the Data Center Sale. The results of operations related to these divestitures and other insignificant transactions are included within Corporate and other for all periods presented to reflect comparable segment operating results consistent with the information regularly reviewed by our chief operating decision maker. The results of operations related to these divestitures included within Corporate and other are as follows:
 
 
 
(dollars in millions)
 
Years Ended December 31,
2018

 
2017

 
2016

Operating Results From Divested Businesses
 
 
 
 
 
Operating revenues
$

 
$
368

 
$
2,115

Cost of services

 
129

 
747

Selling, general and administrative expense

 
68

 
246

Depreciation and amortization expense

 
22

 
127







Other Consolidated Results
Other Income (Expense), Net
Additional information relating to Other income (expense), net is as follows:
 
 
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2018

 
2017

 
2016

 
2018 vs. 2017
 
2017 vs. 2016
Interest income
$
94

 
$
82

 
$
59

 
$
12

 
14.6
%
 
$
23

 
39.0
 %
Other components of net periodic benefit cost
3,068

 
(11
)
 
(2,190
)
 
3,079

 
nm

 
2,179

 
99.5

Other, net
(798
)
 
(2,092
)
 
(1,658
)
 
1,294

 
61.9

 
(434
)
 
(26.2
)
Total
$
2,364

 
$
(2,021
)
 
$
(3,789
)
 
$
4,385

 
nm

 
$
1,768

 
46.7


nm - not meaningful

The change in Other income (expense), net during the year ended December 31, 2018, compared to the similar period in 2017, was primarily driven by pension and benefits credits of $2.1 billion recorded during 2018, compared with pension and benefit charges of approximately $0.9 billion recorded in 2017 (see "Special Items") as well as early debt redemption costs of $0.7 billion recorded during 2018, compared to $2.0 billion recorded during 2017 (see "Special Items"). The change in Other income (expense), net during the year ended December 31, 2017, compared to the similar period in 2016, was primarily driven by a decrease in components of net periodic benefit cost. The change was partially offset by early debt redemption costs of $2.0 billion, compared to $1.8 billion recorded during 2016 (see "Special Items"), as well as a net loss on foreign currency translation adjustments compared to a net gain in the 2016 period.

Interest Expense
 
 
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2018

 
2017

 
2016

 
2018 vs. 2017
 
2017 vs. 2016
Total interest costs on debt balances
$
5,573

 
$
5,411

 
$
5,080

 
$
162

 
3.0
%
 
$
331

 
6.5
 %
Less capitalized interest costs
740

 
678

 
704

 
62

 
9.1

 
(26
)
 
(3.7
)
Total
$
4,833

 
$
4,733

 
$
4,376

 
$
100

 
2.1

 
$
357

 
8.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average debt outstanding
$
115,858

 
$
115,693

 
$
106,113

 
 
 
 
 
 
 
 
Effective interest rate
4.8
%
 
4.7
%
 
4.8
%
 
 
 
 
 
 
 
 

Total interest costs on debt balances increased during 2018 primarily due to an increase in our effective interest rate. Total interest costs on debt balances increased during 2017 primarily due to higher average debt balances.

Provision (Benefit) for Income Taxes
 
 
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
 
Increase/(Decrease)
Years Ended December 31,
2018

 
2017

 
2016

 
2018 vs. 2017
 
2017 vs. 2016
Provision (benefit) for income taxes
$
3,584

 
$
(9,956
)
 
$
7,378

 
$
13,540

 
nm
 
$
(17,334
)
 
nm
Effective income tax rate
18.3
%
 
(48.3
)%
 
35.2
%
 
 
 
 
 
 
 
 

nm - not meaningful

The effective income tax rate is calculated by dividing the provision (benefit) for income taxes by income before income taxes. The effective income tax rate for 2018 was 18.3% compared to (48.3)% for 2017. The increase in the effective income tax rate and the provision for income taxes was primarily due to the non-recurring, non-cash income tax benefit of $16.8 billion recorded in 2017 for the re-measurement of U.S. deferred tax liabilities at the lower 21% U.S. federal corporate income tax rate as a result of the enactment of the Tax Cuts and Jobs Act (TCJA) on December 22, 2017. In addition, the current period provision for income taxes includes the tax impact of the Oath goodwill impairment charge not deductible for tax purposes, offset by the current year reduction in the statutory U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018 under the TCJA and a non-recurring deferred tax benefit of approximately $2.1 billion as a result of an internal reorganization of legal entities within the historical Wireless business.

In December 2017, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin (SAB) 118 to provide guidance for companies that had not completed their accounting for the income tax effects of the TCJA. Due to the complexities involved in accounting for the enactment of the TCJA, SAB 118 allowed for a provisional estimate of the impacts of the TCJA in our earnings for the year ended December 31, 2017, as well as up to a one year measurement period that ended on December 22, 2018, for any subsequent adjustments to such provisional estimate.  Pursuant to SAB 118, Verizon recorded a provisional estimate of $16.8 billion for the impacts of the TCJA, primarily due to the re-





measurement of its U.S. deferred income tax liabilities at the lower 21% U.S. federal corporate income tax rate, with no significant impact from the transition tax on repatriation, the implementation of the territorial tax system, or limitations on the deduction of interest expense.  Verizon has completed its analysis of the impacts of the TCJA, including analyzing the effects of any Internal Revenue Service (IRS) and U.S. Treasury guidance issued, and state tax law changes enacted, within the maximum one year measurement period resulting in no significant adjustments to the $16.8 billion provisional amount previously recorded.

The effective income tax rate for 2017 was (48.3)% compared to 35.2% for 2016. The decrease in the effective income tax rate and the provision for income taxes was primarily due to a non-recurring, non-cash income tax benefit recorded in 2017 as a result of the enactment of the TCJA described above.

A reconciliation of the statutory federal income tax rate to the effective income tax rate for each period is included in Note 12 to the consolidated financial statements.

Consolidated Net Income, Consolidated EBITDA and Consolidated Adjusted EBITDA
Consolidated earnings before interest, taxes, depreciation and amortization expenses (Consolidated EBITDA) and Consolidated Adjusted EBITDA, which are presented below, are non-GAAP measures that we believe are useful to management, investors and other users of our financial information in evaluating operating profitability on a more variable cost basis as they exclude the depreciation and amortization expense related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to Verizon’s competitors. Consolidated EBITDA is calculated by adding back interest, taxes, and depreciation and amortization expenses to net income.

Consolidated Adjusted EBITDA is calculated by excluding from Consolidated EBITDA the effect of the following non-operational items: equity in losses of unconsolidated businesses and other income and expense, net, as well as the effect of special items. We believe that this measure is useful to management, investors and other users of our financial information in evaluating the effectiveness of our operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance. We believe that Consolidated Adjusted EBITDA is widely used by investors to compare a company’s operating performance to its competitors by minimizing impacts caused by differences in capital structure, taxes and depreciation policies. Further, the exclusion of non-operational items and special items enables comparability to prior period performance and trend analysis. See "Special Items" for additional information.

It is management’s intent to provide non-GAAP financial information to enhance the understanding of Verizon’s GAAP financial information, and it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Each non-GAAP financial measure is presented along with the corresponding GAAP measure so as not to imply that more emphasis should be placed on the non-GAAP measure. We believe that non-GAAP measures provide relevant and useful information, which is used by management, investors and other users of our financial information as well as by our management in assessing both consolidated and segment performance. The non-GAAP financial information presented may be determined or calculated differently by other companies and may not be directly comparable to that of other companies.
 
(dollars in millions)
 
Years Ended December 31,
2018

 
2017

 
2016

Consolidated Net Income
$
16,039

 
$
30,550

 
$
13,608

Add (Less):
 
 
 
 
 
Provision (benefit) for income taxes
3,584

 
(9,956
)
 
7,378

Interest expense
4,833

 
4,733

 
4,376

Depreciation and amortization expense
17,403

 
16,954

 
15,928

Consolidated EBITDA*
41,859

 
42,281

 
41,290

 
 
 
 
 
 
Add (Less):
 
 
 
 
 
Other (income) expense, net†
(2,364
)
 
2,021

 
3,789

Equity in losses of unconsolidated businesses‡
186

 
77

 
98

Severance charges
2,157

 
497

 
421

Gain on spectrum license transaction

 
(270
)
 
(142
)
Acquisition and integration related charges§
531

 
879

 

Product realignment charges§
450

 
463

 

Oath goodwill impairment
4,591

 

 

Net gain on sale of divested businesses

 
(1,774
)
 
(1,007
)
Consolidated Adjusted EBITDA
$
47,410

 
$
44,174

 
$
44,449


* Prior period figures have been amended to conform to the current period's calculation of Consolidated EBITDA.
† Includes Pension and benefits mark-to-market adjustments and early debt redemption costs, where applicable.
‡ Includes Product realignment charges, where applicable.
§ Excludes depreciation and amortization expense.






The changes in Consolidated Net Income, Consolidated EBITDA and Consolidated Adjusted EBITDA in the table above were primarily a result of the factors described in connection with operating revenues and operating expenses.

Segment Results of Operations
We have two reportable segments that we operate and manage as strategic business units, Consumer and Business. We measure and evaluate our reportable segments based on segment operating income. The use of segment operating income is consistent with the chief operating decision maker’s assessment of segment performance.

To aid in the understanding of segment performance as it relates to segment operating income, we use the following operating statistics to evaluate the overall effectiveness of our segments:

Wireless retail connections are retail customer device postpaid and prepaid connections. Retail connections under an account may include those from smartphones and basic phones (collectively, phones) as well as tablets and other Internet devices, including wearables and retail IoT devices.

Wireless retail postpaid connections are retail postpaid customer device connections. Retail connections under an account may include those from phones, as well as tablets and other Internet devices, including wearables and retail IoT devices.

Fios Internet connections are the total number of connections to the Internet using Fios Internet services.

Fios video connections are the total number of connections to traditional linear video programming using Fios video services.

Broadband connections are the total number of connections to the Internet using Digital Subscriber Line (DSL) and Fios Internet services.

Voice connections are the total number of traditional switched access lines in service and Fios digital voice connections.

Wireless retail connections, net additions are the total number of additional retail customer device postpaid and prepaid connections, less the number of device disconnects within the current period.

Wireless retail postpaid connections, net additions are the total number of additional retail customer device postpaid connections, less the number of device disconnects within the current period.

Churn is the rate at which service to either retail or postpaid retail connections is terminated on a monthly basis.

Wireless retail postpaid ARPA is the calculated average service revenue per account (ARPA) from retail postpaid accounts, which does not include recurring device payment plan billings related to the Verizon device payment program.

Wireless retail postpaid accounts are retail customers that are directly served and managed under the Verizon Wireless brand and use its services. Accounts include unlimited plans, shared data plans and corporate accounts, as well as legacy single connection plans and family plans. A single account may include monthly wireless services for a variety of connected devices.

Wireless retail postpaid connections per account is calculated by dividing the total number of retail postpaid connections by the number of retail postpaid accounts as of the end of the period.

Segment earnings before interest, taxes, depreciation and amortization (Segment EBITDA), which is presented below, is a non-GAAP measure and does not purport to be an alternative to operating income (loss) as a measure of operating performance. We believe this measure is useful to management, investors and other users of our financial information in evaluating operating profitability on a more variable cost basis as it excludes the depreciation and amortization expenses related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to our competitors. Segment EBITDA is calculated by adding back depreciation and amortization expense to segment operating income (loss). Segment EBITDA margin is calculated by dividing Segment EBITDA by total segment operating revenues. You can find additional information about our segments in Note 13 to the consolidated financial statements.






Verizon Consumer Group
Our Consumer segment provides consumer-focused wireless and wireline communications services and products. Our wireless services are provided across one of the most extensive wireless networks in the United States under the Verizon Wireless brand and through wholesale and other arrangements. Our wireline services are provided in nine states in the Mid-Atlantic and Northeastern U.S., as well as Washington D.C., over our 100% fiber-optic network under the Fios brand and over a traditional copper-based network to customers who are not served by Fios.

Operating Revenues and Selected Operating Statistics
 
 
 
 
 
(dollars in millions, except ARPA)
 
 
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2018

 
2017

 
2016

 
2018 vs. 2017
 
2017 vs. 2016
Service
$
64,223

 
$
63,833

 
$
67,485

 
$
390

 
0.6
 %
 
$
(3,652
)
 
(5.4
)%
Wireless equipment
18,875

 
17,292

 
16,372

 
1,583

 
9.2

 
920

 
5.6

Other
6,664

 
5,929

 
5,644

 
735

 
12.4

 
285

 
5.0

Total Operating Revenues
$
89,762

 
$
87,054

 
$
89,501

 
$
2,708

 
3.1

 
$
(2,447
)
 
(2.7
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Connections (‘000):(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Wireless retail connections
94,507

 
94,471

 
94,021

 
36

 

 
450

 
0.5

Wireless retail postpaid connections
89,861

 
89,068

 
88,574

 
793

 
0.9

 
494

 
0.6

Fios Internet connections
5,760

 
5,565

 
5,386

 
195

 
3.5

 
179

 
3.3

Fios video connections
4,377

 
4,548

 
4,626

 
(171
)
 
(3.8
)
 
(78
)
 
(1.7
)
Broadband connections
6,460

 
6,441

 
6,498

 
19

 
0.3

 
(57
)
 
(0.9
)
Voice connections
6,332

 
6,928

 
7,500

 
(596
)
 
(8.6
)
 
(572
)
 
(7.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Additions in Period (‘000):(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
Wireless retail
372

 
719

 
1,064

 
(347
)
 
(48.3
)
 
(345
)
 
(32.4
)
Wireless retail postpaid
1,129

 
762

 
1,197

 
367

 
48.2

 
(435
)
 
(36.3
)
Wireless retail postpaid phones
498

 
198

 
(282
)
 
300

 
nm

 
480

 
nm

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Churn Rate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Wireless retail
1.25
%
 
1.28
%
 
1.29
%
 
 
 
 
 
 
 
 
Wireless retail postpaid
1.00
%
 
0.99
%
 
0.99
%
 
 
 
 
 
 
 
 
Wireless retail postpaid phones
0.76
%
 
0.75
%
 
0.81
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Account Statistics:
 
 
 
 
 
 
 
 
 
 
 
 
 
Wireless retail postpaid ARPA(3)
$
115.48

 
$
114.79

 
$
123.51

 
$
0.69

 
0.6

 
$
(8.72
)
 
(7.1
)
Wireless retail postpaid accounts (‘000)(1)
34,086

 
34,220

 
34,377

 
(134
)
 
(0.4
)
 
(157
)
 
(0.5
)
Wireless retail postpaid connections per account(1)
2.64

 
2.60

 
2.58

 
0.04

 
1.5

 
0.02

 
0.8

nm - not meaningful

(1) 
As of end of period
(2) 
Excluding acquisitions and adjustments
(3) 
ARPA for periods beginning after January 1, 2018 reflect the adoption of Topic 606. ARPA for periods ending prior to January 1, 2018 were calculated based on the guidance per ASC Topic 605, "Revenue Recognition." Accordingly, amounts are not calculated on a comparative basis.

2018 Compared to 2017
Consumer revenues increased $2.7 billion, or 3.1%, during 2018 compared to 2017, primarily as a result of increases in Service, Wireless equipment and Other revenues.

Service Revenue
Service revenue increased $0.4 billion, or 0.6%, during 2018 compared to 2017, primarily due to increases in wireless service and Fios revenues.

Wireless service revenue increased 1.0%, during 2018 compared to 2017, due to an increase in subscribers and data usage growth from reseller accounts. Wireless retail postpaid ARPA increased 0.6%. Overage revenue pressure began in 2017, following the introduction of unlimited pricing plans, and has subsided during 2018 as the pace of transition to Consumer plans with features that limit overages has reduced.

For the year ended December 31, 2018, Fios revenues totaled $11.1 billion and increased $0.2 billion, or 1.4%, compared to 2017. This increase was due to a 3.5% increase in Fios Internet connections, resulting from subscriber growth and higher value customer mix, reflecting increased





demand in higher broadband speeds, partially offset by a 3.8% decrease in Fios video connections, reflecting the ongoing shift from traditional linear video to over-the-top (OTT) offerings.

Wireless Equipment Revenue
Wireless equipment revenue increased $1.6 billion, or 9.2%, during 2018 compared to 2017, as a result of a shift to higher priced units in the mix of wireless devices sold and a higher amount of revenue allocated to wireless equipment revenue following the adoption of Topic 606 on January 1, 2018, using a modified retrospective approach. See Notes 1 and 2 to the consolidated financial statements for additional information. These increases were partially offset by overall declines in wireless device sales.

Other Revenue
Other revenue includes non-service revenues such as regulatory fees, cost recovery surcharges, revenues associated with our device protection package, leasing and interest on equipment financed under a device payment plan agreement when sold to the customer by an authorized agent.

Other revenue increased $0.7 billion, or 12.4%, during 2018 compared to 2017, primarily due to volume and rate-driven increases in revenues related to our device protection package.

2017 Compared to 2016
Consumer’s total operating revenues decreased $2.4 billion, or 2.7%, during 2017 compared to 2016, primarily as a result of a decline in Service revenues, partially offset by an increase in Wireless equipment and Other revenues.

Service Revenue
Service revenue decreased $3.7 billion, or 5.4%, during 2017 compared to 2016, primarily due to a decrease in wireless service revenue, partially offset by an increase in Fios revenue.

Wireless service revenue decreased 6.6%, during 2017 compared to 2016, due to lower postpaid service revenue, including decreased overage revenue and decreased wireless access revenue. Overage revenue pressure was primarily related to the introduction of unlimited pricing plans in 2017 and the ongoing migration to the pricing plans introduced in 2016 that feature safety mode and carryover data. Service revenue was also negatively impacted as a result of the ongoing customer migration to plans with unsubsidized service pricing. Wireless retail postpaid ARPA decreased 7.1%, as a result of the aforementioned factors impacting wireless service revenue.

For the year ended December 31, 2017, Fios revenues totaled $10.9 billion and increased $0.4 billion, or 3.8%, during 2017 compared to 2016. This increase was due to a 3.3% increase in Fios Internet connections, resulting from subscriber growth fueled by the introduction of gigabit speed data services, as well as higher pay-per-view sales due to marquee events during the third quarter of 2017. These increases were partially offset by a 1.7% decrease in Fios video connections, reflecting the ongoing shift from traditional linear video to OTT offerings.

Wireless Equipment Revenue
Wireless equipment revenue increased $0.9 billion, or 5.6%, during 2017 compared to 2016, as a result of an increase in the Verizon device payment program take rate and an increase in the price of wireless devices, partially offset by an overall decline in wireless device sales volumes.

Other Revenue
Other revenue increased $0.3 billion, or 5.0%, during 2017 compared to 2016, primarily due to an increase in financing revenues from our wireless device payment program and volume-driven increases in revenues related to our wireless device protection package.

Operating Expenses
 
 
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2018

 
2017

 
2016

 
2018 vs. 2017
 
2017 vs. 2016
Cost of services
$
15,335

 
$
14,981

 
$
15,101

 
$
354

 
2.4
 %
 
$
(120
)
 
(0.8
)%
Cost of wireless equipment
18,763

 
17,713

 
18,247

 
1,050

 
5.9

 
(534
)
 
(2.9
)
Selling, general and administrative expense
15,701

 
17,292

 
18,832

 
(1,591
)
 
(9.2
)
 
(1,540
)
 
(8.2
)
Depreciation and amortization expense
11,952

 
11,308

 
10,792

 
644

 
5.7

 
516

 
4.8

Total Operating Expenses
$
61,751

 
$
61,294

 
$
62,972

 
$
457

 
0.7

 
$
(1,678
)
 
(2.7
)

Cost of Services
Cost of services increased $0.4 billion, or 2.4%, during 2018 compared to 2017, primarily due to higher rent expense as a result of adding capacity to the network to support higher demand, increases in content costs associated with continued increases in the cost of programming license fees, as well as new pricing and a volume-driven increase in costs related to the wireless device protection package offered to our customers. Partially offsetting these increases were decreases in costs related to roaming and access costs.






Cost of services decreased $0.1 billion, or 0.8%, during 2017 compared to 2016, primarily due to not incurring incremental costs in 2017 that were incurred in 2016 as a result of the 2016 Work Stoppage, declines in net pension and postretirement benefit costs primarily driven by collective bargaining agreements ratified in June 2016, as well as decreases in costs related to roaming, and cost of data. Partially offsetting these decreases was an increase in rent expense as a result of an increase in macro and small cell sites supporting network capacity expansion and densification, and a volume-driven increase in costs related to the wireless device protection package offered to our customers.

Cost of Wireless Equipment
Cost of wireless equipment increased $1.1 billion, or 5.9%, during 2018 compared to 2017, primarily as a result of shifts to higher priced units in the mix of wireless devices sold, partially offset by declines in the number of smartphones sold.

Cost of wireless equipment decreased $0.5 billion, or 2.9%, during 2017 compared to 2016, primarily as a result of a decline in the number of smartphone and Internet units sold, substantially offset by a shift to higher priced units in the mix of wireless devices sold.

Selling, General and Administrative Expense
Selling, general and administrative expense decreased $1.6 billion, or 9.2%, during 2018 compared to 2017, primarily due to declines in sales commission expense and employee related costs, due to lower headcount, as well as a decline in bad debt expense. The decline in sales commission expense during 2018 compared to 2017, was driven primarily from the deferral of commission costs following the adoption of Topic 606 on January 1, 2018 using a modified retrospective approach.

Selling, general and administrative expense decreased $1.5 billion, or 8.2%, during 2017 compared to 2016, primarily due to a decline in sales commission expense, a decline in employee related costs, primarily due to lower headcount, as well as declines in bad debt expense and advertising expense. The decline in sales commission expense was driven by an increase in the proportion of activations under the Verizon device payment program, which has a lower commission per unit than activations under traditional fixed-term service plans, as well as an overall decline in activations.

Depreciation and Amortization Expense
Depreciation and amortization expense increased $0.6 billion, or 5.7%, during 2018 compared to 2017, and increased $0.5 billion, or 4.8%, during 2017 compared to 2016, driven by the change in the mix of total Verizon depreciable assets and Consumer's usage of those assets.

Segment Operating Income and EBITDA
 
 
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2018

 
2017

 
2016

 
2018 vs. 2017
 
2017 vs. 2016
Segment Operating Income
$
28,011

 
$
25,760

 
$
26,529

 
$
2,251

 
8.7
%
 
$
(769
)
 
(2.9
)%
Add Depreciation and amortization expense
11,952

 
11,308

 
10,792

 
644

 
5.7

 
516

 
4.8

Segment EBITDA
$
39,963

 
$
37,068

 
$
37,321

 
$
2,895

 
7.8

 
$
(253
)
 
(0.7
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment operating income margin
31.2
%
 
29.6
%
 
29.6
%
 
 
 
 
 
 
 
 
Segment EBITDA margin
44.5
%
 
42.6
%
 
41.7
%
 
 
 
 
 
 
 
 

The changes in the table above during the periods presented were primarily a result of the factors described in connection with operating revenues and operating expenses.

Verizon Business Group
Our Business segment provides wireless and wireline communications services and products, video and data services, corporate networking solutions, security and managed network services, local and long distance voice services and network access to deliver various Internet of Things services and products. We provide these products and services to businesses, government customers and wireless and wireline carriers across the U.S. and select products and services to customers around the world. The Business segment is organized in four customer groups: Global Enterprise; Small and Medium Business; Public Sector and Other; and Wholesale.

The operating revenues from XO are included in the Business segment results as of February 2017, following the completion of the acquisition, and are included within all four customer groups. In 2016, we completed the acquisitions of Fleetmatics and Telogis, the results from which are included in our Public Sector and Other customer group.
 
The operating results and statistics for all periods presented below exclude the results of the Data Center Sale in 2017 and other insignificant transactions (see "Operating Results From Divested Businesses"). The results were adjusted to reflect comparable segment operating results consistent with the information regularly reviewed by our chief operating decision maker.






Operating Revenues and Selected Operating Statistics
 
 
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2018

 
2017

 
2016

 
2018 vs. 2017
 
2017 vs. 2016
Global Enterprise
$
11,201

 
$
11,449

 
$
11,364

 
$
(248
)
 
(2.2
)%
 
$
85

 
0.7
 %
Small and Medium Business
10,752

 
9,811

 
9,034

 
941

 
9.6

 
777

 
8.6

Public Sector and Other
5,833

 
5,655

 
5,118

 
178

 
3.1

 
537

 
10.5

Wholesale
3,748

 
3,998

 
4,021

 
(250
)
 
(6.3
)
 
(23
)
 
(0.6
)
Total Operating Revenues(1)
$
31,534

 
$
30,913

 
$
29,537

 
$
621

 
2.0

 
$
1,376

 
4.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Connections (‘000):(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
Wireless retail postpaid connections
23,492

 
21,786

 
20,222

 
1,706

 
7.8

 
1,564

 
7.7

Fios Internet connections
307

 
285

 
267

 
22

 
7.7

 
18

 
6.7

Fios video connections
74

 
71

 
68

 
3

 
4.2

 
3

 
4.4

Broadband connections
501

 
518

 
540

 
(17
)
 
(3.3
)
 
(22
)
 
(4.1
)
Voice connections
5,400

 
5,893

 
6,439

 
(493
)
 
(8.4
)
 
(546
)
 
(8.5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Additions in Period ('000): (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
Wireless retail postpaid
1,397

 
1,322

 
1,091

 
75

 
5.7

 
231

 
21.2

Wireless retail postpaid phones
625

 
576

 
498

 
49

 
8.5

 
78

 
15.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Churn Rate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Wireless retail postpaid
1.19
%
 
1.12
%
 
1.14
%
 
 
 
 
 
 
 
 
Wireless retail postpaid phones
0.98
%
 
0.92
%
 
0.96
%
 
 
 
 
 
 
 
 
(1) 
Service and other revenues included in our Business segment amounted to approximately $28.1 billion, $29.3 billion and $28.4 billion for the years ended December 31, 2018, 2017 and 2016, respectively. Wireless equipment revenues included in our Business segment amounted to approximately $3.4 billion, $1.6 billion and $1.1 billion for the years ended December 31, 2018, 2017 and 2016, respectively.
(2) 
As of end of period
(3) 
Excluding acquisitions and adjustments

2018 Compared to 2017
Business revenues increased $0.6 billion, or 2.0%, during 2018 compared to 2017, primarily due to increases in Small and Medium Business and Public Sector and Other revenues, partially offset by decreases in Global Enterprise and Wholesale revenues. The year ended 2018 includes one additional month of operating revenues from XO compared to the similar period in 2017.

Global Enterprise

The Global Enterprise group offers services to large businesses, which are identified based on their size and volume of business with Verizon, as well as non-U.S. public sector customers.

Global Enterprise revenues decreased $0.2 billion, or 2.2%, during 2018 compared to 2017, primarily due to declines in traditional data and voice communication services as a result of competitive price pressures.  These declines were partially offset by an increase in wireless revenue as a result of higher priced units in the mix of devices sold partially offset by overall decline in sales.  The increase in wireless revenue was also driven by a higher amount of revenue allocated to wireless equipment revenue partially offset by a decline in postpaid service revenue following the adoption of Topic 606 on January 1, 2018.    

Small and Medium Business

The Small and Medium Business group offers wireless services and equipment, tailored voice and networking products, Fios services, IP Networking, advanced voice solutions, security, and managed information technology services to our U.S.-based customers that do not meet the requirements to be categorized as Global Enterprise.

Small and Medium Business revenues increased $0.9 billion, or 9.6%, during 2018 compared to 2017, primarily due to a higher amount of revenue allocated to wireless equipment revenue following the adoption of Topic 606 on January 1, 2018, using a modified retrospective approach; an increase in wireless sales volumes on device payment plans and an increase in wireless postpaid net adds. The increase was partially offset by a decline in wireless postpaid service revenue, driven by the adoption of Topic 606.

For the year ended December 31, 2018, Small and Medium Business Fios revenues totaled $0.8 billion and increased $0.1 billion, or 9.8%. during 2018 compared to 2017, reflecting increased demand for higher broadband speeds.






Public Sector and Other

The Public Sector and Other group offers wireless products and services, as well as wireline connectivity solutions, to U.S. federal, state and local governments and educational institutions. These services include the services offered by Consumer discussed above and business services and connectivity similar to the products and services offered by the Global Enterprise group, in each case, with features and pricing designed to address the needs of governments and educational institutions.

Public Sector and Other revenues increased $0.2 billion, or 3.1%, during 2018 compared to 2017, driven by an increase in wireless postpaid service revenue and wireless equipment revenue due to an increase in wireless retail postpaid net additions.

Wholesale

The Wholesale group offers wireline communications services including data, voice, local dial tone and broadband services primarily to local, long distance, and wireless carriers that use our facilities to provide services to their customers.

Wholesale revenues decreased $0.3 billion, or 6.3%, during 2018 compared to 2017, primarily due to declines in core data and traditional voice services, resulting from the effect of technology substitution and continuing contraction of market rates due to competition. Data declines were partially offset by growth in higher bandwidth services, including dark fiber transport.

2017 Compared to 2016
Business revenues increased $1.4 billion, or 4.7%, during 2017 compared to 2016, primarily due to increases in Global Enterprise revenue, Small and Medium Business revenue and Public Sector and Other revenue, partially offset by a decrease in Wholesale revenue.

Global Enterprise
Global Enterprise revenues increased $0.1 billion, or 0.7%, during 2017 compared to 2016, primarily due to an increase in wireless postpaid service and wireless equipment revenues related to an increase in wireless retail postpaid net additions and the acquisition of XO. These increases were partially offset by declines in traditional data and voice communications services as a result of competitive price pressures.

Small and Medium Business

Small and Medium Business revenues increased $0.8 billion, or 8.6%, during 2017 compared to 2016, primarily related to an increase in wireless equipment revenue due an increase in volume and the price of devices. The increase was further driven by other revenue related to a volume-driven increase in device protection plans and the acquisition of XO. These increases were partially offset by a decrease in wireless postpaid service revenue, as well as revenue declines related to the loss of traditional voice and DSL connections, as a result of competitive price pressures.

For the year ended December 31, 2017, Small and Medium Business Fios revenues totaled $0.7 billion and increased
7.6%, during
2017 compared to 2016, reflecting increased demand for higher broadband speeds.

Public Sector and Other

Public Sector and Other revenues increased $0.5 billion, or 10.5%, during 2017 compared to 2016, primarily due to the revenue increase related to the acquisitions of Fleetmatics and Telogis and an increase in wireless postpaid service and wireless equipment revenues due to an increase in wireless postpaid net additions.

Wholesale

Wholesale revenues remained consistent during 2017 compared to 2016, primarily due to the revenue increase related to the acquisition of XO, fully offset by revenue declines related to the loss of traditional voice and low speed broadband connections, as a result of competitive price pressures.

Operating Expenses
 
 
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2018

 
2017

 
2016

 
2018 vs. 2017
 
2017 vs. 2016
Cost of services
$
10,859

 
$
11,094

 
$
11,436

 
$
(235
)
 
(2.1
)%
 
$
(342
)
 
(3.0
)%
Cost of wireless equipment
4,560

 
4,434

 
3,991

 
126

 
2.8

 
443

 
11.1

Selling, general and administrative expense
7,689

 
7,448

 
6,827

 
241

 
3.2

 
621

 
9.1

Depreciation and amortization expense
4,258

 
4,483

 
4,472

 
(225
)
 
(5.0
)
 
11

 
0.2

Total Operating Expenses
$
27,366

 
$
27,459

 
$
26,726

 
$
(93
)
 
(0.3
)
 
$
733

 
2.7






Cost of Services
Cost of services decreased $0.2 billion, or 2.1%, during 2018 compared to 2017, primarily due to decreases in personnel costs, cost of equipment and access costs, which were partially offset by increases in other direct costs.

Cost of services decreased $0.3 billion, or 3.0%, during 2017 compared to 2016, primarily due to not incurring incremental costs in 2017 that were incurred in 2016 as a result of the 2016 Work Stoppage, as well as a decline in net pension and postretirement benefit costs primarily driven by collective bargaining agreements ratified in June 2016. These decreases were partially offset by an increase in access costs as a result of the acquisition of XO.

Cost of Wireless Equipment
Cost of wireless equipment increased $0.1 billion, or 2.8%, during 2018 compared to 2017, and increased $0.4 billion, or 11.1%, during 2017 compared to 2016, primarily driven by an increase in the number of smartphone units sold, along with a shift to higher priced units in the mix of wireless devices sold.

Selling, General and Administrative Expense
Selling, general and administrative expense increased $0.2 billion, or 3.2%, during 2018 compared to 2017, due to an increase in personnel costs, partially offset by a decrease in commission costs arising from the deferral of commission costs, as a result of the adoption of Topic 606 on January 1, 2018 using a modified retrospective approach.

Selling, general and administrative expense increased $0.6 billion, or 9.1%, during 2017 compared to 2016, primarily related to an increase in expenses resulting from the acquisitions of XO, Fleetmatics and Telogis.

Depreciation and Amortization Expense
Depreciation and amortization expense decreased $0.2 billion, or 5.0%, during 2018 compared to 2017, driven by the change in the mix of total Verizon depreciable assets and Business's usage of those assets.

Depreciation and amortization expense remained consistent during 2017 compared to 2016.

Segment Operating Income and EBITDA
 
 
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
 
 
Increase/(Decrease)
 
Years Ended December 31,
2018

 
2017

 
2016

 
2018 vs. 2017
 
2017 vs. 2016
Segment Operating Income
$
4,168

 
$
3,454

 
$
2,811

 
$
714

 
20.7
 %
 
$
643

 
22.9
%
Add Depreciation and amortization expense
4,258

 
4,483

 
4,472

 
(225
)
 
(5.0
)%
 
11

 
0.2
%
Segment EBITDA
$
8,426

 
$
7,937

 
$
7,283

 
$
489

 
6.2

 
$
654

 
9.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment operating income margin
13.2
%
 
11.2
%
 
9.5
%
 
 
 
 
 
 
 
 
Segment EBITDA margin
26.7
%
 
25.7
%
 
24.7
%
 
 
 
 
 
 
 
 
The changes in the table above during the periods presented were primarily a result of the factors described in connection with operating revenues and operating expenses.






Special Items
Special items included in Income Before (Provision) Benefit For Income Taxes were as follows:
 
(dollars in millions)
 
Years Ended December 31,
2018

 
2017

 
2016

Severance, pension and benefits charges (credits)
 
 
 
 
 
Selling, general and administrative expense
$
2,157

 
$
497

 
$
421

Other income (expense), net
(2,107
)
 
894

 
2,502

Gain on spectrum license transactions
 
 
 
 
 
Selling, general and administrative expense

 
(270
)
 
(142
)
Acquisition and integration related charges
 
 
 
 
 
Selling, general and administrative expense
531

 
879

 

Depreciation and amortization expense
22

 
5

 

Product realignment charges
 
 
 
 
 
Cost of services
303

 
171

 

Selling, general and administrative expense
147

 
292

 

Equity in losses of unconsolidated businesses
207


(11
)


Depreciation and amortization expense
1

 
219

 

Oath goodwill impairment
 
 
 
 
 
Oath goodwill impairment
4,591

 

 

Net gain on sale of divested businesses
 
 
 
 
 
Selling, general and administrative expense

 
(1,774
)
 
(1,007
)
Early debt redemption costs
 
 
 
 
 
Other income (expense), net
725

 
1,983

 
1,822

Total
$
6,577

 
$
2,885

 
$
3,596


The Consolidated Adjusted EBITDA non-GAAP measure presented in the Consolidated Net Income, Consolidated EBITDA and Consolidated Adjusted EBITDA discussion (see "Consolidated Results of Operations") excludes all of the amounts included above, as described below.

The income and expenses related to special items included in our consolidated results of operations were as follows:
 
(dollars in millions)
 
Years Ended December 31,
2018

 
2017

 
2016

Within Total Operating Expenses
$
7,752

 
$
19

 
$
(728
)
Within Equity in losses of unconsolidated businesses
207

 
(11
)
 

Within Other income (expense), net
(1,382
)
 
2,877

 
4,324

Total
$
6,577

 
$
2,885

 
$
3,596


Severance, Pension and Benefits Charges (Credits)
During 2018, we recorded net pre-tax pension and benefits credits of $2.1 billion in accordance with our accounting policy to recognize actuarial gains and losses in the period in which they occur. The pension and benefits remeasurement credits of $2.3 billion, which were recorded in Other income (expense), net in our consolidated statements of income, were primarily driven by an increase in our discount rate assumption used to determine the current year liabilities of our pension plans and postretirement benefit plans from a weighted-average of 3.7% at December 31, 2017 to a weighted-average of 4.4% at December 31, 2018 ($2.6 billion), and mortality and other assumption adjustments of $1.7 billion, $1.6 billion of which related to healthcare claims and trend adjustments, offset by the difference between our estimated return on assets of 7.0% and our actual return on assets of (2.7)% ($1.9 billion). The credits were partially offset by $0.2 billion due to the effects of participants retiring under the voluntary separation program. During 2018, we also recorded net pre-tax severance charges of $2.2 billion in Selling, general and administrative expense, primarily driven by the voluntary separation program for select U.S.-based management employees and other headcount reduction initiatives, which resulted in a severance charge of $1.8 billion ($1.4 billion after-tax), and $0.3 billion in severance costs recorded under other existing separation plans.

During 2017, we recorded net pre-tax severance, pension and benefits charges of $1.4 billion, exclusive of acquisition related severance charges, in accordance with our accounting policy to recognize actuarial gains and losses in the period in which they occur. The pension and benefits remeasurement charges of approximately $0.9 billion, which were recorded in Other income (expense), net in our consolidated statements of income, were primarily driven by a decrease in our discount rate assumption used to determine the current year liabilities of our pension and postretirement benefit plans from a weighted-average of 4.2% at December 31, 2016 to a weighted-average of 3.7% at December 31, 2017 ($2.6 billion). The charges were partially offset by the difference between our estimated return on assets of 7.0% and our actual return on assets of 14.0% ($1.2 billion), a change in mortality assumptions primarily driven by the use of updated actuarial tables (MP-2017) issued by the Society of Actuaries ($0.2 billion) and other assumption adjustments ($0.3 billion). As part of these charges, we also recorded severance costs





of $0.5 billion under our existing separation plans, which were recorded in Selling, general and administrative expense in our consolidated statements of income.

During 2016, we recorded net pre-tax severance, pension and benefits charges of $2.9 billion in accordance with our accounting policy to recognize actuarial gains and losses in the period in which they occur. The pension and benefits remeasurement charges of $2.5 billion, which were recorded in Other income (expense), net, in our consolidated statements of income, were primarily driven by a decrease in our discount rate assumption used to determine the current year liabilities of our pension and other postretirement benefit plans from a weighted-average of 4.6% at December 31, 2015 to a weighted-average of 4.2% at December 31, 2016 ($2.1 billion), updated health care trend cost assumptions ($0.9 billion), the difference between our estimated return on assets of 7.0% and our actual return on assets of 6.0% ($0.2 billion) and other assumption adjustments ($0.3 billion). These charges were partially offset by a change in mortality assumptions primarily driven by the use of updated actuarial tables (MP-2016) issued by the Society of Actuaries ($0.5 billion) and lower negotiated prescription drug pricing ($0.5 billion). As part of these charges, we also recorded severance costs of $0.4 billion under our existing separation plans, which were recorded in Selling, general and administrative expense in our consolidated statements of income.

The net pre-tax severance, pension and benefits charges during 2016 were comprised of a net pre-tax pension remeasurement charge of $0.2 billion measured as of March 31, 2016 related to settlements for employees who received lump-sum distributions in one of our defined benefit pension plans, a net pre-tax pension and benefits remeasurement charge of $0.8 billion measured as of April 1, 2016 related to curtailments in three of our defined benefit pension and one of our other postretirement plans, a net pre-tax pension and benefits remeasurement charge of $2.7 billion measured as of May 31, 2016 in two defined benefit pension plans and three other postretirement benefit plans as a result of our accounting for the contractual healthcare caps and bargained for changes, a net pre-tax pension remeasurement charge of $0.1 billion measured as of May 31, 2016 related to settlements for employees who received lump-sum distributions in three of our defined benefit pension plans, a net pre-tax pension remeasurement charge of $0.6 billion measured as of August 31, 2016 related to settlements for employees who received lump-sum distributions in five of our defined benefit pension plans, and a net pre-tax pension and benefits credit of $1.9 billion as a result of our fourth quarter remeasurement of our pension and other postretirement assets and liabilities based on updated actuarial assumptions.

Due to the presentation of the other components of net periodic benefit cost, we recognize a portion of the pension and benefits charges (credits) in Other income (expense), net, in our consolidated statements of income.

Gain on Spectrum License Transactions
During the fourth quarter of 2017, we completed a license exchange transaction with affiliates of T-Mobile USA Inc. (T-Mobile USA) to exchange certain Advanced Wireless Services (AWS) and Personal Communication Services (PCS) spectrum licenses. As a result of this agreement, we received $0.4 billion of AWS and PCS spectrum licenses at fair value and recorded a pre-tax gain of $0.1 billion in Selling, general and administrative expense in our consolidated statement of income for the year ended December 31, 2017.

During the first quarter of 2017, we completed a license exchange transaction with affiliates of AT&T Inc. (AT&T) to exchange certain AWS and PCS spectrum licenses. As a result of this non-cash exchange, we received $1.0 billion of AWS and PCS spectrum licenses at fair value and recorded a pre-tax gain of $0.1 billion in Selling, general and administrative expense in our consolidated statement of income for the year ended December 31, 2017.

During the first quarter of 2016, we completed a license exchange transaction with affiliates of AT&T to exchange certain AWS and PCS spectrum licenses. As a result of this non-cash exchange, we received $0.4 billion of AWS and PCS spectrum licenses at fair value and we recorded a pre-tax gain of approximately $0.1 billion in Selling, general and administrative expense in our consolidated statement of income for the year ended December 31, 2016.

Acquisition and Integration Related Charges
Acquisition and integration related charges of $0.6 billion and $0.9 billion recorded during the years ended December 31, 2018 and 2017 primarily related to the acquisition of Yahoo’s operating business in June 2017.

Product Realignment Charges
Product realignment charges of $0.7 billion recorded during the year ended December 31, 2018 primarily related to the discontinuation of the go90 platform and associated content during the second quarter of 2018.

Product realignment charges of $0.7 billion recorded during the year ended December 31, 2017 primarily related to charges taken against certain early-stage developmental technologies during the fourth quarter of 2017.

Oath Goodwill Impairment
The Oath goodwill impairment charge of $4.6 billion recorded during the year ended December 31, 2018 for our Media business, branded Oath, was a result of the Company's annual goodwill impairment test performed in the fourth quarter (see "Critical Accounting Estimates").

Net Gain on Sale of Divested Businesses
The net gain on the sale of divested businesses of $1.8 billion recorded during 2017 related to the Data Center Sale in May 2017 and other insignificant transactions.






The net gain on the sale of divested businesses of $1.0 billion recorded during 2016 related to the Access Line Sale. The gain recorded included a $0.5 billion pension and postretirement benefit curtailment gain due to the elimination of the accrual of pension and other postretirement benefits for some or all future services of a significant number of employees covered in three of our defined benefit pension plans and one of our other postretirement benefit plans.

Early Debt Redemption Costs
During 2018, 2017, and 2016, we recorded losses on early debt redemptions of $0.7 billion, $2.0 billion, and $1.8 billion, respectively.
 
We recognize losses on early debt redemptions in Other income (expense), net in our consolidated statements of income. See Note 7 to the consolidated financial statements for additional information related to our early debt redemptions.

Operating Environment and Trends
The telecommunications industry is highly competitive. We expect competition to intensify further with traditional and non-traditional participants seeking increased market share. Our high-quality customer base and networks differentiate us from our competitors and give us the ability to plan and manage through changing economic and competitive conditions. We remain focused on executing on the fundamentals of the business: maintaining a high-quality customer base, delivering strong financial and operating results and strengthening our balance sheet. We will continue to invest for growth, which we believe is the key to creating value for our shareholders. We continue to lead in 4G LTE performance while building momentum for our 5G network. Our strategy lays the foundation for the future through investments in our Intelligent Edge Network that enable efficiencies throughout our core infrastructure and deliver flexibility to meet customer requirements.

The U.S. wireless market has achieved a high penetration of smartphones, which reduces the opportunity for new phone connection growth for the industry. We expect future revenue growth in the industry to be driven by expanding existing customer relationships, increasing the number of ways customers can connect with wireless networks and services and increasing the penetration of other connected devices including wearables, tablets and IoT devices. We expect 5G technology will provide a significant opportunity for growth in the industry in 2020 and beyond. With respect to our wireless connectivity products and services, we compete against other national wireless service providers, including AT&T Inc., Sprint Corporation and T-Mobile USA, Inc., as well as various regional wireless service providers. We also compete for retail activations with resellers that buy bulk wholesale service from wireless service providers for resale, including resellers that buy from us. We face competition from other communications and technology companies seeking to increase their brand recognition and capture customer revenue with respect to the provision of wireless products and services, in addition to non-traditional offerings in mobile data. For example, Microsoft Corporation, Alphabet Inc., Apple Inc. and others are offering alternative means for making wireless voice calls that, in certain cases, can be used in lieu of the wireless provider’s voice service, as well as alternative means of accessing video content.

With respect to wireless services and equipment, pricing plays an important role in the wireless competitive landscape. We compete in this area by offering our customers services and devices that we believe they will regard as the best available value for the price. As the demand for wireless services continues to grow, wireless service providers are offering a range of service plans at competitive prices. These service offerings will vary from time to time based on customer needs, technology changes and market conditions and may be provided as standard plans or as part of limited time promotional offers.

We expect future service revenue growth opportunities to arise from increased access revenue as customers shift to higher access plans, as well as from increased connections per account. Future service revenue growth opportunities will be dependent on expanding the penetration of our services, increasing the number of ways that our customers can connect with our networks and services and the development of new ecosystems.We and other wireless service providers, as well as equipment manufacturers, offer device payment options, which provide customers with the ability to pay for their device over a period of time, and some providers offer device leasing arrangements.

Current and potential competitors in the wireline service market include cable companies, wireless service providers, domestic and foreign telecommunications providers, satellite television companies, Internet service providers, over-the-top providers and other companies that offer network services and managed enterprise solutions.

In addition, companies with a global presence are increasingly competing with us in our wireline services. A relatively small number of telecommunications and integrated service providers with global operations serve customers in the global enterprise market and, to a lesser extent, the global wholesale market. We compete with these providers for large contracts to provide integrated services to global enterprises. Many of these companies have strong market presence, brand recognition and existing customer relationships, all of which contribute to intensifying competition that may affect our future revenue growth.

Despite this challenging environment, we expect that we will be able to grow key aspects of our wireline services. We continue to provide network reliability and offer consumers products, which include fiber-optic Internet access, several video services, and voice services. Further, we will continue to offer our business and government customers more robust IP products and services, and advance our IoT strategies by leveraging business models that monetize usage on our networks at the connectivity, platform and solution layers.

The online advertising market continues to evolve as online users are migrating from traditional desktop to mobile and multiple-device usage. Also, there is a continued shift towards programmatic advertising which presents opportunities to connect online advertisers with the appropriate online users in a rapid environment. Our Media business competes with other online search engines, advertising platforms, digital video services





and social networks. We are experiencing pressure from search and desktop usage and believe the pressure in these sectors will continue. We are implementing initiatives to realize synergies across all of our media assets and build services around our core content pillars to diversify revenue and return to growth.

We will also continue to focus on cost efficiencies to attempt to offset adverse impacts from unfavorable economic conditions and competitive pressures.

2019 Connection Trends
In our Consumer segment, we expect to continue to attract new customers and maintain high-quality retail postpaid customers, capitalizing on demand for data services and providing our customers new ways of using wireless services in their daily lives. We expect that future connection growth will be driven by smartphones, tablets and other connected devices such as wearables. We believe the overall customer experience of matching the unlimited plan with our high-quality wireless network performance continues to attract and retain higher value retail postpaid connections, contributes to continued increases in the penetration of data services and helps us remain competitive with other wireless carriers. We expect to manage churn by providing a consistent, reliable experience on our wireless service and focusing on improving the customer experience through simplified pricing and continued focus in our distribution channels. We expect to continue to grow our Fios Internet connections as we seek to increase our penetration rates within our Fios service areas, further supported by the demand for higher speed internet connections. In Fios video, the business continues to face ongoing pressure as observed throughout the linear television market. We expect to manage market pressure by offering customers a choice of video service, and options such as “skinny bundles” and other offerings. We have experienced continuing access line losses as customers have disconnected both primary and secondary lines and switched to alternative technologies such as wireless, VoIP and cable for voice and data services.

In our Business segment, we offer wireless products and services to business and government customers across the U.S. We continue to grow our retail connections while facing a competitive environment. We expect to maintain connection growth in part by adding capacity and density to our 4G LTE network, in addition to leading the build-out of 5G technology. We expect this connection growth, combined with our industry-leading network assets, will provide additional opportunities to sell solutions, such as those around security, advanced communications and professional services. We expect to expand our existing services offered to business customers through our Intelligent Edge Network, our multi-use platform.

2019 Operating Revenue Trends
In our Consumer segment, we expect to see a continuation of the service revenue trends from 2018 as customers shift to higher access plans with additional services and increase the number of devices they connect with our networks and services. Equipment revenues are largely dependent on wireless device sales volumes, the mix of devices, promotions and upgrades, which are subject to device lifecycles, iconic device launches and competition within the wireless industry.

In our Business segment, we expect overall revenue growth in 2019 as wireless services and our high-quality fiber-based products will offset secular declines from legacy technologies and pressure from competition. We expect wireless revenue to expand, driven by connection growth led by Small and Medium Business. We expect our Fios products, through increased penetration, will also contribute to revenue growth. Legacy traditional wireline services continue to face secular pressures.

Our Media Business, Verizon Media is primarily made up of digital advertising products. We are experiencing revenue pressure from search and desktop usage and believe the pressure in those sectors will continue. We are focused on returning to revenue growth by implementing initiatives to realize synergies across all of our media assets and building services around our core content pillars. We expect positive growth in mobile services and products.

2019 Operating Expense and Cash Flow from Operations Trends
We expect our consolidated operating income margin and adjusted consolidated EBITDA margin to remain strong as we continue to undertake initiatives to reduce our overall cost structure by improving productivity and gaining efficiencies in our operations throughout the business in 2019 and beyond. Business Excellence initiatives include the adoption of the zero-based budgeting methodology, driving capital efficiencies from the architecture of the networks, evolving our Information Technology strategy and offering the voluntary separation program. The goal of the Business Excellence initiative is to take $10 billion of cumulative cash outflows out of the business over four years, beginning with 2018. As part of this initiative, we are focusing on both operating expenses and capital expenditures. Our Business Excellence initiatives produced cumulative cash savings of $2.3 billion in 2018 from a mix of capital and operational expenditure activities. The program remains on track to achieve our goal. Expenses related to newly acquired businesses and programs funded through the reinvestment of program savings are expected to apply offsetting pressures to our margins.

The implementation of Topic 606, resulted in the deferral of commission expense in both our Consumer and Business segments. In 2019 and 2020, we expect a smaller benefit from the adoption of the standard due to the deferral of commissions costs as compared to 2018.

Due to the implementation of Accounting Standard Codification Topic 842 related to leasing on January 1, 2019, we estimate an increase in operating expense for the full year 2019 due to certain initial direct costs that can no longer be deferred under the new accounting guidance.

We create value for our shareholders by investing the cash flows generated by our business in opportunities and transactions that support continued profitable growth, thereby increasing customer satisfaction and usage of our products and services. In addition, we have used our cash flows to





maintain and grow our dividend payout to shareholders. Verizon’s Board of Directors increased the Company’s quarterly dividend by 2.1% during 2018, making this the twelfth consecutive year in which we have raised our dividend.

Our goal is to use our cash to create long-term value for our shareholders. We will continue to look for investment opportunities that will help us to grow the business, strengthen our balance sheet, acquire spectrum licenses (see "Cash Flows from Investing Activities"), pay dividends to our shareholders and, when appropriate, buy back shares of our outstanding common stock (see "Cash Flows from Financing Activities").

Capital Expenditures
Our 2019 capital program includes capital to fund advanced networks and services, including expanding our core networks, adding capacity and density to our 4G LTE network in order to stay ahead of our customers’ increasing data demands and deploying our 5G network, transforming our structure to deploy the Intelligent Edge Network while reducing the cost to deliver services to our customers and pursuing other opportunities to drive operating efficiencies. We expect that the new network architecture will simplify operations by eliminating legacy network elements, improve our 4G LTE coverage, speed the deployment of 5G technology, and create new enterprise opportunities in the business market. The level and the timing of the Company’s capital expenditures within these broad categories can vary significantly as a result of a variety of factors outside of our control, such as material weather events. Capital expenditures for 2019 are expected to be in the range of $17.0 billion to $18.0 billion, including the continued investment in our 5G network. Capital expenditures were $16.7 billion in 2018 and $17.2 billion in 2017. We believe that we have significant discretion over the amount and timing of our capital expenditures on a Company-wide basis as we are not subject to any agreement that would require significant capital expenditures on a designated schedule or upon the occurrence of designated events.

Consolidated Financial Condition
 
(dollars in millions)
 
Years Ended December 31,
2018

 
2017

 
2016

Cash flows provided by (used in)
 
 
 
 
 
Operating activities
$
34,339

 
$
24,318

 
$
21,689

Investing activities
(17,934
)
 
(18,456
)
 
(9,874
)
Financing activities
(15,377
)
 
(6,151
)
 
(13,376
)
Increase (decrease) in cash, cash equivalents and restricted cash
$
1,028

 
$
(289
)
 
$
(1,561
)

We use the net cash generated from our operations to fund expansion and modernization of our networks, service and repay external financing, pay dividends, invest in new businesses and, when appropriate, buy back shares of our outstanding common stock. Our sources of funds, primarily from operations and, to the extent necessary, from external financing arrangements, are sufficient to meet ongoing operating and investing requirements. We expect that our capital spending requirements will continue to be financed primarily through internally generated funds. Debt or equity financing may be needed to fund additional investments or development activities or to maintain an appropriate capital structure to ensure our financial flexibility. Our cash and cash equivalents are held both domestically and internationally, and are invested to maintain principal and provide liquidity. See "Market Risk" for additional information regarding our foreign currency risk management strategies.

Our available external financing arrangements include an active commercial paper program, credit available under credit facilities and other bank lines of credit, vendor financing arrangements, issuances of registered debt or equity securities, U.S. retail medium-term notes and other capital market securities that are privately-placed or offered overseas. In addition, we monetize our device payment plan agreement receivables through asset-backed debt transactions.

On January 1, 2018, we adopted ASU 2016-18 and ASU 2016-15. As required by ASU 2016-18, we included restricted cash in the statement of cash flows for all periods presented. In addition, as required by ASU 2016-15, we retrospectively reclassified approximately $0.6 billion of collections of deferred purchase price related to off-balance sheet securitization from Cash flows from operating activities to Cash flows from investing activities in our consolidated statement of cash flows for the year ended December 31, 2017, and $1.1 billion for the year ended December 31, 2016.

Cash Flows Provided By Operating Activities
Our primary source of funds continues to be cash generated from operations. Net cash provided by operating activities during 2018 increased by $10.0 billion primarily due to an improvement in working capital which includes a decrease in cash income taxes, an increase of $4.0 billion in earnings, and a lower amount of discretionary contributions to qualified employee benefit plans in 2018 compared to 2017. We made $1.7 billion and $3.4 billion in discretionary employee benefits contributions during 2018 and 2017, respectively, primarily to our defined benefit pension plan. As a result of the discretionary pension contributions in 2018 and a $0.3 billion discretionary contribution in January 2019, we expect that there will be no required pension funding until 2024, which will benefit future cash flows. Further, the funded status of our qualified pension plan improved as a result of the contributions.

Net cash provided by operating activities during 2017 increased by $2.6 billion primarily due to an increase in earnings and changes in working capital, partially offset by our discretionary contributions to qualified pension plans of $3.4 billion (approximately $2.1 billion, net of tax benefit) and the change in the method in which we monetize device payment plan receivables, as discussed below.






During 2016, we changed the strategic method by which we monetize device payment plan receivables from sales of device payment plan receivables, which were recorded within cash flows provided by operating activities, to asset-backed debt transactions that are recorded in cash flows from financing activities. During 2016, we received proceeds related to sales of wireless device payment plan agreement receivables of approximately $2.0 billion. See Note 8 to the consolidated financial statements for additional information. During 2018, 2017 and 2016, we received proceeds from asset-backed debt transactions of approximately $4.8 billion, $4.3 billion and $5.0 billion, respectively. See Note 7 to the consolidated financial statements and "Cash Flows Used in Financing Activities" for additional information.

Cash Flows Used In Investing Activities
Capital Expenditures
Capital expenditures continue to relate primarily to the use of capital resources to facilitate the introduction of new products and services, enhance responsiveness to competitive challenges, maintain the existing infrastructure and increase the operating efficiency and productivity of our networks.

Capital expenditures, including capitalized software, were as follows:
(dollars in millions)
 
Years Ended December 31,
2018

 
2017

 
2016

Capital expenditures (including capitalized software)
$
16,658

 
$
17,247

 
$
17,059

Total as a percentage of revenue
12.7
%
 
13.7
%
 
13.5
%

Capital expenditures decreased in 2018 primarily due to capital efficiencies from our Business Excellence initiatives. Capital expenditures increased in 2017 primarily as a result of an increase in investments to support our multi-use fiber deployment. Our investments primarily related to network equipment to support the business.

Acquisitions
During 2018, 2017 and 2016, we invested $1.4 billion, $0.6 billion and $0.5 billion, respectively, in acquisitions of wireless licenses. During 2018, 2017 and 2016, we also invested $0.2 billion, $5.9 billion and $3.8 billion, respectively, in acquisitions of businesses, net of cash acquired.

See "Acquisitions and Divestitures" for information on our acquisitions.

Dispositions
During 2017 and 2016, we received net cash proceeds of $3.5 billion and $9.9 billion, respectively, from dispositions of businesses.

See "Acquisitions and Divestitures" for information on our dispositions.

Cash Flows Used In Financing Activities
We seek to maintain a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters and to protect against earnings and cash flow volatility resulting from changes in market conditions. During 2018, 2017 and 2016, net cash used in financing activities was $15.4 billion, $6.2 billion and $13.4 billion, respectively.

2018
During 2018, our net cash used in financing activities of $15.4 billion was primarily driven by:

$14.6 billion used for repayments, redemptions and repurchases of long-term borrowings and capital lease obligations, which included $3.6 billion used for prepayments and repayments of asset-backed long-term borrowings; and
$9.8 billion used for dividend payments.

These uses of cash were partially offset by proceeds from long-term borrowings of $10.8 billion, which included $4.8 billion of proceeds from our asset-backed debt transactions.

Proceeds from and Repayments, Redemptions, and Repurchases of Long-Term Borrowings
At December 31, 2018, our total debt decreased to $113.1 billion as compared to $117.1 billion at December 31, 2017. Our effective interest rate was 4.8% and 4.7% during the years ended December 31, 2018 and 2017, respectively. The substantial majority of our total debt portfolio consists of fixed rate indebtedness, therefore, changes in interest rates do not have a material effect on our interest payments. See also "Market Risk" and Note 7 to the consolidated financial statements for additional information.

At December 31, 2018, approximately $17.1 billion or 15.1% of the aggregate principal amount of our total debt portfolio consisted of foreign denominated debt, primarily the Euro and British Pound Sterling. We have entered into cross currency swaps on a majority of our foreign denominated debt in order to fix our future interest and principal payments in U.S. dollars and mitigate the impact of foreign currency transaction gains or losses. See "Market Risk" for additional information.






Verizon may continue to repurchase debt securities issued by Verizon and its affiliates in the future through open market purchases, privately negotiated transactions, tender offers, exchange offers, or otherwise, upon such terms and at such prices as Verizon may from time to time determine for cash or other consideration.

Other, net
Other, net financing activities during 2018 included early debt redemption costs, see "Special Items" for additional information, as well as cash paid on debt exchanges and derivative-related transactions.

Dividends
The Verizon Board of Directors assesses the level of our dividend payments on a periodic basis taking into account such factors as long-term growth opportunities, internal cash requirements and the expectations of our shareholders. During the third quarter of 2018, the Board increased our quarterly dividend payment 2.1% to $0.6025 from $0.5900 per share in the prior period. This is the twelfth consecutive year that Verizon’s Board of Directors has approved a quarterly dividend increase.

As in prior periods, dividend payments were a significant use of capital resources. During 2018, we paid $9.8 billion in dividends.

2017
During 2017, our net cash used in financing activities of $6.2 billion was primarily driven by:

$24.2 billion used for repayments, redemptions and repurchases of long-term borrowings and capital lease obligations, which included $0.4 billion used for prepayments of asset-backed long-term borrowings; and
$9.5 billion used for dividend payments.

These uses of cash were partially offset by proceeds from long-term borrowings of $32.0 billion, which included $4.3 billion of proceeds from our asset-backed debt transactions.

Proceeds from and Repayments, Redemptions, and Repurchases of Long-Term Borrowings
At December 31, 2017, our total debt increased to $117.1 billion as compared to $108.1 billion at December 31, 2016. Our effective interest rate was 4.7% and 4.8% during the years ended December 31, 2017 and 2016, respectively. The substantial majority of our total debt portfolio consisted of fixed rate indebtedness, therefore, changes in interest rates did not have a material effect on our interest payments. See also "Market Risk" and Note 7 to the consolidated financial statements for additional information.

At December 31, 2017, approximately $18.0 billion or 15.3% of the aggregate principal amount of our total debt portfolio consisted of foreign denominated debt, primarily the Euro and British Pound Sterling. We have entered into cross currency swaps on a majority of our foreign denominated debt in order to fix our future interest and principal payments in U.S. dollars and mitigate the impact of foreign currency transaction gains or losses. See "Market Risk" for additional information.

Other, net
Other, net financing activities during 2017, included early debt redemption costs. See "Special Items" for additional information related to the early debt redemption costs incurred during the year ended December 31, 2017.

Dividends
During the third quarter of 2017, the Board increased our quarterly dividend payment 2.2% to $0.5900 from $0.5775 per share in the prior period.

As in prior periods, dividend payments were a significant use of capital resources. During 2017, we paid $9.5 billion in dividends.

2016
During 2016, our net cash used in financing activities of $13.4 billion was primarily driven by:

$19.2 billion used for repayments, redemptions and repurchases of long-term borrowings and capital lease obligations; and
$9.3 billion used for dividend payments.

These uses of cash were partially offset by proceeds from long-term borrowings of $18.0 billion, which included $5.0 billion of proceeds from our asset-backed debt transactions.

Proceeds from and Repayments, Redemptions, and Repurchases of Long-Term Borrowings
At December 31, 2016, our total debt decreased to $108.1 billion as compared to $109.7 billion at December 31, 2015. Our effective interest rate was 4.8% during the year ended December 31, 2016. The substantial majority of our total debt portfolio consisted of fixed rate indebtedness, therefore, changes in interest rates did not have a material effect on our interest payments. See also "Market Risk" for additional information.






At December 31, 2016, approximately $11.6 billion or 10.7% of the aggregate principal amount of our total debt portfolio consisted of foreign denominated debt, primarily the Euro and British Pound Sterling. We have entered into cross currency swaps on a majority of our foreign denominated debt in order to fix our future interest and principal payments in U.S. dollars and mitigate the impact of foreign currency transaction gains or losses. See "Market Risk" for additional information.

Other, net
Other, net financing activities during 2016, included early debt redemption costs of $1.8 billion. See "Special Items" for additional information related to the early debt redemption costs incurred during the year ended December 31, 2016.

Dividends
During the third quarter of 2016, the Board increased our quarterly dividend payment 2.2% to $0.5775 from $0.565 per share in the prior period.

As in prior periods, dividend payments were a significant use of capital resources. During 2016, we paid $9.3 billion in dividends.

Asset-Backed Debt
As of December 31, 2018, the carrying value of our asset-backed debt was $10.1 billion. Our asset-backed debt includes notes (the Asset-Backed Notes) issued to third-party investors (Investors) and loans (ABS Financing Facilities) received from banks and their conduit facilities (collectively, the Banks). Our consolidated asset-backed debt bankruptcy remote legal entities (each, an ABS Entity or collectively, the ABS Entities) issue the debt or are otherwise party to the transaction documentation in connection with our asset-backed debt transactions. Under the terms of our asset-backed debt, we transfer device payment plan agreement receivables from Cellco Partnership (Cellco) and certain other affiliates of Verizon (collectively, the Originators) to one of the ABS Entities, which in turn transfers such receivables to another ABS Entity that issues the debt. Verizon entities retain the equity interests in the ABS Entities, which represent the rights to all funds not needed to make required payments on the asset-backed debt and other related payments and expenses.

Our asset-backed debt is secured by the transferred device payment plan agreement receivables and future collections on such receivables. The device payment plan agreement receivables transferred to the ABS Entities and related assets, consisting primarily of restricted cash, will only be available for payment of asset-backed debt and expenses related thereto, payments to the Originators in respect of additional transfers of device payment plan agreement receivables, and other obligations arising from our asset-backed debt transactions, and will not be available to pay other obligations or claims of Verizon’s creditors until the associated asset-backed debt and other obligations are satisfied. The Investors or Banks, as applicable, which hold our asset-backed debt have legal recourse to the assets securing the debt, but do not have any recourse to Verizon with respect to the payment of principal and interest on the debt. Under a parent support agreement, Verizon has agreed to guarantee certain of the payment obligations of Cellco and the Originators to the ABS Entities.

Cash collections on the device payment plan agreement receivables collateralizing our asset-backed debt securities are required at certain specified times to be placed into segregated accounts. Deposits to the segregated accounts are considered restricted cash and are included in Prepaid expenses and other, and Other assets in our consolidated balance sheets.

Proceeds from our asset-backed debt transactions are reflected in Cash flows from financing activities in our condensed consolidated statements of cash flows. The asset-backed debt issued and the assets securing this debt are included in our consolidated balance sheets.

During September 2016 and May 2017, we entered into loan agreements through an ABS Entity with a number of financial institutions. Under these ABS loan agreements, we have the right to prepay all or a portion of the loans at any time without penalty, but in certain cases, with breakage costs. The two year revolving period of the two loan agreements ended in September 2018. In 2018, we made a $1.5 billion drawdown and an aggregate amount of $3.0 billion of prepayments and repayments. We made a $0.4 billion prepayment in December 2017.

In May 2018, we entered into a second device payment plan agreement financing facility with a number of financial institutions (2018 ABS Financing Facility). Under the terms of the 2018 ABS Financing Facility, the financial institutions made advances under asset-backed loans backed by device payment plan agreement receivables of business customers for proceeds of $0.5 billion.

Credit Facilities
In April 2018, we amended our $9.0 billion credit facility to increase the capacity to $9.5 billion and extend its maturity to April 4, 2022. As of December 31, 2018, the unused borrowing capacity under our $9.5 billion credit facility was approximately $9.4 billion. The credit facility does not require us to comply with financial covenants or maintain specified credit ratings, and it permits us to borrow even if our business has incurred a material adverse change. We use the credit facility for the issuance of letters of credit and for general corporate purposes.

In March 2016, we entered into a $1.0 billion credit facility insured by Eksportkreditnamnden Stockholm, Sweden, the Swedish export credit agency. As of December 31, 2018, the outstanding balance was $0.7 billion. We used this credit facility to finance network equipment-related purchases.

In July 2017, we entered into credit facilities insured by various export credit agencies providing us with the ability to borrow up to $4.0 billion to finance equipment-related purchases. The facilities have borrowings available, portions of which extend through October 2019, contingent upon the amount of eligible equipment-related purchases that we make. During 2018, we drew down $3.0 billion from these facilities, and $2.8 billion remained outstanding as of December 31, 2018. In January 2019, we drew down an additional $0.4 billion from these facilities.






Common Stock
Common stock has been used from time to time to satisfy some of the funding requirements of employee and shareholder plans. During the years ended December 31, 2018, 2017 and 2016, we issued 3.5 million, 2.8 million and 3.5 million common shares from Treasury stock, respectively, which had an insignificant aggregate value.

In March 2017, the Verizon Board of Directors authorized a share buyback program to repurchase up to 100 million shares of the Company's common stock. The program will terminate when the aggregate number of shares purchased reaches 100 million, or at the close of business on February 28, 2020, whichever is sooner. The program permits Verizon to repurchase shares over time, with the amount and timing of repurchases depending on market conditions and corporate needs. There were no repurchases of common stock during 2018, 2017 or 2016.

Credit Ratings
Verizon’s credit ratings did not change in 2018, 2017 or 2016.

Securities ratings assigned by rating organizations are expressions of opinion and are not recommendations to buy, sell or hold securities. A securities rating is subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.

Covenants
Our credit agreements contain covenants that are typical for large, investment grade companies. These covenants include requirements to pay interest and principal in a timely fashion, pay taxes, maintain insurance with responsible and reputable insurance companies, preserve our corporate existence, keep appropriate books and records of financial transactions, maintain our properties, provide financial and other reports to our lenders, limit pledging and disposition of assets and mergers and consolidations, and other similar covenants.

We and our consolidated subsidiaries are in compliance with all of our restrictive covenants in our debt agreements.

Change In Cash, Cash Equivalents and Restricted Cash
Our Cash and cash equivalents at December 31, 2018 totaled $2.7 billion, a $0.7 billion increase compared to Cash and cash equivalents at December 31, 2017 primarily as a result of the factors discussed above. Our Cash and cash equivalents at December 31, 2017 totaled $2.1 billion, a $0.8 billion decrease compared to Cash and cash equivalents at December 31, 2016 primarily as a result of the factors discussed above.

Restricted cash at December 31, 2018 totaled $1.2 billion, a $0.4 billion increase compared to restricted cash at December 31, 2017 primarily due to cash collections on the device payment plan agreement receivables that are required at certain specified times to be placed into segregated accounts. Restricted cash at December 31, 2017 totaled $0.8 billion, a $0.5 billion increase compared to restricted cash at December 31, 2016 primarily related to cash collections on the device payment plan agreement receivables that are required at certain specified times to be placed into segregated accounts.

Free Cash Flow
Free cash flow is a non-GAAP financial measure that reflects an additional way of viewing our liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows. Free cash flow is calculated by subtracting capital expenditures from net cash provided by operating activities. We believe it is a more conservative measure of cash flow since purchases of fixed assets are necessary for ongoing operations. Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures. For example, free cash flow does not incorporate payments made on capital lease obligations or cash payments for business acquisitions. Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows.

The following table reconciles net cash provided by operating activities to Free cash flow:
 
(dollars in millions)
 
Years Ended December 31,
2018

 
2017

 
2016

Net cash provided by operating activities
$
34,339

 
$
24,318

 
$
21,689

Less Capital expenditures (including capitalized software)
16,658

 
17,247

 
17,059

Free cash flow
$
17,681

 
$
7,071

 
$
4,630


The changes in free cash flow during 2018, 2017 and 2016 were a result of the factors described in connection with net cash provided by operating activities and capital expenditures. The change in free cash flow during 2018 was primarily due to an improvement in working capital which includes a decrease in cash income taxes, an increase of $4.0 billion in earnings, and a lower amount of discretionary contributions to qualified employee benefit plans in 2018 compared to 2017. We made $1.7 billion and $3.4 billion in discretionary employee benefits contributions during 2018 and 2017, respectively, primarily to our defined benefit pension plan. As a result of the discretionary pension contributions in 2018 and a $0.3 billion discretionary contribution in January 2019, we expect that there will be no required pension funding until 2024, which will benefit future cash flows. Further, the funded status of our qualified pension plan improved as a result of the contributions. Capital expenditures decreased during 2018 compared to 2017, primarily due to capital expenditure efficiencies from our Business Excellence initiatives.






The change in free cash flow during 2017 was primarily due to an increase in earnings and changes in working capital, partially offset by our discretionary contributions to qualified pension plans of $3.4 billion (approximately $2.1 billion, net of tax benefit) and the change in the method in which we monetize device payment plan receivables, as discussed below.

During 2016, we changed the strategic method by which we monetized device payment plan receivables from sales of device payment plan receivables, which were recorded within cash flows provided by operating activities, to asset-backed debt transactions that are recorded in cash flows from financing activities. During 2016, we received proceeds related to sales of wireless device payment plan agreement receivables of approximately $2.0 billion. See Note 8 to the consolidated financial statements for additional information. During 2018, 2017 and 2016, we received proceeds from asset-backed debt transactions of approximately $4.8 billion, $4.3 billion and $5.0 billion, respectively. See Note 7 to the consolidated financial statements and "Cash Flows Used in Financing Activities" for additional information.

Employee Benefit Plan Funded Status and Contributions
Employer Contributions
We operate numerous qualified and nonqualified pension plans and other postretirement benefit plans. These plans primarily relate to our domestic business units. During 2018, 2017 and 2016, contributions to our qualified pension plans were $1.0 billion, $4.0 billion and $0.8 billion, respectively. We made no contribution to our nonqualified pension plans in 2018, and contributed $0.1 billion in both 2017 and 2016. In January 2019, we made a $0.3 billion discretionary contribution to our qualified pension plans.

The Company’s overall investment strategy is to achieve a mix of assets that allows us to meet projected benefit payments while taking into consideration risk and return. In an effort to reduce the risk of our portfolio strategy and better align assets with liabilities, we have adopted a liability driven pension strategy that seeks to better match cash flows from investments with projected benefit payments. We expect that the strategy will reduce the likelihood that assets will decline at a time when liabilities increase (referred to as liability hedging), with the goal to reduce the risk of underfunding to the plan and its participants and beneficiaries; however, we also expect the strategy to result in lower asset returns. Nonqualified pension contributions are estimated to be approximately $0.1 billion in 2019.

Contributions to our other postretirement benefit plans generally relate to payments for benefits on an as-incurred basis since these other postretirement benefit plans do not have funding requirements similar to the pension plans. We contributed $0.7 billion, $1.3 billion and $1.1 billion to our other postretirement benefit plans in 2018, 2017 and 2016, respectively. Contributions to our other postretirement benefit plans are estimated to be approximately $0.5 billion in 2019.

Leasing Arrangements
See Note 6 to the consolidated financial statements for a discussion of leasing arrangements.






Contractual Obligations
The following table provides a summary of our contractual obligations and commercial commitments at December 31, 2018. Additional detail about these items is included in the notes to the consolidated financial statements.
 
(dollars in millions)
 
 
Payments Due By Period
Contractual Obligations
Total

 
Less than
1 year

 
1 to 3 years

 
3 to 5 years

 
More than
5 years

Long-term debt(1)
$
112,548

 
$
6,744

 
$
14,019

 
$
13,441

 
$
78,344

Capital lease obligations(2)
905

 
314

 
360

 
136

 
95

Total long-term debt, including current maturities
113,453

 
7,058

 
14,379

 
13,577

 
78,439

Interest on long-term debt(1)
82,117

 
5,048

 
9,364

 
8,474

 
59,231

Operating leases(2)
26,593

 
4,043

 
6,950

 
5,393

 
10,207

Purchase obligations(3)
22,179

 
8,764

 
9,098

 
2,137

 
2,180

Other long-term liabilities(4)
4,405

 
474

 
1,872

 
2,059

 

Finance obligations(5)
1,819

 
276

 
569

 
592

 
382

Total contractual obligations
$
250,566

 
$
25,663

 
$
42,232

 
$
32,232

 
$
150,439


(1) 
Items included in long-term debt with variable coupon rates exclude unamortized debt issuance costs, and are described in Note 7 to the consolidated financial statements.
(2) 
See Note 6 to the consolidated financial statements for additional information.
(3) 
Items included in purchase obligations are primarily commitments to purchase content and network services, equipment, software and marketing services, which will be used or sold in the ordinary course of business. These amounts do not represent our entire anticipated purchases in the future, but represent only those items that are the subject of contractual obligations. We also purchase products and services as needed with no firm commitment. For this reason, the amounts presented in this table alone do not provide a reliable indicator of our expected future cash outflows or changes in our expected cash position. See Note 16 to the consolidated financial statements for additional information.
(4) 
Other long-term liabilities represent estimated postretirement benefit and qualified pension plan contributions. Estimated qualified pension plan contributions include expected minimum funding contributions, which commence in 2024 based on the plan's current funded status. Estimated postretirement benefit payments include expected future postretirement benefit payments. These estimated amounts: (1) are subject to change based on changes to assumptions and future plan performance, which could impact the timing or amounts of these payments; and (2) exclude expectations beyond 5 years due to uncertainty of the timing and amounts. See Note 11 to the consolidated financial statements for additional information.
(5) 
Represents future minimum payments under the sublease arrangement for our tower transaction. See Note 6 to the consolidated financial statements for additional information.

We are not able to make a reasonable estimate of when the unrecognized tax benefits balance of $2.9 billion and related interest and penalties will be settled with the respective taxing authorities until issues or examinations are further developed. See Note 12 to the consolidated financial statements for additional information.

Guarantees
We guarantee the debentures of our operating telephone company subsidiaries as well as the debt obligations of GTE LLC, as successor in interest to GTE Corporation, that were issued and outstanding prior to July 1, 2003. See Note 7 to the consolidated financial statements for additional information.

As a result of the closing of the Access Line Sale on April 1, 2016, GTE Southwest Inc., Verizon California Inc. and Verizon Florida LLC are no longer wholly-owned subsidiaries of Verizon, and the guarantees of $0.6 billion aggregate principal amount of debentures and first mortgage bonds of those entities have terminated pursuant to their terms.

In connection with the execution of agreements for the sale of businesses and investments, Verizon ordinarily provides representations and warranties to the purchasers pertaining to a variety of nonfinancial matters, such as ownership of the securities being sold, as well as financial losses. See Note 16 to the consolidated financial statements for additional information.

As of December 31, 2018, letters of credit totaling approximately $0.6 billion, which were executed in the normal course of business and support several financing arrangements and payment obligations to third parties, were outstanding. See Note 16 to the consolidated financial statements for additional information.






Market Risk
We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes, foreign currency exchange rate fluctuations, changes in investment, equity and commodity prices and changes in corporate tax rates. We employ risk management strategies, which may include the use of a variety of derivatives including cross currency swaps, forward starting interest rate swaps, interest rate swaps, interest rate caps and foreign exchange forwards. We do not hold derivatives for trading purposes.

It is our general policy to enter into interest rate, foreign currency and other derivative transactions only to the extent necessary to achieve our desired objectives in optimizing exposure to various market risks. Our objectives include maintaining a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters and to protect against earnings and cash flow volatility resulting from changes in market conditions. We do not hedge our market risk exposure in a manner that would completely eliminate the effect of changes in interest rates and foreign exchange rates on our earnings.

Counterparties to our derivative contracts are major financial institutions with whom we have negotiated derivatives agreements (ISDA master agreements) and credit support annex (CSA) agreements which provide rules for collateral exchange. Our CSA agreements entered into prior to the fourth quarter of 2017 generally require collateralized arrangements with our counterparties in connection with uncleared derivatives. During 2017, we paid an insignificant amount of cash to extend amendments to certain of our collateral exchange arrangements, which eliminated the requirement to post collateral for a specified period of time. Additionally, during the fourth quarter of 2017, we began negotiating and executing new ISDA master agreements and CSA agreements with our counterparties. The negotiations and executions of new agreements continued in 2018. The newly executed CSA agreements contain rating based thresholds such that we or our counterparties may be required to hold or post collateral based upon changes in outstanding positions as compared to established thresholds and changes in credit ratings. At December 31, 2018, we posted collateral of approximately $0.1 billion related to derivative contracts under collateral exchange arrangements, which were recorded as Prepaid expenses and other in our consolidated balance sheet. We did not post any collateral at December 31, 2017. While we may be exposed to credit losses due to the nonperformance of our counterparties, we consider the risk remote and do not expect that any such nonperformance would result in a significant effect on our results of operations or financial condition due to our diversified pool of counterparties. See Note 9 to the consolidated financial statements for additional information regarding the derivative portfolio.

Interest Rate Risk
We are exposed to changes in interest rates, primarily on our short-term debt and the portion of long-term debt that carries floating interest rates. As of December 31, 2018, approximately 78% of the aggregate principal amount of our total debt portfolio consisted of fixed rate indebtedness, including the effect of interest rate swap agreements designated as hedges. The impact of a 100-basis-point change in interest rates affecting our floating rate debt would result in a change in annual interest expense, including our interest rate swap agreements that are designated as hedges, of approximately $0.3 billion. The interest rates on our existing long-term debt obligations are unaffected by changes to our credit ratings.

The table that follows summarizes the fair values of our long-term debt, including current maturities, and interest rate swap derivatives as of December 31, 2018 and 2017. The table also provides a sensitivity analysis of the estimated fair values of these financial instruments assuming 100-basis-point upward and downward shifts in the yield curve. Our sensitivity analysis does not include the fair values of our commercial paper and bank loans, if any, because they are not significantly affected by changes in market interest rates.
 
 
 
 
 
(dollars in millions)

Long-term debt and related derivatives
Fair Value

 
Fair Value assuming
+ 100 basis point shift

 
Fair Value assuming
 - 100 basis point shift

At December 31, 2018
$
119,195

 
$
111,250

 
$
128,957

At December 31, 2017
128,867

 
119,235

 
140,216


Interest Rate Swaps
We enter into interest rate swaps to achieve a targeted mix of fixed and variable rate debt. We principally receive fixed rates and pay variable rates based on the London Interbank Offered Rate, resulting in a net increase or decrease to Interest expense. These swaps are designated as fair value hedges and hedge against interest rate risk exposure of designated debt issuances. At December 31, 2018, the fair value of the asset and liability of these contracts was insignificant and $0.8 billion, respectively. At December 31, 2017, the fair value of the asset and liability of these contracts were $0.1 billion and $0.4 billion, respectively. At December 31, 2018 and 2017, the total notional amount of the interest rate swaps was $19.8 billion and $20.2 billion, respectively.

Forward Starting Interest Rate Swaps
We have entered into forward starting interest rate swaps designated as cash flow hedges in order to manage our exposure to interest rate changes on future forecasted transactions. At December 31, 2018, the fair value of the liability of these contracts was $0.1 billion. At December 31, 2018, the total notional amount of the forward starting interest rate swaps was $4.0 billion.

Interest Rate Caps
We also have interest rate caps which we use as an economic hedge but for which we have elected not to apply hedge accounting. We enter into interest rate caps to mitigate our interest exposure to interest rate increases on our ABS Financing Facility and Asset-Backed Notes. The fair value of the asset and liability of these contracts were insignificant at both December 31, 2018 and 2017. At December 31, 2018 and 2017, the total notional value of these contracts was $2.2 billion and $2.8 billion, respectively.






Foreign Currency Translation
The functional currency for our foreign operations is primarily the local currency. The translation of income statement and balance sheet amounts of our foreign operations into U.S. dollars is recorded as cumulative translation adjustments, which are included in Accumulated other comprehensive income in our consolidated balance sheets. Gains and losses on foreign currency transactions are recorded in the consolidated statements of income in Other income (expense), net. At December 31, 2018, our primary translation exposure was to the British Pound Sterling, Euro, Australian Dollar and Japanese Yen.

Cross Currency Swaps
We have entered into cross currency swaps designated as cash flow hedges to exchange our British Pound Sterling, Euro, Swiss Franc and Australian Dollar-denominated cash flows into U.S. dollars and to fix our cash payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses. The fair value of the asset of these contracts was $0.2 billion and $0.5 billion at December 31, 2018 and 2017, respectively. At December 31, 2018 and 2017, the fair value of the liability of these contracts was $0.5 billion and insignificant respectively. At both December 31, 2018 and 2017, the total notional amount of the cross currency swaps was $16.6 billion.

Foreign Exchange Forwards
We also have foreign exchange forwards which we use as an economic hedge but for which we have elected not to apply hedge accounting. We enter into British Pound Sterling and Euro foreign exchange forwards to mitigate our foreign exchange rate risk related to non-functional currency denominated monetary assets and liabilities of international subsidiaries. At December 31, 2018, the total notional amount of the foreign exchange forwards was $0.6 billion.

Critical Accounting Estimates and Recently Issued Accounting Standards
Critical Accounting Estimates
A summary of the critical accounting estimates used in preparing our financial statements is as follows:

Wireless licenses and Goodwill are a significant component of our consolidated assets. Both our wireless licenses and goodwill are treated as indefinite-lived intangible assets and, therefore are not amortized, but rather are tested for impairment annually in the fourth fiscal quarter, unless there are events requiring an earlier assessment or changes in circumstances during an interim period providing impairment indicators are present. We believe our estimates and assumptions are reasonable and represent appropriate marketplace considerations as of the valuation date. Although we use consistent methodologies in developing the assumptions and estimates underlying the fair value calculations used in our impairment tests, these estimates and assumptions are uncertain by nature, may change over time and can vary from actual results. It is possible that in the future there may be changes in our estimates and assumptions, including the timing and amount of future cash flows, margins, growth rates, market participant assumptions, comparable benchmark companies and related multiples and discount rates, which could result in different fair value estimates. Significant and adverse changes to any one or more of the above-noted estimates and assumptions could result in a goodwill impairment for one or more of our reporting units.

Wireless Licenses
The carrying value of our wireless licenses was approximately $94.1 billion as of December 31, 2018. We aggregate our wireless licenses into one single unit of accounting, as we utilize our wireless licenses on an integrated basis as part of our nationwide wireless network. Our wireless licenses provide us with the exclusive right to utilize certain radio frequency spectrum to provide wireless communication services. There are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of our wireless licenses.

In 2018, our quantitative impairment test consisted of comparing the estimated fair value of our aggregate wireless licenses to the aggregated carrying amount as of the test date.

In 2017 and 2016, we performed a qualitative impairment assessment to determine whether it is more likely than not that the fair value of our wireless licenses was less than the carrying amount. As part of our assessment we considered several qualitative factors including the business enterprise value of our historical Wireless segment, macroeconomic conditions (including changes in interest rates and discount rates), industry and market considerations (including industry revenue and EBITDA margin projections), the projected financial performance of our historical Wireless segment, as well as other factors.

Our impairment tests in 2018, 2017 and 2016 indicated that the fair value of our wireless licenses significantly exceeded their carrying value and, therefore, did not result in an impairment.

Under our quantitative assessment, we estimated the fair value of our wireless licenses using the Greenfield approach. The Greenfield approach is an income-based valuation approach that values the wireless licenses by calculating the cash flow generating potential of a hypothetical start-up company that goes into business with no assets except the wireless licenses to be valued. A discounted cash flow analysis is used to estimate what a marketplace participant would be willing to pay to purchase the aggregated wireless licenses as of the valuation date. As a result, we were required to make significant estimates about future cash flows specifically associated with our wireless licenses, an appropriate discount rate based on the risk associated with those estimated cash flows and assumed terminal value and growth rates. We considered current and expected future economic conditions, current and expected availability of wireless network technology and infrastructure and related





equipment and the costs thereof as well as other relevant factors in estimating future cash flows. The discount rate represented our estimate of the weighted-average cost of capital (WACC), or expected return, that a marketplace participant would have required as of the valuation date. We developed the discount rate based on our consideration of the cost of debt and equity of a group of guideline companies as of the valuation date. Accordingly, our discount rate incorporated our estimate of the expected return a marketplace participant would have required as of the valuation date, including the risk premium associated with the current and expected economic conditions as of the valuation date. The terminal value growth rate represented our estimate of the marketplace’s long-term growth rate.

Goodwill
In November 2018, we announced a strategic reorganization of our business. The Company began reporting externally under the new structure as of April 1, 2019. The goodwill impairment assessment results described below relate to the previous reporting structure in effect as of December 31, 2018.

At December 31, 2018, the balance of our goodwill was approximately $24.6 billion, of which $18.4 billion was in our historical Wireless reporting unit, $3.9 billion was in our historical Wireline reporting unit, $0.2 billion was in our Media reporting unit and $2.1 billion was in our historical Connect reporting unit. To determine if goodwill is potentially impaired, we have the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we elect to bypass the qualitative assessment or if indications of a potential impairment exist, the determination of whether an impairment has occurred requires the determination of the fair value of each respective reporting unit.

We performed a quantitative impairment assessment for all of our reporting units in 2018 and for all of our reporting units, except for our historical Wireless reporting unit, in 2017 and 2016 for which a qualitative assessment was completed. For 2018, 2017 and 2016, our impairment tests indicated that the fair value for each of our historical Wireless, historical Wireline and historical Connect reporting units exceeded their respective carrying value and, therefore, did not result in an impairment. For details on our Media reporting unit, refer to the discussion below.

Under our quantitative assessment, the fair value of the reporting unit is calculated using a market approach and a discounted cash flow method. The market approach includes the use of comparative multiples to corroborate discounted cash flow results. The discounted cash flow method is based on the present value of two components-projected cash flows and a terminal value. The terminal value represents the expected normalized future cash flows of the reporting unit beyond the cash flows from the discrete projection period. The fair value of the reporting unit is calculated based on the sum of the present value of the cash flows from the discrete period and the present value of the terminal value. The discount rate represented our estimate of the WACC, or expected return, that a marketplace participant would have required as of the valuation date. The application of our goodwill impairment test required key assumptions underlying our valuation model. The discounted cash flow analysis factored in assumptions on discount rates and terminal growth rates to reflect risk profiles of key strategic revenue and cost initiatives, as well as revenue and EBITDA growth relative to history and market trends and expectations. The market multiples approach incorporated significant judgment involved in the selection comparable public company multiples and benchmarks. The selection of companies was influenced by differences in growth and profitability, and volatility in market prices of peer companies. Similar assumptions were made by management for all of our reporting units. These valuation inputs are inherently uncertain, and an adverse change in one or a combination of these inputs could trigger a goodwill impairment loss in the future.

The fair value of our historical Wireless and historical Connect reporting units significantly exceeded their respective carrying value for the impairment tests performed for 2018, 2017 and 2016.

Our historical Wireline reporting unit had experienced increasing market pressures that had resulted in lower than expected revenues and earnings and these pressures may persist over the near term. A projected sustained decline in a reporting unit's revenues and earnings could have a significant negative impact on its fair value and may result in impairment charges in the future. Such a decline could be driven by, among other things: (1) further anticipated decreases in service pricing, sales volumes and long-term growth rate as a result of competitive pressures or other factors; or (2) the inability to achieve or delays in achieving the goals in strategic initiatives. Also, adverse changes to macroeconomic factors, such as increases to long-term interest rates, would also negatively impact the fair value of the reporting unit.

At the goodwill impairment measurement date of October 31, 2018, 2017 and 2016, our historical Wireline reporting unit had fair value that exceeded its carrying amount by 5%, 14% and 20%, respectively. See Note 4 to the consolidated financial statements for additional information. As a result of our goodwill assessment, management believed there was an increasing risk that our historical Wireline reporting unit may be required to recognize an impairment charge in the future.

Our Media business, which operated in 2018 under the "Oath" brand until January 2019 and is now referred to as Verizon Media, experienced increased competitive and market pressures throughout 2018 that resulted in lower than expected revenues and earnings. These pressures are expected to continue and have resulted in a loss of market positioning to our competitors in the digital advertising business. Oath also achieved lower than expected benefits from the integration of the Yahoo Inc. and AOL Inc. (AOL) businesses.

As of August 2018, Hans Vestberg became Chief Executive Officer of Verizon, and as of October 2018, K. Guru Gowrappan was appointed Chief Executive Officer of our Media business. In connection with Verizon’s annual budget process in the fourth quarter of 2018, the new leadership at both Oath and Verizon completed a comprehensive five-year strategic planning review of Oath’s business prospects resulting in unfavorable adjustments to Oath’s financial projections. These revised projections were used as a key input into Oath's annual goodwill impairment test performed in the fourth quarter.






Consistent with our accounting policy, we applied a combination of a market approach and a discounted cash flow method reflecting current assumptions and inputs, including our revised projections, discount rate and expected growth rates, which resulted determination that the fair value of the Media reporting unit was less than its carrying amount. As a result, we recorded a non-cash goodwill impairment charge of approximately $4.6 billion ($4.5 billion after-tax) in the fourth quarter of 2018 in our consolidated statement of income. The goodwill balance of the Media reporting unit was approximately $4.8 billion prior to the incurrence of this impairment charge. For 2017 and 2016, our impairment test indicated that the fair value of our Media reporting unit exceeded its carrying value and, therefore, did not result in an impairment.

Pension and Other Postretirement Benefit Plans
We maintain benefit plans for most of our employees, including, for certain employees, pension and other postretirement benefit plans. At December 31, 2018, in the aggregate, pension plan benefit obligations exceeded the fair value of pension plan assets, which will result in future pension plan expense. Other postretirement benefit plans have larger benefit obligations than plan assets, resulting in expense. Significant benefit plan assumptions, including the discount rate used, the long-term rate of return on plan assets, the determination of the substantive plan and health care trend rates are periodically updated and impact the amount of benefit plan income, expense, assets and obligations. Changes to one or more of these assumptions could significantly impact our accounting for pension and other postretirement benefits. A sensitivity analysis of the impact of changes in these assumptions on the benefit obligations and expense (income) recorded, as well as on the funded status due to an increase or a decrease in the actual versus expected return on plan assets as of December 31, 2018 and for the year then ended pertaining to Verizon’s pension and postretirement benefit plans, is provided in the table below.
(dollars in millions)
Percentage point
change
Increase/(decrease) at December 31, 2018*

Pension plans discount rate
+0.50
$
(926
)
 
-0.50
1,025

Rate of return on pension plan assets
+1.00
(185
)
 
-1.00
185

Postretirement plans discount rate
+0.50
(798
)
 
-0.50
893

Rate of return on postretirement plan assets
+1.00
(9
)
 
-1.00
9

Health care trend rates
+1.00
462

 
-1.00
(485
)

* In determining its pension and other postretirement obligation, the Company used a weighted-average discount rate of 4.4%. The rate was selected to approximate the composite interest rates available on a selection of high-quality bonds available in the market at December 31, 2018. The bonds selected had maturities that coincided with the time periods during which benefits payments are expected to occur, were non-callable and available in sufficient quantities to ensure marketability (at least $0.3 billion par outstanding).

The annual measurement date for both our pension and other postretirement benefits is December 31. Effective January 1, 2016, we adopted the full yield curve approach to estimate the interest cost component of net periodic benefit cost for pension and other postretirement benefits. We accounted for this change as a change in accounting estimate and, accordingly, accounted for it prospectively beginning in the first quarter of 2016. Prior to this change, we estimated the interest cost component utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period.

The full yield curve approach refines our estimate of interest cost by applying the individual spot rates from a yield curve composed of the rates of return on several hundred high-quality fixed income corporate bonds available at the measurement date. These individual spot rates align with the timing of each future cash outflow for benefit payments and therefore provide a more precise estimate of interest cost.

Income Taxes
Our current and deferred income taxes and associated valuation allowances are impacted by events and transactions arising in the normal course of business as well as in connection with the adoption of new accounting standards, changes in tax laws and rates, acquisitions and dispositions of businesses and non-recurring items. As a global commercial enterprise, our income tax rate and the classification of income taxes can be affected by many factors, including estimates of the timing and realization of deferred income tax assets and the timing and amount of income tax payments. We account for tax benefits taken or expected to be taken in our tax returns in accordance with the accounting standard relating to the uncertainty in income taxes, which requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return. We review and adjust our liability for unrecognized tax benefits based on our best judgment given the facts, circumstances and information available at each reporting date. To the extent that the final outcome of these tax positions is different than the amounts recorded, such differences may impact income tax expense and actual tax payments. We recognize any interest and penalties accrued related to unrecognized tax benefits in income tax expense. Actual tax payments may materially differ from estimated liabilities as a result of changes in tax laws as well as unanticipated transactions impacting related income tax balances. See Note 12 to the consolidated financial statements for additional information.

Property, Plant and Equipment
Our Property, plant and equipment balance represents a significant component of our consolidated assets. We record Property, plant and equipment at cost. We depreciate Property, plant and equipment on a straight-line basis over the estimated useful life of the assets. We expect





that a one year increase in estimated useful lives of our Property, plant and equipment would result in a decrease to our 2018 depreciation expense of $2.9 billion and that a one year decrease would result in an increase of approximately $4.9 billion in our 2018 depreciation expense.

Accounts Receivable
We maintain allowances for uncollectible accounts receivable, including our direct-channel device payment plan agreement receivables, for estimated losses resulting from the failure or inability of our customers to make required payments. Indirect-channel device payment loans are considered financial instruments and are initially recorded at fair value net of imputed interest, and credit losses are recorded as incurred. However, loan balances are assessed quarterly for impairment and an allowance is recorded if the loan is considered impaired. Our allowance for uncollectible accounts receivable is based on management’s assessment of the collectability of specific customer accounts and includes consideration of the credit worthiness and financial condition of those customers. We record an allowance to reduce the receivables to the amount that is reasonably believed to be collectible. We also record an allowance for all other receivables based on multiple factors including historical experience with bad debts, the general economic environment and the aging of such receivables. Similar to traditional service revenue, we record direct device payment plan agreement bad debt expense based on an estimate of the percentage of equipment revenue that will not be collected. This estimate is based on a number of factors including historical write-off experience, credit quality of the customer base and other factors such as macroeconomic conditions. If there is a deterioration of our customers’ financial condition or if future actual default rates on receivables in general differ from those currently anticipated, we may have to adjust our allowance for doubtful accounts, which would affect earnings in the period the adjustments are made.

Recently Issued Accounting Standards
See Note 1 to the consolidated financial statements for a discussion of recently issued accounting standard updates not yet adopted as of December 31, 2018.

Acquisitions and Divestitures
Access Line Sale
In February 2015, we entered into a definitive agreement with Frontier pursuant to which Verizon sold its local exchange business and related landline activities in California, Florida and Texas, including Fios Internet and video customers, switched and special access lines and high-speed Internet service and long distance voice accounts in these three states, for approximately $10.5 billion (approximately $7.3 billion net of income taxes), subject to certain adjustments and including the assumption of $0.6 billion of indebtedness from Verizon by Frontier. The transaction included the acquisition by Frontier of the equity interests of Verizon’s incumbent local exchange carriers in California, Florida and Texas. The transaction closed on April 1, 2016. See Note 3 to the consolidated financial statements for additional information.

Acquisition of AOL Inc.
In May 2015, we entered into an Agreement and Plan of Merger with AOL Inc. pursuant to which we commenced a tender offer to acquire all of the outstanding shares of common stock of AOL at a price of $50.00 per share, net to the seller in cash, without interest and less any applicable withholding taxes.

On June 23, 2015, we completed the tender offer and merger, and AOL became a wholly-owned subsidiary of Verizon. The aggregate cash consideration paid by Verizon at the closing of these transactions was approximately $3.8 billion. Holders of approximately 6.6 million shares exercised appraisal rights under Delaware law. In September 2018, we obtained court approval to settle this matter for total cash consideration of $0.2 billion, of which an insignificant amount relates to interest, resulting in an insignificant gain. We paid the cash consideration in October 2018.

XO Holdings
In February 2016, we entered into a purchase agreement to acquire XO, which owned and operated one of the largest fiber-based IP and Ethernet networks in the U.S. Concurrently, we entered into a separate agreement to utilize certain wireless spectrum from a wholly-owned subsidiary of XO Holdings, NextLink, that held XO's millimeter-wave wireless spectrum. The agreement included an option, subject to certain conditions, to acquire NextLink. In February 2017, we completed our acquisition of XO for total cash consideration of approximately $1.5 billion, of which $0.1 billion was paid in 2015, and we prepaid $0.3 billion in connection with the NextLink option which represented the fair value of the option.

In April 2017, we exercised our option to buy NextLink for approximately $0.5 billion, subject to certain adjustments, of which $0.3 billion was prepaid in the first quarter of 2017. The transaction closed in January 2018. The acquisition of NextLink was accounted for as an asset acquisition, as substantially all of the value related to the acquired spectrum. Upon closing, we recorded approximately $0.7 billion of wireless licenses, $0.1 billion of a deferred tax liability and $0.1 billion of other liabilities. See Note 3 to the consolidated financial statements for additional information.

Acquisition of Yahoo! Inc.’s Operating Business
In July 2016, Verizon entered into a stock purchase agreement (the Purchase Agreement) with Yahoo. Pursuant to the Purchase Agreement, upon the terms and subject to the conditions thereof, we agreed to acquire the stock of one or more subsidiaries of Yahoo holding all of Yahoo’s operating business for approximately $4.83 billion in cash, subject to certain adjustments (the Transaction).






In February 2017, Verizon and Yahoo entered into an amendment to the Purchase Agreement, pursuant to which the Transaction purchase price was reduced by $350 million to approximately $4.48 billion in cash, subject to certain adjustments. Subject to certain exceptions, the parties also agreed that certain user security and data breaches incurred by Yahoo (and the losses arising therefrom) were to be disregarded: (1) for purposes of specified conditions to Verizon’s obligations to close the Transaction; and (2) in determining whether a "Business Material Adverse Effect" under the Purchase Agreement had occurred.

In June 2017, we completed the Transaction. The aggregate purchase consideration at the closing of the Transaction was approximately $4.7 billion, including cash acquired of $0.2 billion.

Concurrently with the amendment of the Purchase Agreement, Yahoo and Yahoo Holdings, Inc., a wholly-owned subsidiary of Yahoo that Verizon agreed to purchase pursuant to the Transaction, also entered into an amendment to the related reorganization agreement, pursuant to which Yahoo (which changed its name to Altaba Inc. following the closing of the Transaction) retains 50% of certain post-closing liabilities arising out of governmental or third-party investigations, litigations or other claims related to certain user security and data breaches incurred by Yahoo prior to its acquisition by Verizon, including an August 2013 data breach disclosed by Yahoo on December 14, 2016. At that time, Yahoo disclosed that more than one billion of the approximately three billion accounts existing in 2013 had likely been affected. In accordance with the original Transaction agreements, Yahoo will continue to retain 100% of any liabilities arising out of any shareholder lawsuits (including derivative claims) and investigations and actions by the SEC.

Prior to the closing of the Transaction, pursuant to a related reorganization agreement, Yahoo transferred all of the assets and liabilities constituting Yahoo’s operating business to the subsidiaries that we acquired in the Transaction. The assets that we acquired did not include Yahoo’s ownership interests in Alibaba, Yahoo! Japan and certain other investments, certain undeveloped land recently divested by Yahoo, certain non-core intellectual property or its cash, other than the cash from its operating business we acquired. We received for our benefit and that of our current and certain future affiliates a non-exclusive, worldwide, perpetual, royalty-free license to all of Yahoo’s intellectual property that was not conveyed with the business.

In October 2017, based upon information that we received in connection with our integration of Yahoo's operating business, we disclosed that we believe that the August 2013 data breach previously disclosed by Yahoo affected all of its accounts.

Fleetmatics Group PLC
In July 2016, we entered into an agreement to acquire Fleetmatics. Fleetmatics was a leading global provider of fleet and mobile workforce management solutions. Pursuant to the terms of the agreement, we acquired Fleetmatics for $60.00 per ordinary share in cash. The aggregate merger consideration was approximately $2.5 billion, including cash acquired of $0.1 billion. We completed the acquisition on November 7, 2016.

Telogis, Inc.
In July 2016, we acquired Telogis, a global cloud-based mobile enterprise management software business, for $0.9 billion of cash consideration.

Data Center Sale
In December 2016, we entered into a definitive agreement, which was subsequently amended in March 2017, with Equinix Inc. pursuant to which we agreed to sell 23 customer-facing data center sites in the U.S. and Latin America for approximately $3.6 billion, subject to certain adjustments. The transaction closed in May 2017.

Straight Path
In May 2017, we entered into a purchase agreement to acquire Straight Path, a holder of millimeter wave spectrum configured for 5G wireless services, for total consideration reflecting an enterprise value of approximately $3.1 billion. Under the terms of the purchase agreement, we agreed to pay: (1) Straight Path shareholders $184.00 per share, payable in Verizon shares; and (2) certain transaction costs payable in cash of approximately $0.7 billion, consisting primarily of a fee to be paid to the FCC. The transaction closed in February 2018 at which time we issued approximately 49 million shares of Verizon common stock, valued at approximately $2.4 billion, and paid the associated cash consideration. See Note 3 to the consolidated financial statements for additional information.

WideOpenWest, Inc.
In August 2017, we entered into a definitive agreement to purchase certain fiber-optic network assets in the Chicago market from WOW!, a leading provider of communications services. The transaction closed in December 2017. In addition, the parties entered into a separate agreement pursuant to which WOW! will complete the build-out of the network assets in 2019. The total cash consideration for the transactions is approximately $0.3 billion, of which $0.2 billion was paid in December 2017.

Spectrum License Transactions
From time to time, we enter into agreements to buy, sell or exchange spectrum licenses. We believe these spectrum license transactions have allowed us to continue to enhance the reliability of our wireless network while also resulting in a more efficient use of spectrum. See Note 3 to the consolidated financial statements for additional information regarding our spectrum license transactions.






Other
From time to time, we enter into strategic agreements to acquire various other businesses and investments. See Note 3 to the consolidated financial statements for additional information.





Cautionary Statement Concerning Forward-Looking Statements
In this report we have made forward-looking statements. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words "anticipates," "believes," "estimates," "expects," "hopes" or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

The following important factors, along with those discussed elsewhere in this report and in other filings with the SEC, could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements:

adverse conditions in the U.S. and international economies;

the effects of competition in the markets in which we operate;

material changes in technology or technology substitution;

disruption of our key suppliers’ provisioning of products or services;

changes in the regulatory environment in which we operate, including any increase in restrictions on our ability to operate our networks;

breaches of network or information technology security, natural disasters, terrorist attacks or acts of war or significant litigation and any resulting financial impact not covered by insurance;

our high level of indebtedness;

an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations or adverse conditions in the credit markets affecting the cost, including interest rates, and/or availability of further financing;

material adverse changes in labor matters, including labor negotiations, and any resulting financial and/or operational impact;

significant increases in benefit plan costs or lower investment returns on plan assets;

changes in tax laws or treaties, or in their interpretation;

changes in accounting assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings;

the inability to implement our business strategies; and

the inability to realize the expected benefits of strategic transactions.





Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Verizon Communications Inc.:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Verizon Communications Inc. and subsidiaries (Verizon) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, cash flows and changes in equity for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Verizon at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), Verizon’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 15, 2019 expressed an unqualified opinion thereon.

Adoption of New Accounting Standards

ASU No. 2016-15
As discussed in Note 1 to the consolidated financial statements, on January 1, 2018 Verizon retrospectively changed its method of presenting certain cash receipts and cash payments in the accompanying consolidated statements of cash flows as a result of the adoption of FASB Accounting Standards Update (ASU) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.

ASU No. 2016-18
As discussed in Note 1 to the consolidated financial statements, on January 1, 2018 Verizon retrospectively changed its method of presenting changes in restricted cash in the accompanying consolidated statements of cash flows as a result of the adoption of ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash.

ASU No. 2017-07
As discussed in Note 1 to the consolidated financial statements, on January 1, 2018 Verizon retrospectively changed its method of presenting the service cost component of net benefit cost in the accompanying consolidated statements of income as a result of the adoption of ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.

ASU No. 2014-09
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2018 Verizon changed its method for recognizing revenue as a result of the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-08, 2016-10 and 2016-12 using the modified retrospective method.

Basis for Opinion

These financial statements are the responsibility of Verizon’s management. Our responsibility is to express an opinion on Verizon’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to Verizon in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/
Ernst & Young LLP
 
Ernst & Young LLP
 
We have served as Verizon's auditor since 2000.
 
New York, New York
 
 
 
February 15, 2019
 
except for Notes 1 and 13, as to which the date is August 8, 2019





Consolidated Statements of Income Verizon Communications Inc. and Subsidiaries
 
 
(dollars in millions, except per share amounts)
 
Years Ended December 31,
2018

 
2017

 
2016

 
 
 
 
 
 
Operating Revenues
 
 
 
 
 
Service revenues and other
$
108,605

 
$
107,145

 
$
108,468

Wireless equipment revenues
22,258

 
18,889

 
17,512

Total Operating Revenues
130,863


126,034


125,980

 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
Cost of services (exclusive of items shown below)
32,185

 
30,916

 
30,463

Cost of wireless equipment
23,323

 
22,147

 
22,238

Selling, general and administrative expense (including net gain on sale of divested businesses of $0, $1,774 and $1,007, respectively)
31,083

 
28,592

 
28,102

Depreciation and amortization expense
17,403

 
16,954

 
15,928

Oath goodwill impairment
4,591

 

 

Total Operating Expenses
108,585

 
98,609

 
96,731

 
 
 
 
 
 
Operating Income
22,278

 
27,425

 
29,249

Equity in losses of unconsolidated businesses
(186
)
 
(77
)
 
(98
)
Other income (expense), net
2,364

 
(2,021
)
 
(3,789
)
Interest expense
(4,833
)
 
(4,733
)
 
(4,376
)
Income Before (Provision) Benefit For Income Taxes
19,623

 
20,594

 
20,986

(Provision) benefit for income taxes
(3,584
)
 
9,956

 
(7,378
)
Net Income
$
16,039

 
$
30,550

 
$
13,608

 
 
 
 
 
 
Net income attributable to noncontrolling interests
$
511

 
$
449

 
$
481

Net income attributable to Verizon
15,528

 
30,101

 
13,127

Net Income
$
16,039

 
$
30,550

 
$
13,608

 
 
 
 
 
 
Basic Earnings Per Common Share
 
 
 
 
 
Net income attributable to Verizon
$
3.76

 
$
7.37

 
$
3.22

Weighted-average shares outstanding (in millions)
4,128

 
4,084

 
4,080

 
 
 
 
 
 
Diluted Earnings Per Common Share
 
 
 
 
 
Net income attributable to Verizon
$
3.76

 
$
7.36

 
$
3.21

Weighted-average shares outstanding (in millions)
4,132

 
4,089

 
4,086

See Notes to Consolidated Financial Statements





Consolidated Statements of Comprehensive Income Verizon Communications Inc. and Subsidiaries
 
(dollars in millions)
 
Years Ended December 31,
2018

 
2017

 
2016

 
 
 
 
 
 
Net Income
$
16,039

 
$
30,550

 
$
13,608

Other Comprehensive Income (Loss), Net of Tax (Expense) Benefit
 
 
 
 
 
Foreign currency translation adjustments
(117
)
 
245

 
(159
)
Unrealized gain (loss) on cash flow hedges, net of tax of $(19), $20 and $(168)
55

 
(31
)
 
198

Unrealized gain (loss) on marketable securities, net of tax of $0, $10 and $26
1

 
(14
)
 
(55
)
Defined benefit pension and postretirement plans, net of tax of $284, $144 and $(1,339)
(858
)
 
(214
)
 
2,139

Other comprehensive income (loss) attributable to Verizon
(919
)

(14
)
 
2,123

Total Comprehensive Income
$
15,120

 
$
30,536

 
$
15,731

 
 
 
 
 
 
Comprehensive income attributable to noncontrolling interests
$
511

 
$
449

 
$
481

Comprehensive income attributable to Verizon
14,609

 
30,087

 
15,250

Total Comprehensive Income
$
15,120

 
$
30,536

 
$
15,731

See Notes to Consolidated Financial Statements





Consolidated Balance Sheets Verizon Communications Inc. and Subsidiaries
(dollars in millions, except per share amounts)
 
At December 31,
2018

 
2017

 
 
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
2,745

 
$
2,079

Accounts receivable, net of allowances of $765 and $939
25,102

 
23,493

Inventories
1,336

 
1,034

Prepaid expenses and other
5,453

 
3,307

Total current assets
34,636

 
29,913

 
 
 
 
Property, plant and equipment
252,835

 
246,498

Less accumulated depreciation
163,549

 
157,930

Property, plant and equipment, net
89,286


88,568

 
 
 
 
Investments in unconsolidated businesses
671

 
1,039

Wireless licenses
94,130

 
88,417

Goodwill
24,614

 
29,172

Other intangible assets, net
9,775

 
10,247

Other assets
11,717

 
9,787

Total assets
$
264,829


$
257,143

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities
 
 
 
Debt maturing within one year
$
7,190

 
$
3,453

Accounts payable and accrued liabilities
22,501

 
21,232

Other current liabilities
8,239

 
8,352

Total current liabilities
37,930

 
33,037

 
 
 
 
Long-term debt
105,873

 
113,642

Employee benefit obligations
18,599

 
22,112

Deferred income taxes
33,795

 
31,232

Other liabilities
13,922

 
12,433

Total long-term liabilities
172,189

 
179,419

 
 
 
 
Commitments and Contingencies (Note 16)

 

 
 
 
 
Equity
 
 
 
Series preferred stock ($0.10 par value; 250,000,000 shares authorized; none issued)

 

Common stock ($0.10 par value; 6,250,000,000 shares authorized in each period; 4,291,433,646 and 4,242,374,240 shares issued)
429

 
424

Additional paid in capital
13,437

 
11,101

Retained earnings
43,542

 
35,635

Accumulated other comprehensive income
2,370

 
2,659

Common stock in treasury, at cost (159,400,267 and 162,897,868 shares outstanding)
(6,986
)
 
(7,139
)
Deferred compensation – employee stock ownership plans and other
353

 
416

Noncontrolling interests
1,565

 
1,591

Total equity
54,710

 
44,687

Total liabilities and equity
$
264,829


$
257,143


See Notes to Consolidated Financial Statements





Consolidated Statements of Cash Flows Verizon Communications Inc. and Subsidiaries
 
 
(dollars in millions)
 
Years Ended December 31,
 
2018

 
2017

 
2016

 
 
 
 
 
 
 
Cash Flows from Operating Activities
 
 
 
 
 
 
Net Income
 
$
16,039

 
$
30,550

 
$
13,608

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization expense
 
17,403

 
16,954

 
15,928

Employee retirement benefits
 
(2,657
)
 
440

 
2,705

Deferred income taxes
 
389

 
(14,463
)
 
(1,063
)
Provision for uncollectible accounts
 
980

 
1,167

 
1,420

Equity in losses of unconsolidated businesses, net of dividends received
 
231

 
117

 
138

Net gain on sale of divested businesses
 

 
(1,774
)
 
(1,007
)
Oath goodwill impairment
 
4,591

 

 

Changes in current assets and liabilities, net of effects from acquisition/disposition of businesses:
 
 
 
 
 
 
Accounts receivable
 
(2,667
)
 
(5,674
)
 
(5,067
)
Inventories
 
(324
)
 
168

 
61

Prepaid expenses and other
 
37

 
27

 
(660
)
Accounts payable and accrued liabilities and Other current liabilities
 
1,777

 
(459
)
 
(1,089
)
Discretionary employee benefits contributions
 
(1,679
)
 
(3,411
)
 
(186
)
Other, net
 
219

 
676

 
(3,099
)
Net cash provided by operating activities
 
34,339


24,318


21,689

 
 
 
 
 
 
 
Cash Flows from Investing Activities
 
 
 
 
 
 
Capital expenditures (including capitalized software)
 
(16,658
)
 
(17,247
)
 
(17,059
)
Acquisitions of businesses, net of cash acquired
 
(230
)
 
(5,880
)
 
(3,765
)
Acquisitions of wireless licenses
 
(1,429
)
 
(583
)
 
(534
)
Proceeds from dispositions of businesses
 

 
3,614

 
9,882

Other, net
 
383

 
1,640

 
1,602

Net cash used in investing activities
 
(17,934
)
 
(18,456
)
 
(9,874
)
 
 
 
 
 
 
 
Cash Flows from Financing Activities
 
 
 
 
 
 
Proceeds from long-term borrowings
 
5,967

 
27,707

 
12,964

Proceeds from asset-backed long-term borrowings
 
4,810

 
4,290

 
4,986

Repayments of long-term borrowings and capital lease obligations
 
(10,923
)
 
(23,837
)
 
(19,159
)
Repayments of asset-backed long-term borrowings
 
(3,635
)
 
(400
)
 

Dividends paid
 
(9,772
)
 
(9,472
)
 
(9,262
)
Other, net
 
(1,824
)
 
(4,439
)
 
(2,905
)
Net cash used in financing activities
 
(15,377
)
 
(6,151
)
 
(13,376
)
 
 
 
 
 
 
 
Increase (decrease) in cash, cash equivalents and restricted cash
 
1,028

 
(289
)
 
(1,561
)
Cash, cash equivalents and restricted cash, beginning of period
 
2,888

 
3,177

 
4,738

Cash, cash equivalents and restricted cash, end of period (Note 1)
 
$
3,916

 
$
2,888

 
$
3,177

See Notes to Consolidated Financial Statements





Consolidated Statements of Changes in Equity Verizon Communications Inc. and Subsidiaries
 
 
(dollars in millions, except per share amounts, and shares in thousands)
 
Years Ended December 31,
2018

 
 
 
2017

 
 
 
2016

 
 
 
Shares

 
Amount

 
Shares

 
Amount

 
Shares

 
Amount

 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
4,242,374

 
$
424

 
4,242,374

 
$
424

 
4,242,374

 
$
424

Common shares issued
49,059

 
5

 

 

 

 

Balance at end of year
4,291,433


429


4,242,374


424


4,242,374


424

 
 
 
 
 
 
 
 
 
 
 
 
Additional Paid In Capital
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
 
 
11,101

 
 
 
11,182

 
 
 
11,196

Other
 
 
2,336

 
 
 
(81
)
 
 
 
(14
)
Balance at end of year


13,437




11,101




11,182

 
 
 
 
 
 
 
 
 
 
 
 
Retained Earnings
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
 
 
35,635

 
 
 
15,059

 
 
 
11,246

Opening balance sheet adjustment (Note 1)
 
 
2,232

 
 
 

 
 
 

Adjusted opening balance
 
 
37,867

 
 
 
15,059

 
 
 
11,246

Net income attributable to Verizon
 
 
15,528

 
 
 
30,101

 
 
 
13,127

Dividends declared ($2.385, $2.335, $2.285 per share)
 
 
(9,853
)
 
 
 
(9,525
)
 
 
 
(9,314
)
Balance at end of year


43,542




35,635




15,059

 
 
 
 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year attributable to Verizon
 
 
2,659

 
 
 
2,673

 
 
 
550

Opening balance sheet adjustment (Note 1)
 
 
630

 
 
 

 
 
 

Adjusted opening balance
 
 
3,289

 
 
 
2,673

 
 
 
550

Foreign currency translation adjustments
 
 
(117
)
 
 
 
245

 
 
 
(159
)
Unrealized gain (loss) on cash flow hedges
 
 
55

 
 
 
(31
)
 
 
 
198

Unrealized gain (loss) on marketable securities
 
 
1

 
 
 
(14
)
 
 
 
(55
)
Defined benefit pension and postretirement plans
 
 
(858
)
 
 
 
(214
)
 
 
 
2,139

Other comprehensive income (loss)
 
 
(919
)
 
 
 
(14
)
 
 
 
2,123

Balance at end of year attributable to Verizon
 
 
2,370

 
 
 
2,659

 
 
 
2,673

 
 
 
 
 
 
 
 
 
 
 
 
Treasury Stock
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
(162,898
)
 
(7,139
)
 
(165,690
)
 
(7,263
)
 
(169,199
)
 
(7,416
)
Employee plans (Note 15)
3,494

 
153

 
2,787

 
124

 
3,439

 
150

Shareholder plans (Note 15)
4

 

 
5

 

 
70

 
3

Balance at end of year
(159,400
)

(6,986
)

(162,898
)

(7,139
)

(165,690
)

(7,263
)
 
 
 
 
 
 
 
 
 
 
 
 
Deferred Compensation-ESOPs and Other
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
 
 
416

 
 
 
449

 
 
 
428

Restricted stock equity grant
 
 
162

 
 
 
157

 
 
 
223

Amortization

 
(225
)
 
 
 
(190
)
 
 
 
(202
)
Balance at end of year


353




416




449

 
 
 
 
 
 
 
 
 
 
 
 
Noncontrolling Interests
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of year
 
 
1,591

 
 
 
1,508

 
 
 
1,414

Opening balance sheet adjustment (Note 1)
 
 
44

 
 
 

 
 
 

Adjusted opening balance
 
 
1,635

 
 
 
1,508

 
 
 
1,414

Net income attributable to noncontrolling interests
 
 
511

 
 
 
449

 
 
 
481

Total comprehensive income


511




449




481

Distributions and other
 
 
(581
)
 
 
 
(366
)
 
 
 
(387
)
Balance at end of year
 
 
1,565

 
 
 
1,591

 
 
 
1,508

Total Equity
 
 
$
54,710





$
44,687





$
24,032


See Notes to Consolidated Financial Statements





Notes to Consolidated Financial Statements Verizon Communications Inc. and Subsidiaries
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Verizon Communications Inc. (Verizon or the Company) is a holding company that, acting through its subsidiaries, is one of the world’s leading providers of communications, information and entertainment products and services to consumers, businesses and government entities. With a presence around the world, we offer voice, data and video services and solutions on our networks that are designed to meet customers’ demand for mobility, reliable network connectivity, security and control.

In November 2018, we announced a strategic reorganization of our business. Under the new structure, effective April 1, 2019, there are two reportable segments that we operate and manage as strategic business units - Verizon Consumer Group (Consumer) and Verizon Business Group (Business). In conjunction with the new reporting structure, we recast our segment disclosures for all periods presented.

Our Consumer segment provides consumer-focused wireless and wireline communications services and products. Our wireless services are provided across one of the most extensive wireless networks in the United States (U.S.) under the Verizon Wireless brand and through wholesale and other arrangements. Our wireline services are provided in nine states in the Mid-Atlantic and Northeastern U.S., as well as Washington D.C., over our 100% fiber-optic network under the Fios brand and over a traditional copper-based network to customers who are not served by Fios. Our Consumer segment's wireless and wireline products and services are available to our retail customers, as well as resellers that purchase wireless network access from us on a wholesale basis.

Our Business segment provides wireless and wireline communications services and products, video and data services, corporate networking solutions, security and managed network services, local and long distance voice services and network access to deliver various Internet of Things services and products. We provide these products and services to businesses, government customers and wireless and wireline carriers across the U.S. and select products and services to customers around the world.

Consolidation
The method of accounting applied to investments, whether consolidated, or equity, involves an evaluation of all significant terms of the investments that explicitly grant or suggest evidence of control or influence over the operations of the investee. The consolidated financial statements include our controlled subsidiaries, as well as variable interest entities (VIE) where we are deemed to be the primary beneficiary. For controlled subsidiaries that are not wholly-owned, the noncontrolling interests are included in Net income and Total equity. Investments in businesses that we do not control, but have the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. Equity method investments are included in Investments in unconsolidated businesses in our consolidated balance sheets. All significant intercompany accounts and transactions have been eliminated.

Basis of Presentation
We have reclassified certain prior year amounts to conform to the current year presentation, including impacts for changes in our reportable segments.

Use of Estimates
We prepare our financial statements using U.S. generally accepted accounting principles (GAAP), which requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.

Examples of significant estimates include the allowance for doubtful accounts, the recoverability of property, plant and equipment, the recoverability of intangible assets and other long-lived assets, fair value measurements, including those related to financial instruments, goodwill, spectrum licenses and intangible assets, unrecognized tax benefits, valuation allowances on tax assets, pension and postretirement benefit obligations, contingencies and the identification and valuation of assets acquired and liabilities assumed in connection with business combinations.

Revenue Recognition
We earn revenue from contracts with customers, primarily through the provision of telecommunications and other services and through the sale of wireless equipment. These services include a variety of communication and connectivity services for our Consumer and Business customers including other carriers that use our facilities to provide services to their customers, as well as professional and integrated managed services for our large enterprises and government customers. We account for these revenues under Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers" (Topic 606), which we adopted on January 1, 2018, using the modified retrospective approach. This standard update, along with related subsequently issued updates, clarifies the principles for recognizing revenue and develops a common revenue standard U.S. GAAP. The standard update also amends current guidance for the recognition of costs to obtain and fulfill contracts with customers such that incremental costs of obtaining and direct costs of fulfilling contracts with customers will be deferred and amortized consistent with the transfer of the related good or service.






We also earn revenues that are not accounted for under Topic 606 from leasing arrangements (such as those for towers and equipment), captive reinsurance arrangements primarily related to wireless device insurance and the interest on equipment financed under a device payment plan agreement when sold to the customer by an authorized agent.

Nature of Products and Services
Telecommunications
Service
We offer wireless services through a variety of plans on a postpaid or prepaid basis. For wireless service, we recognize revenue using an output method, either as the service allowance units are used or as time elapses, because it reflects the pattern by which we satisfy our performance obligation through the transfer of service to the customer. Monthly service is generally billed in advance, which results in a contract liability. See Note 2 for additional information. For postpaid plans, where monthly usage exceeds the allowance, the overage usage represents options held by the customer for incremental services and the usage-based fee is recognized when the customer exercises the option (typically on a month-to-month basis).

For our contracts related to wireline communication and connectivity services, in general, fixed monthly fees for service are billed one month in advance and service revenue is recognized over the enforceable contract term as the service is rendered, as the customer simultaneously receives and consumes the benefits of the services through network access and usage. While substantially all of our wireline service revenue contracts are the result of providing access to our networks, revenue from services that are not fixed in amount and, instead, are based on usage are generally billed in arrears and recognized as the usage occurs.

Equipment
We sell wireless devices and accessories under the Verizon Wireless brand. Equipment revenue is generally recognized when the products are delivered to and accepted by the customer, as this is when control passes to the customer. In addition to offering the sale of equipment on a standalone basis, we have two primary offerings through which customers pay for a wireless device, in connection with a service contract: fixed-term plans and device payment plans.

Under a fixed-term plan, the customer is sold the wireless device without any upfront charge or at a discounted price in exchange for entering into a fixed-term service contract (typically for a term of 24 months or less).

Under a device payment plan, the customer is sold the wireless device in exchange for a non-interest-bearing installment note, which is repaid by the customer, typically over a 24-month term, and concurrently enters into a month-to-month contract for wireless service. We may offer certain promotions that provide billing credits applied over a specified term, contingent upon the customer maintaining service. The credits are included in the transaction price, which are allocated to the performance obligations based on their relative selling price and are recognized when earned.

A financing component exists in both our fixed-term plans and device payment plans because the timing of the payment for the device, which occurs over the contract term, differs from the satisfaction of the performance obligation, which occurs at contract inception upon transfer of device to the customer. We periodically assess, at the contract level, the significance of the financing component inherent in our fixed-term and device payment plan receivable based on qualitative and quantitative considerations related to our customer classes. These considerations include assessing the commercial objective of our plans, the term and duration of financing provided, interest rates prevailing in the marketplace, and credit risks of our customer classes, all of which impact our selection of appropriate discount rates. Based on current facts and circumstances, we determined that the financing component in our existing wireless device payments and fixed-term contracts sold through the direct channel is not significant and therefore is not accounted for separately. See Note 8 for additional information on the interest on equipment financed on a device payment plan agreement when sold to the customer by an authorized agent in our indirect channel.

Contracts
Wireless
For our wireless contracts, total contract revenue, which represents the transaction price for wireless service and wireless equipment, is allocated between service and equipment revenue based on their estimated standalone selling prices. We estimate the standalone selling price of the device or accessory to be its retail price excluding subsidies or conditional purchase discounts. We estimate the standalone selling price of wireless service to be the price that we offer to customers on month-to-month contracts that can be cancelled at any time without penalty (i.e., when there is no fixed-term for service) or when service is procured without the concurrent purchase of a wireless device. In addition, we also assess whether the service term is impacted by certain legally enforceable rights and obligations in our contract with customers, such as penalties that a customer would have to pay to early terminate a fixed-term contract or billing credits that would cease if the month-to-month wireless service is canceled. The assessment of these legally enforceable rights and obligations involves judgment and impacts our determination of the transaction price and related disclosures.

From time to time, we may offer certain promotions that provide our customers on device payment plans with the right to upgrade to a new device after paying a specified portion of their device payment plan agreement amount and trading in their device in good working order. We account for this trade-in right as a guarantee obligation. The full amount of the trade-in right's fair value is recognized as a guarantee liability and results in a reduction to the revenue recognized upon the sale of the device. The guarantee obligation was insignificant at December 31, 2018





and 2017. The total transaction price is reduced by the guarantee obligation, which is accounted for outside the scope of Topic 606, and the remaining transaction price is allocated between the performance obligations within the contract.

Our fixed-term plans generally include the sale of a wireless device at subsidized prices. This results in the creation of a contract asset at the time of sale, which represents the recognition of equipment revenue in excess of amounts billed.

For our device payment plans, billing credits are accounted for as consideration payable to a customer and are included in the determination of total transaction price, resulting in a contract liability.

We may provide a right of return on our products and services for a short time period after a sale. These rights are accounted for as variable consideration when determining the transaction price, and accordingly we recognize revenue based on the estimated amount to which we expect to be entitled after considering expected returns. Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available. We also may provide credits or incentives on our products and services for contracts with resellers, which are accounted for as variable consideration when estimating the amount of revenue to recognize. These amounts have not been significant.

Wireline
Total consideration for wireline services that are bundled in a single contract is allocated to each performance obligation based on our standalone selling price for each service. While many contracts include one or more service performance obligations, the revenue recognition pattern is generally not impacted by the allocation since the services are generally satisfied over the same period of time. We estimate the standalone selling price to be the price of the services when sold on a standalone basis without any promotional discount. In addition, we also assess whether the service term is impacted by certain legally enforceable rights and obligations in our contract with customers such as penalties that a customer would have to pay to early terminate a fixed-term contract. The assessment of these legally enforceable rights and obligations involves judgment and impacts our determination of transaction price and related disclosures.

We may provide performance-based credits or incentives on our products and services for contracts with our Business customers, which are accounted for as variable consideration when estimating the transaction price. Credits are estimated at contract inception and are updated at the end of each reporting period as additional information becomes available.

For certain promotions that involve a third-party, we evaluate gross versus net considerations by assessing indicators of control. These offerings have not been significant.

Other
Advertising revenues are generated through display advertising and search advertising. Display advertising revenue is generated by the display of graphical advertisements and other performance-based advertising. Search advertising revenue is generated when a consumer clicks on a text-based advertisement on their screen. Our Media business, Verizon Media Group (Verizon Media), which operated in 2018 under the "Oath" brand until January 2019, primarily earns revenue through display advertising on Verizon Media properties, as well as on third-party properties through our advertising platforms, search advertising and subscription arrangements. We recognize revenue at a point in time for our display and search advertising contracts and over time for our subscription contracts. We determined that we are generally the principal in transactions carried out through our advertising platforms, and therefore report gross revenue based on the amount billed to our customers. Where we are the principal, we concluded that while the control and transfer of digital advertising inventory occurs in a rapid, real-time environment, our proprietary technology enables us to identify, enhance, verify and solely control digital advertising inventory that we then sell to our customers. Our control is further supported by us being primarily responsible to our customers for fulfillment and the fact that we can exercise a level of discretion over pricing.

We offer telematics services including smart fleet management and optimization software. Telematics service revenue is generated primarily through subscription services. We recognize revenue over time for our subscription contracts.

We report taxes collected from customers on behalf of governmental authorities on revenue-producing transactions on a net basis.

Maintenance and Repairs
We charge the cost of maintenance and repairs, including the cost of replacing minor items not constituting substantial betterments, principally to Cost of services as these costs are incurred.

Advertising Costs
Costs for advertising products and services, as well as other promotional and sponsorship costs, are charged to Selling, general and administrative expense in the periods in which they are incurred. See Note 15 for additional information.

Earnings Per Common Share
Basic earnings per common share are based on the weighted-average number of shares outstanding during the period. Where appropriate, diluted earnings per common share include the dilutive effect of shares issuable under our stock-based compensation plans.






There were a total of approximately 4 million, 5 million and 6 million outstanding dilutive securities, primarily consisting of restricted stock units, included in the computation of diluted earnings per common share for the years ended December 31, 2018, 2017 and 2016, respectively.

Cash, Cash Equivalents and Restricted Cash
We consider all highly liquid investments with an original maturity of 90 days or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates quoted market value and includes amounts held in money market funds.

Cash collections on the device payment plan agreement receivables collateralizing asset-backed debt securities are required at certain specified times to be placed into segregated accounts. Deposits to the segregated accounts are considered restricted cash and are included in Prepaid expenses and other and Other assets in our consolidated balance sheets.

Cash, cash equivalents and restricted cash are included in the following line items on the consolidated balance sheets:
 
(dollars in millions)
 
At December 31,
2018

 
2017

 
Increase

Cash and cash equivalents
$
2,745

 
$
2,079

 
$
666

Restricted cash:
 
 
 
 
 
Prepaid expenses and other
1,047

 
693

 
354

Other assets
124

 
116

 
8

Cash, cash equivalents and restricted cash
$
3,916

 
$
2,888

 
$
1,028



Investments in Debt and Equity Securities
Investments in equity securities that are not accounted for under equity method accounting or result in consolidation are to be measured at fair value. For investments in equity securities without readily determinable fair values, Verizon elects the measurement alternative permitted under GAAP to measure these investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. For investments in debt securities without quoted prices, Verizon uses an alternative matrix pricing method. Investments in equity securities that do not result in consolidation of the investee are included in Investments in unconsolidated businesses and debt securities are included in Other assets in our consolidated balance sheets. 

Allowance for Doubtful Accounts
Accounts receivable are recorded in the consolidated financial statements at cost net of an allowance for credit losses, with the exception of indirect-channel device payment plan loans. We maintain allowances for uncollectible accounts receivable, including our direct-channel device payment plan agreement receivables, for estimated losses resulting from the failure or inability of our customers to make required payments. Indirect-channel device payment loans are considered financial instruments and are initially recorded at fair value net of imputed interest, and credit losses are recorded as incurred. However, loan balances are assessed quarterly for impairment and an allowance is recorded if the loan is considered impaired. Our allowance for uncollectible accounts receivable is based on management’s assessment of the collectability of specific customer accounts and includes consideration of the credit worthiness and financial condition of those customers. We record an allowance to reduce the receivables to the amount that is reasonably believed to be collectible. We also record an allowance for all other receivables based on multiple factors including historical experience with bad debts, the general economic environment and the aging of such receivables. Similar to traditional service revenue, we record direct device payment plan agreement bad debt expense based on an estimate of the percentage of equipment revenue that will not be collected. This estimate is based on a number of factors including historical write-off experience, credit quality of the customer base and other factors such as macroeconomic conditions. We monitor the aging of our accounts with device payment plan agreement receivables and write-off account balances if collection efforts are unsuccessful and future collection is unlikely.

Inventories
Inventory consists of wireless and wireline equipment held for sale, which is carried at the lower of cost (determined principally on either an average cost or first-in, first-out basis) or net realizable value.

Plant and Depreciation
Property, Plant and Equipment
We record property, plant and equipment at cost. Property, plant and equipment are generally depreciated on a straight-line basis.

Leasehold improvements are amortized over the shorter of the estimated life of the improvement or the remaining term of the related lease, calculated from the time the asset was placed in service.

When depreciable assets are retired or otherwise disposed of, the related cost and accumulated depreciation are deducted from the property, plant and equipment accounts and any gains or losses on disposition are recognized in income.






We capitalize and depreciate network software purchased or developed along with related property, plant and equipment assets. We also capitalize interest associated with the acquisition or construction of network-related assets. Capitalized interest is reported as a reduction in interest expense and depreciated as part of the cost of the network-related assets.

In connection with our ongoing review of the estimated useful lives of property, plant and equipment during 2018, we determined that the average useful lives of certain assets would be increased. These changes in estimates were applied prospectively and resulted in a decrease to depreciation expense of $0.3 billion for the year ended 2018. In addition, during 2016 we determined that the average useful lives of certain leasehold improvements would be increased from 5 to 7 years. This change resulted in decreases to depreciation expense of $0.1 billion, $0.1 billion and $0.2 billion in 2018, 2017 and 2016, respectively. We determined that changes were also necessary to the remaining estimated useful lives of certain assets as a result of technology changes, enhancements and planned retirements. These changes resulted in increases in depreciation expense of $0.5 billion, $0.3 billion and $0.3 billion in 2018, 2017 and 2016, respectively. While the timing and extent of current deployment plans are subject to ongoing analysis and modification, we believe that the current estimates of useful lives are reasonable.

Computer Software Costs
We capitalize the cost of internal-use network and non-network software that has a useful life in excess of one year. Subsequent additions, modifications or upgrades to internal-use network and non-network software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Planning, software maintenance and training costs are expensed in the period in which they are incurred. Also, we capitalize interest associated with the development of internal-use network and non-network software. Capitalized non-network internal-use software costs are amortized using the straight-line method over a period of 3 to 7 years and are included in Other intangible assets, net in our consolidated balance sheets. For a discussion of our impairment policy for capitalized software costs, see "Goodwill and Other Intangible Assets" below. Also, see Note 4 for additional information of internal-use non-network software reflected in our consolidated balance sheets.

Goodwill and Other Intangible Assets
Goodwill
Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. Impairment testing for goodwill is performed annually in the fourth quarter or more frequently if impairment indicators are present.

To determine if goodwill is potentially impaired, we have the option to perform a qualitative assessment. However, we may elect to bypass the qualitative assessment and perform an impairment test even if no indications of a potential impairment exist. The quantitative impairment test for goodwill is performed at the reporting unit level and compares the fair value of the reporting unit (calculated using a combination of a market approach and a discounted cash flow method) to its carrying value. Estimated fair values of reporting units are Level 3 measures in the fair value hierarchy, see Fair Value Measurements discussion below for additional information.

Under the qualitative assessment, we consider several qualitative factors, including the business enterprise value of the reporting unit from the last quantitative test and the excess of fair value over carrying value from this test, macroeconomic conditions (including changes in interest rates and discount rates), industry and market considerations (including industry revenue and Earnings before interest, taxes, depreciation and amortization (EBITDA) margin projections), the recent and projected financial performance of the reporting unit, as well as other factors.

The market approach includes the use of comparative multiples of guideline companies to corroborate discounted cash flow results. The discounted cash flow method is based on the present value of two components, a projected cash flows and a terminal value. The terminal value represents the expected normalized future cash flows of the reporting unit beyond the cash flows from the discrete projection period. The fair value of the reporting unit is calculated based on the sum of the present value of the cash flows from the discrete period and the present value of the terminal value. The discount rate represents our estimate of the weighted-average cost of capital, or expected return, that a marketplace participant would have required as of the valuation date. If the carrying value exceeds the fair value, an impairment charge is booked for the excess carrying value over fair value, limited to the total amount of goodwill of that reporting unit. During the fourth quarter of 2018, the Company updated its five-year strategic planning review for each of its reporting units. Those plans considered current economic conditions and trends, estimated future operating results, the Company’s view of growth-rates and-anticipated future economic and regulatory conditions.

See Note 4 for additional information regarding our goodwill impairment testing.

Intangible Assets Not Subject to Amortization
A significant portion of our intangible assets are wireless licenses that provide our wireless operations with the exclusive right to utilize designated radio frequency spectrum to provide wireless communication services. While licenses are issued for only a fixed time, generally ten years, such licenses are subject to renewal by the Federal Communications Commission (FCC). License renewals have occurred routinely and at nominal cost. Moreover, we have determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of our wireless licenses. As a result, we treat the wireless licenses as an indefinite-lived intangible asset. We re-evaluate the useful life determination for wireless licenses each year to determine whether events and circumstances continue to support an indefinite useful life. We aggregate our wireless licenses into one single unit of accounting, as we utilize our wireless licenses on an integrated basis as part of our nationwide wireless network.

We test our wireless licenses for potential impairment annually or more frequently if impairment indicators are present. We have the option to first perform a qualitative assessment to determine whether it is necessary to perform a quantitative impairment test. However, we may elect to





bypass the qualitative assessment in any period and proceed directly to performing the quantitative impairment test. Our quantitative assessment consists of comparing the estimated fair value of our aggregate wireless licenses to the aggregated carrying amount as of the test date. Using a quantitative assessment, we estimate the fair value of our aggregate wireless licenses using the Greenfield approach. The Greenfield approach is an income based valuation approach that values the wireless licenses by calculating the cash flow generating potential of a hypothetical start-up company that goes into business with no assets except the wireless licenses to be valued. A discounted cash flow analysis is used to estimate what a marketplace participant would be willing to pay to purchase the aggregated wireless licenses as of the valuation date. If the estimated fair value of the aggregated wireless licenses is less than the aggregated carrying amount of the wireless licenses, then an impairment charge is recognized. As part of our qualitative assessment, we consider several qualitative factors including the business enterprise value of our historical Wireless segment, macroeconomic conditions (including changes in interest rates and discount rates), industry and market considerations (including industry revenue and EBITDA), margin projections, the recent and projected financial performance of our historical Wireless segment, as well as other factors. See Note 4 for additional information regarding our impairment tests.

Interest expense incurred while qualifying activities are performed to ready wireless licenses for their intended use is capitalized as part of wireless licenses. The capitalization period ends when the development is discontinued or substantially completed and the license is ready for its intended use.

Intangible Assets Subject to Amortization and Long-Lived Assets
Our intangible assets that do not have indefinite lives (primarily customer lists and non-network internal-use software) are amortized over their estimated useful lives. All of our intangible assets subject to amortization, and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indications of impairment are present, we would test for recoverability by comparing the carrying amount of the asset group to the net undiscounted cash flows expected to be generated from the asset group. If those net undiscounted cash flows do not exceed the carrying amount, we would perform the next step, which is to determine the fair value of the asset and record an impairment, if any. We re-evaluate the useful life determinations for these intangible assets each year to determine whether events and circumstances warrant a revision to their remaining useful lives.

For information related to the carrying amount of goodwill, wireless licenses and other intangible assets, as well as the major components and average useful lives of our other acquired intangible assets, see Note 4.

Fair Value Measurements
Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities
Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3—No observable pricing inputs in the market

Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. Our assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their categorization within the fair value hierarchy.

Income Taxes
Our effective tax rate is based on pre-tax income, statutory tax rates, tax laws and regulations and tax planning strategies available to us in the various jurisdictions in which we operate.

Deferred income taxes are provided for temporary differences in the basis between financial statement and income tax assets and liabilities. Deferred income taxes are recalculated annually at tax rates in effect for the years in which those tax assets and liabilities are expected to be realized or settled. We record valuation allowances to reduce our deferred tax assets to the amount that is more likely than not to be realized.

We use a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return. The first step is recognition: we determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one or more of the following: an increase in a liability for income taxes payable, a reduction of an income tax refund receivable, a reduction in a deferred tax asset or an increase in a deferred tax liability.

Significant management judgment is required in evaluating our tax positions and in determining our effective tax rate.

Verizon has completed its analysis of the impacts of the Tax Cuts and Jobs Act (TCJA), including analyzing the effects of any Internal Revenue Service (IRS) and U.S. Treasury guidance issued, and state tax law changes enacted, within the maximum one year measurement period resulting in no significant adjustments to the $16.8 billion provisional amount previously recorded.






Stock-Based Compensation
We measure and recognize compensation expense for all stock-based compensation awards made to employees and directors based on estimated fair values. See Note 10 for additional information.

Foreign Currency Translation
The functional currency of our foreign operations is generally the local currency. For these foreign entities, we translate income statement amounts at average exchange rates for the period, and we translate assets and liabilities at end-of-period exchange rates. We record these translation adjustments in Accumulated other comprehensive income, a separate component of Equity, in our consolidated balance sheets. We report exchange gains and losses on intercompany foreign currency transactions of a long-term nature in Accumulated other comprehensive income. Other exchange gains and losses are reported in income.

Employee Benefit Plans
Pension and postretirement health care and life insurance benefits earned during the year, as well as interest on projected benefit obligations, are accrued currently. Prior service costs and credits resulting from changes in plan benefits are generally amortized over the average remaining service period of the employees expected to receive benefits. Expected return on plan assets is determined by applying the return on assets assumption to the actual fair value of plan assets. Actuarial gains and losses are recognized in operating results in the year in which they occur. These gains and losses are measured annually as of December 31 or upon a remeasurement event. Verizon management employees no longer earn pension benefits or earn service towards the Company retiree medical subsidy. See Note 11 for additional information.

We recognize a pension or a postretirement plan’s funded status as either an asset or liability on the consolidated balance sheets. Also, we measure any unrecognized prior service costs and credits that arise during the period as a component of Accumulated other comprehensive income, net of applicable income tax.

Derivative Instruments
We enter into derivative transactions primarily to manage our exposure to fluctuations in foreign currency exchange rates and interest rates. We employ risk management strategies, which may include the use of a variety of derivatives including cross currency swaps, forward starting interest rate swaps, interest rate swaps, interest rate caps and foreign exchange forwards. We do not hold derivatives for trading purposes. See Note 9 for additional information.

We measure all derivatives at fair value and recognize them as either assets or liabilities in our consolidated balance sheets. Our derivative instruments are valued primarily using models based on readily observable market parameters for all substantial terms of our derivative contracts and thus are classified as Level 2. Changes in the fair values of derivative instruments not qualifying for hedge accounting are recognized in earnings in the current period. For fair value hedges, the change in the fair value of the derivative instruments is recognized in earnings, along with the change in the fair value of the hedged item. For cash flow hedges, the change in the fair value of the derivative instruments, along with the change in the fair value of the hedged item, are reported in Other comprehensive income (loss) and recognized in earnings when the hedged item is recognized in earnings. For net investment hedges of certain of our foreign operations, the change in the fair value of the derivative instruments is reported in Other comprehensive income (loss) as part of the cumulative translation adjustment and partially offset the impact of foreign currency changes on the value of our net investment.

Variable Interest Entities
VIEs are entities that lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity. We consolidate the assets and liabilities of VIEs when we are deemed to be the primary beneficiary. The primary beneficiary is the party that has the power to make the decisions that most significantly affect the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.






Recently Adopted Accounting Standards
The following ASUs were issued by Financial Accounting Standards Board (FASB), and have been recently adopted by Verizon.
 
Description
Date of Adoption
Effect on Financial Statements
 
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
 
This standard update, along with related subsequently issued updates, clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP. The standard update amends current guidance for the recognition of costs to obtain and fulfill contracts with customers such that incremental costs of obtaining and direct costs of fulfilling contracts with customers will be deferred and amortized consistent with the transfer of the related good or service. The standard update intends to provide a more robust framework for addressing revenue issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; and provide more useful information to users of financial statements through improved disclosure requirements.
1/1/2018
We recorded the pre-tax cumulative effect of $3.9 billion ($2.9 billion net of tax) as an adjustment to the January 1, 2018 opening balance of Retained earnings. We adopted this standard using the modified retrospective method. The cumulative after-tax effect of the changes made to our consolidated balance sheet for the adoption of this standard are reflected in the table below.

See Note 2 for additional information related to revenues and contract costs, including qualitative and quantitative disclosures required under Topic 606, as well as a reconciliation of the adjustments from the adoption of Topic 606 relative to Topic 605 on certain impacted financial statement line items.
 
 
 
ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10)
 
The amendments in this update make targeted improvements to GAAP by requiring most equity securities to be measured at fair value with changes in fair value recognized in net income. For investments in equity securities without readily determinable fair values, the cost method is eliminated. A practicability exception is available for investments in equity securities that do not have readily determinable fair values. These investments may be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.

This update simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates impairment exists, an entity is required to measure the investment at fair value

1/1/2018
We adopted this standard update on a prospective basis resulting in an insignificant adjustment to our opening retained earnings. The amendments related to equity securities without readily determinable fair values are applied prospectively to equity investments that exist as of the date of adoption.

 
 
 
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
 
This standard update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice for these issues. This standard update requires, among other things, that cash receipts from payments on a transferor’s beneficial interests in securitized trade receivables be classified as cash inflows from investing activities.

The amendment relating to beneficial interests in securitization transactions impacted our presentation of collections of certain deferred purchase price from sales of wireless device payment plan agreement receivables in our consolidated statements of cash flows.
1/1/2018
We retrospectively reclassified approximately $0.6 billion of deferred purchase price collections from Cash flows from operating activities to Cash flows from investing activities in our consolidated statement of cash flows for the year ended December 31, 2017 and $1.1 billion for the year ended December 31, 2016. There were no other significant impacts as a result of adopting this standard.
 
 







 
Description
Date of Adoption
Effect on Financial Statements
 
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash
 
The amendments in this update require that cash and cash equivalent balances in a statement of cash flows include those amounts deemed to be restricted cash and restricted cash equivalents.
1/1/2018
 We have provided a reconciliation from Cash and cash equivalents as presented in our consolidated balance sheets to Cash, cash equivalents and restricted cash as reported in our consolidated statements of cash flows. We adopted the amendments in this accounting standard update on a retrospective basis. The adoption of this standard update for the year ended December 31, 2017 resulted in an increase in cash flow used in financing activities of $0.6 billion, a decrease in cash flow provided by operating activities of $0.1 billion and an insignificant increase in cash flow used in investing activities. There was an insignificant impact to our consolidated statements of cash flows for the year ended December 31, 2016.

See "Cash, Cash Equivalents and Restricted Cash" for additional information, as well as a discussion of the nature of our restricted cash balances.

 
 
ASU 2017-07, Compensation - Retirement Benefits (Topic 715)
 
The amendments in this update require an employer to report the service cost component arising from employer sponsored pension and other postretirement plans in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost, including the recognition of prior service credits, will be presented in the consolidated statements of income separately from the service cost component and outside the subtotal of income from operations. The amendments in this update also allow only the service cost component of pension and other postretirement benefit costs to be eligible for capitalization when applicable. Verizon previously recorded service cost and other components of net periodic benefit cost in operating expenses in the consolidated statements of income. The amendments in this update allow a practical expedient that permits an employer to use the amounts disclosed in its employee benefits footnote for the prior comparative periods as the estimation basis for applying the retrospective presentation.
1/1/2018
As required by the amendments in this update, the presentation of the service cost component and other components of net periodic benefit cost in the consolidated statements of income were applied retrospectively, and the updates for the capitalization of the service cost component of net periodic benefit cost in assets were applied prospectively on and after the effective date. Verizon reclassified the other components of net periodic benefit costs from Cost of services and Selling, general and administrative expense to Other income (expense), net, which is part of non-operating expenses. The retrospective adoption of this standard update had an insignificant impact to consolidated operating income for the year ended December 31, 2017 and an increase to consolidated operating income of approximately $2.2 billion for the year ended December 31, 2016. These impacts to consolidated operating income were fully offset by an insignificant decrease and a $2.2 billion decrease to Other income (expense), net for the years ended December 31, 2017 and 2016, respectively. There was no impact to consolidated Net income for the years ended December 31, 2017 or 2016.

Verizon utilized the practical expedient to estimate the impact on the prior comparative period information presented in the consolidated statements of income.
 
 
ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220)
 
The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from TCJA. The stranded tax effects result from the change in the federal tax rate for deferred taxes recorded to Accumulated other comprehensive income. This standard update is effective as of the first quarter of 2019; however, early adoption is permitted. Verizon has elected to early adopt this update effective January 1, 2018 and record the effects of adoption at the beginning of the period of adoption.
1/1/2018
The adoption of this standard update resulted in a charge to Retained earnings of $0.7 billion which consists primarily of stranded tax effects related to deferred taxes for pensions and postretirement benefits. It is Verizon’s policy to release income tax effects from accumulated other comprehensive income at the same time that the related unit of account affects net income. The cumulative after-tax effect of the changes made to our consolidated balance sheet for the adoption of this standard are reflected in the table below.

 








The cumulative after-tax effect of the changes made to our consolidated balance sheet for the adoption of Topic 606, ASU 2018-02 and other ASUs was as follows:
 
 
 
Adjustments due to
 
 
(dollars in millions)
At December 31, 2017

 
Topic 606

 
ASU 2018-02

 
Other ASUs

 
At January 1,
2018

Accounts receivable, net of allowance
$
23,493

 
$
53

 
$

 
$

 
$
23,546

Prepaid expenses and other
3,307

 
2,014

 

 

 
5,321

Other assets
9,787

 
1,238

 

 
(59
)
 
10,966

Investments in unconsolidated businesses
1,039

 
2

 

 

 
1,041

Other current liabilities
8,352

 
(541
)
 

 

 
7,811

Deferred income taxes
31,232

 
1,008

 

 
(31
)
 
32,209

Other liabilities
12,433

 
(94
)
 

 

 
12,339

Retained earnings
35,635

 
2,890

 
(652
)
 
(6
)
 
37,867

Accumulated other comprehensive income
2,659

 

 
652

 
(22
)
 
3,289

Noncontrolling interests
1,591

 
44

 

 

 
1,635


Recently Issued Accounting Standards
The following ASUs have been recently issued by the FASB.
 
Description
Date of Adoption
Effect on Financial Statements
 
ASU 2016-02, Leases (Topic 842)
 
In February 2016, the FASB issued this standard update to increase transparency and improve comparability by requiring entities to recognize assets and liabilities on the balance sheet for all leases, with certain exceptions. In addition, through improved disclosure requirements, the standard update will enable users of financial statements to further understand the amount, timing, and uncertainty of cash flows arising from leases. This standard update allows for a modified retrospective application and is effective as of the first quarter of 2019; however, early adoption is permitted. Entities are allowed to apply the modified retrospective approach: (1) retrospectively to each prior reporting period presented in the financial statements with the cumulative-effect adjustment recognized at the beginning of the earliest comparative period presented; or (2) retrospectively at the beginning of the period of adoption (January 1, 2019) through a cumulative-effect adjustment. The effective date of this standard is January 1, 2019, at which time Verizon will adopt the standard using the modified retrospective approach with a cumulative-effect adjustment to opening retained earnings recorded at the beginning of the period of adoption. Therefore, upon adoption, Verizon will recognize and measure leases without revising comparative period information or disclosure. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply.


1/1/2019
We have established a cross-functional coordinated team to implement the standard update. We have completed our assessment of the transition practical expedients offered by the standard. These practical expedients lessen the transitional burden of implementing the standard update by not requiring a reassessment of certain conclusions reached under existing lease accounting guidance. Accordingly, we will apply these practical expedients and will not reassess: (1) whether an expired or existing contract is a lease or contains an embedded lease; (2) lease classification of an expired or existing lease; (3) initial direct costs for an existing lease; and (4) whether an existing or expired land easement is or contains a lease if it has not historically been accounted for as a lease. We have identified and implemented a new system solution to meet the requirements of the new standard and have identified and implemented processes and internal controls to meet the standards reporting and disclosure requirements.

Upon adoption of this standard, there will be a significant impact in our consolidated balance sheet as we expect to recognize a right-of-use asset and liability related to substantially all operating lease arrangements, which we currently estimate will range between $21.0 billion and $23.0 billion. Verizon’s current operating lease portfolio included in this range is primarily comprised of network equipment including towers, distributed antenna systems, and small cells, real estate, connectivity mediums including dark fiber, and equipment leases. In addition, pre-tax deferred gains of approximately $0.6 billion arising from prior period sales-leaseback transactions, which would have been recognized to income over an average period of nine years, will be adjusted through opening retained earnings on January 1, 2019. Lastly, we expect a lower amount of lease costs to qualify as initial direct costs under the new standard which will result in an immediate recognition of expense instead of recognition of expense over time.

 
 






 
Description
Date of Adoption
Effect on Financial Statements
 
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326)
 
In June 2016, the FASB issued this standard update which requires certain financial assets be measured at amortized cost net of an allowance for estimated credit losses such that the net receivable represents the present value of expected cash collection. In addition, this standard update requires that certain financial assets be measured at amortized cost reflecting an allowance for estimated credit losses expected to occur over the life of the assets. The estimate of credit losses must be based on all relevant information including historical information, current conditions and reasonable and supportable forecasts that affect the collectability of the amounts. An entity will apply the update through a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which an other-than-temporary impairment has been recognized before the effective date. Early adoption of this standard is permitted.

1/1/2020
We are currently evaluating the impacts that this standard update will have on our various financial assets which we expect to include, but is not limited to, our device payment plan agreement receivables and service receivables.  We have established a cross-functional coordinated team to address the potential impacts to our systems, processes and internal controls in order to meet the standard update's accounting and reporting requirements.

 
 


Note 2. Revenue and Contract Costs
We earn revenue from contracts with customers, primarily through the provision of telecommunications and other services and through the sale of wireless equipment. These services include a variety of communication and connectivity services for our Consumer and Business customers including other carriers that use our facilities to provide services to their customers, as well as professional and integrated managed services for our large enterprises and government customers. We account for these revenues under Topic 606, which we adopted on January 1, 2018, using the modified retrospective approach. We also earn revenues that are not accounted for under Topic 606 from leasing arrangements (such as those for towers and equipment), captive reinsurance arrangements primarily related to wireless device insurance and the interest on equipment financed on a device payment plan agreement when sold to the customer by an authorized agent.
We applied the new revenue recognition standard to customer contracts not completed at the date of initial adoption. For incomplete contracts that were modified before the date of adoption, the Company elected to use the practical expedient available under the modified retrospective method, which allows us to aggregate the effect of all modifications when identifying satisfied and unsatisfied performance obligations, determining the transaction price and allocating transaction price to the satisfied and unsatisfied performance obligations for the modified contract at transition. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while amounts reported for prior periods have not been adjusted and continue to be reported under accounting standards in effect for those periods.
Prior to the adoption of Topic 606, we were required to limit the revenue recognized when a wireless device was sold to the amount of consideration that was not contingent on the provision of future services, which was typically limited to the amount of consideration received from the customer at the time of sale. Under Topic 606, the total consideration in the contract is allocated between wireless equipment and service based on their relative standalone selling prices. This change primarily impacts our arrangements that include sales of wireless devices at subsidized prices in conjunction with a fixed-term plan, also known as the subsidy model, for service. Accordingly, under Topic 606, generally more equipment revenue is recognized upon sale of the equipment to the customer and less service revenue is recognized over the contract term than was previously recognized under the prior "Revenue Recognition" (Topic 605) standard. At the time the equipment is sold, this allocation results in the recognition of a contract asset equal to the difference between the amount of revenue recognized and the amount of consideration received from the customer. As of January 2017, we no longer offer Consumer customers new fixed-term plans with subsidized equipment pricing; however, we continue to offer fixed-term plans to our Business customers. At December 31, 2018 and December 31, 2017, approximately 14% and 19% of retail postpaid connections were under fixed-term plans, respectively.

Topic 606 also requires the deferral of incremental costs incurred to obtain a customer contract, which are then amortized to expense, as a component of Selling, general and administrative expense, over the respective periods of expected benefit. As a result, a significant amount of our sales commission costs, which were historically expensed as incurred under our previous accounting, relating to our contracts to provide wireless and wireline services, are now deferred and amortized under Topic 606.

Finally, under Topic 605, at the time of the sale of a device, we imputed risk adjusted interest on the device payment plan agreement receivables. We recorded the imputed interest as a reduction to the related accounts receivable and interest income was recognized over the financed device payment term. Under Topic 606, while there continues to be a financing component in both the fixed-term plans and device payment plans, also known as the installment model, we have determined that this financing component for our customer classes in the direct channels for wireless devices are not significant and therefore we no longer impute interest for these contracts. This change results in additional revenue recognized upon the sale of wireless devices and no interest income recognized over the device payment term.







A reconciliation of the adjustments from the adoption of Topic 606 relative to Topic 605 on certain impacted financial statement line items in our consolidated statements of income and balance sheet were as follows:
 
December 31, 2018
 
(dollars in millions)
As reported

 
Balances without adoption of
Topic 606

 
Adjustments

Operating Revenues
 
 
 
 
 
Service revenues and other
$
108,605

 
$
109,964

 
$
(1,359
)
Wireless equipment revenues
22,258

 
20,474

 
1,784

Total Operating Revenues
130,863

 
130,438

 
425

 
 
 
 
 
 
Cost of services (exclusive of items shown below)
32,185

 
32,240

 
(55
)
Cost of wireless equipment
23,323

 
23,189

 
134

Selling, general and administrative expense
31,083

 
32,588

 
(1,505
)
 
 
 
 
 
 
Equity in losses of unconsolidated businesses
(186
)
 
(187
)
 
1

Income Before Provision For Income Taxes
19,623

 
17,771

 
1,852

Provision for income taxes
(3,584
)
 
(3,104
)
 
(480
)
Net Income
$
16,039

 
$
14,667

 
$
1,372

 
 
 
 
 
 
Net income attributable to noncontrolling interests
$
511

 
$
481

 
$
30

Net income attributable to Verizon
15,528

 
14,186

 
1,342

Net Income
$
16,039

 
$
14,667

 
$
1,372


 
December 31, 2018
 
(dollars in millions)
As reported

 
Balances without adoption of
Topic 606

 
Adjustments

Assets
 
 
 
 
 
Current assets
 
 
 
 
 
Accounts receivable, net of allowance
$
25,102

 
$
24,759

 
$
343

Prepaid expenses and other
5,453

 
2,902

 
2,551

 
 
 
 
 
 
Investments in unconsolidated businesses
671

 
668

 
3

Other assets
11,717

 
9,631

 
2,086

 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable and accrued liabilities
22,501

 
21,727

 
774

Other current liabilities
8,239

 
8,805

 
(566
)
 
 
 
 
 
 
Deferred income taxes
33,795

 
33,082

 
713

Other liabilities
13,922

 
14,166

 
(244
)
 
 
 
 
 
 
Equity
 
 
 
 
 
Retained earnings
43,542

 
39,310

 
4,232

Noncontrolling interests
1,565

 
1,491

 
74



Revenue by Category
We have two reportable segments that we operate and manage as strategic business units, Consumer and Business. Revenue is disaggregated by products and services within Consumer, and customer groups (Global Enterprise, Small and Medium Business, Public Sector and Other, and Wholesale) within Business. See Note 13 for additional information on revenue by segment.

Corporate and other includes the results of our media business, Verizon Media and other businesses. Verizon Media generated revenues from contracts with customers under Topic 606 of approximately $7.7 billion for the year ended December 31, 2018.

We also earn revenues, that are not accounted for under Topic 606, from leasing arrangements (such as towers and equipment), captive reinsurance arrangements primarily related to wireless device insurance and the interest on equipment financed on a device payment plan agreement when





sold to the customer by an authorized agent. Revenues from arrangements that were not accounted for under Topic 606 were approximately $4.5 billion for the year ended December 31, 2018.

Remaining Performance Obligations
When allocating the total contract transaction price to identified performance obligations, a portion of the total transaction price may relate to service performance obligations which were not satisfied or are partially satisfied as of the end of the reporting period. Below we disclose information relating to these unsatisfied performance obligations. We have elected to apply the practical expedient available under Topic 606 that provides the option to exclude the expected revenues arising from unsatisfied performance obligations related to contracts that have an original expected duration of one year or less. This situation primarily arises with respect to certain month-to-month service contracts. At December 31, 2018, month-to-month service contracts represented approximately 86% of our wireless postpaid contracts and 56% of our wireline
Consumer and Small and Medium Business contracts.

Additionally, certain contracts provide customers the option to purchase additional services. The fees related to these additional services are recognized when the customer exercises the option (typically on a month-to-month basis).

Contracts for wireless services are generally either month-to-month and cancellable at any time (typically under a device payment plan) or contain terms ranging from greater than one month up to two years (typically under a fixed-term plan). Additionally, customers may incur charges based on usage or additional optional services in conjunction with entering into a contract that can be cancelled at any time and therefore are not included in the transaction price. The transaction price allocated to service performance obligations, which are not satisfied or are partially satisfied as of the end of the reporting period, are generally related to our fixed-term plans.

Our Consumer group customers also include other telecommunications companies who utilize Verizon's networks to resell wireless service to their respective end customers. Reseller arrangements generally include a stated contract term, which typically extend longer than two years. These arrangements generally include an annual minimum revenue commitment over the term of the contract for which revenues will be recognized in future periods.

Consumer customer contracts for wireline services generally have a service term of two years; however, this term may be shorter at one year or month-to-month. Certain contracts with Business customers for wireline services extend into future periods, contain fixed monthly fees and usage-based fees, and can include annual commitments per each year of the contract or commitments over the entire specified contract term; however, a significant number of contracts for wireline services with our Business customers have a contract term that is twelve months or less.

Furthermore, there are certain contracts with Business customers for wireline services that have a contractual minimum fee over the total contract term. We cannot predict the time period when revenue will be recognized related to those contracts; thus, they are excluded from the time bands below. These contracts have varying terms spanning over five years ending in June 2023 and have aggregate contract minimum payments totaling $3.9 billion.

At December 31, 2018, the transaction price related to unsatisfied performance obligations for total wireless and wireline revenue contracts expected to be recognized for 2019, 2020 and thereafter was $18.6 billion, $8.7 billion and $3.0 billion, respectively.

Accounts Receivable and Contract Balances
The timing of revenue recognition may differ from the time of billing to our customers. Receivables presented in our consolidated balance sheet represent an unconditional right to consideration. Contract balances represent amounts from an arrangement when either Verizon has performed, by transferring goods or services to the customer in advance of receiving all or partial consideration for such goods and services from the customer, or the customer has made payment to Verizon in advance of obtaining control of the goods and/or services promised to the customer in the contract.

Contract assets primarily relate to our rights to consideration for goods or services provided to customers but for which we do not have an unconditional right at the reporting date. Under a fixed-term plan, total contract revenue is allocated between wireless service and equipment revenues, as discussed above. In conjunction with these arrangements, a contract asset is created, which represents the difference between the amount of equipment revenue recognized upon sale and the amount of consideration received from the customer when the performance obligation related to the transfer of control of the equipment is satisfied. The contract asset is reclassified to accounts receivable as wireless services are provided and billed. We have the right to bill the customer as service is provided over time, which results in our right to the payment being unconditional. The contract asset balances are presented in our consolidated balance sheet as Prepaid expenses and other and Other assets. We assess our contract assets for impairment on a quarterly basis and will recognize an impairment charge to the extent their carrying amount is not recoverable. The impairment charge related to contract assets was $0.1 billion for the year ended December 31, 2018, and is included in Other in the table below.

Contract liabilities arise when we bill our customers and receive consideration in advance of providing the goods or services promised in the contract. We typically bill service one month in advance, which is the primary component of the contract liability balance. Contract liabilities are recognized as revenue when services are provided to the customer. The contract liability balances are presented in our consolidated balance sheet as Other current liabilities and Other liabilities.






The following table presents information about receivables from contracts with customers:
 
At January 1,

 
At December 31,

(dollars in millions)
2018

 
2018

Receivables(1)
$
12,073

 
$
12,104

Device payment plan agreement receivables(2)
1,461

 
8,940


(1) 
Balances do not include receivables related to the following contracts: leasing arrangements (such as towers and equipment), captive reinsurance arrangements primarily related to wireless device insurance and the interest on equipment financed on a device payment plan agreement when sold to the customer by an authorized agent.
(2) 
Included in device payment plan agreement receivables presented in Note 8. Balances do not include receivables related to contracts completed prior to January 1, 2018 and receivables derived from the sale of equipment on a device payment plan through an authorized agent.

The following table represents significant changes in the contract assets balance:
(dollars in millions)
Contract Assets

Balance at January 1, 2018
$
38

Opening balance sheet adjustment related to Topic 606 adoption
1,132

Adjusted opening balance, January 1, 2018
1,170

Increase resulting from new contracts
1,583

Contract assets reclassified to a receivable or collected in cash
(1,575
)
Other
(175
)
Balance at December 31, 2018
$
1,003


The following table represents significant changes in the contract liabilities balance:
(dollars in millions)
Contract Liabilities

Balance at January 1, 2018(1)
$
5,086

Opening balance sheet adjustments related to Topic 606 adoption
(634
)
Adjusted opening balance, January 1, 2018
4,452

Net increase in contract liabilities
4,446

Revenue recognized related to contract liabilities existing at January 1, 2018
(3,923
)
Other
(32
)
Balance at December 31, 2018
$
4,943


(1) 
Prior to the adoption of Topic 606, liabilities related to contracts with customers included advanced billings and deferred revenue, which was included within Other current liabilities and Other liabilities in our consolidated balance sheet at December 31, 2017.

The balance of contract assets and contract liabilities recorded in our consolidated balance sheet were as follows:


At December 31,

(dollars in millions)
2018

Assets
 
Prepaid expenses and other
$
757

Other assets
246

Total
$
1,003

 
 
Liabilities
 
Other current liabilities
$
4,207

Other liabilities
736

Total
$
4,943



Contract Costs
As discussed in Note 1, Topic 606 requires the recognition of an asset for incremental costs to obtain a customer contract, which are then amortized to expense, over the respective periods of expected benefit. We recognize an asset for incremental commission expenses paid to internal sales personnel and agents in conjunction with obtaining customer contracts. We only defer these costs when we have determined the commissions are, in fact, incremental and would not have been incurred absent the customer contract. Costs to obtain a contract are amortized and recorded ratably as commission expense over the period representing the transfer of goods or services to which the assets relate. Costs to obtain wireless contracts are amortized over both of our Consumer and Business customers' estimated device upgrade cycles, as such costs are typically incurred each time a customer upgrades. Costs to obtain wireline contracts are amortized as expense over the estimated customer relationship period for





our Consumer customers. Incremental costs to obtain wireline contracts for our Business customers are insignificant. These costs are recorded in Selling, general and administrative expense.

We also defer costs incurred to fulfill contracts that: (1) relate directly to the contract; (2) are expected to generate resources that will be used to satisfy our performance obligation under the contract; and (3) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs are expensed as we satisfy our performance obligations and recorded to Cost of services. These costs principally relate to direct costs that enhance our wireline business resources, such as costs incurred to install circuits.

We determine the amortization periods for our costs incurred to obtain or fulfill a customer contract at a portfolio level due to the similarities within these customer contract portfolios.

Other costs, such as general costs or costs related to past performance obligations, are expensed as incurred.

Collectively, costs to obtain a contract and costs to fulfill a contract are referred to as Deferred contract costs, and amortized over a 2 to 5-year period. Deferred contract costs are classified as current or non-current within Prepaid expenses and other and Other assets, respectively. The balances of Deferred contract costs included in our consolidated balance sheet were as follows:


At December 31,

(dollars in millions)
2018

Assets
 
Prepaid expenses and other
$
2,083

Other assets
1,812

Total
$
3,895



For the year ended December 31, 2018, we recognized expense of $2.0 billion, associated with the amortization of Deferred contract costs, primarily within Selling, general and administrative expense in our consolidated statements of income.

We assess our Deferred contract costs for impairment on a quarterly basis. We recognize an impairment charge to the extent the carrying amount of a deferred cost exceeds the remaining amount of consideration we expect to receive in exchange for the goods and services related to the cost, less the expected costs related directly to providing those goods and services that have not yet been recognized as expenses. There have been no impairment charges recognized for the year ended December 31, 2018.

Note 3. Acquisitions and Divestitures
Spectrum License Transactions
Since 2016, we have entered into or completed several strategic spectrum transactions including:

During the fourth quarter of 2015, we entered into a license exchange agreement with affiliates of AT&T Inc. (AT&T) to exchange certain Advanced Wireless Services (AWS) and Personal Communication Services (PCS) spectrum licenses. This non-cash exchange was completed in March 2016. As a result, we received $0.4 billion of AWS and PCS spectrum licenses at fair value and recorded a pre-tax gain of $0.1 billion in Selling, general and administrative expense in our consolidated statement of income for the year ended December 31, 2016.

During the first quarter of 2016, we entered into a license exchange agreement with affiliates of Sprint Corporation (Sprint) to exchange certain AWS and PCS spectrum licenses. This non-cash exchange was completed in September 2016. As a result, we received $0.3 billion of AWS and PCS spectrum licenses at fair value and recorded an insignificant gain in Selling, general and administrative expense in our consolidated statement of income for the year ended December 31, 2016.

During the fourth quarter of 2016, we entered into a license exchange agreement with affiliates of AT&T to exchange certain AWS and PCS spectrum licenses. This non-cash exchange was completed in February 2017. As a result, we received $1.0 billion of AWS and PCS spectrum licenses at fair value and recorded a pre-tax gain of $0.1 billion in Selling, general and administrative expense in our consolidated statement of income for the year ended December 31, 2017.

During the first quarter of 2017, we entered into a license exchange agreement with affiliates of Sprint to exchange certain PCS spectrum licenses. This non-cash exchange was completed in May 2017. As a result, we received $0.1 billion of PCS spectrum licenses at fair value and recorded an insignificant gain in Selling, general and administrative expense in our consolidated statement of income for the year ended December 31, 2017.

During the third quarter of 2017, we entered into a license exchange agreement with affiliates of T-Mobile USA Inc. to exchange certain AWS and PCS spectrum licenses. This non-cash exchange was completed in December 2017. As a result, we received $0.4 billion of AWS and PCS spectrum licenses at fair value and recorded a pre-tax gain of $0.1 billion in Selling, general and administrative expense in our consolidated statement of income for the year ended December 31, 2017.






During 2018, we entered into and completed various wireless license transactions, including the purchase of Straight Path Communications Inc. (Straight Path) and NextLink Wireless LLC (NextLink).

Access Line Sale
In February 2015, we entered into a definitive agreement with Frontier Communications Corporation (Frontier) pursuant to which Verizon sold its local exchange business and related landline activities in California, Florida and Texas, including Fios Internet and video customers, switched and special access lines and high-speed Internet service and long distance voice accounts in these three states, for approximately $10.5 billion (approximately $7.3 billion net of income taxes), subject to certain adjustments and including the assumption of $0.6 billion of indebtedness from Verizon by Frontier. The transaction included the acquisition by Frontier of the equity interests of Verizon’s incumbent local exchange carriers (ILECs) in California, Florida and Texas. The transaction closed on April 1, 2016.

The transaction resulted in Frontier acquiring approximately 3.3 million voice connections, 1.6 million Fios Internet subscribers, 1.2 million Fios video subscribers and the related ILEC businesses from Verizon. For the year ended December 31, 2016, these businesses generated revenues of approximately $1.3 billion and operating income of $0.7 billion for Verizon.

During April 2016, Verizon used the net cash proceeds received of $9.9 billion to reduce its consolidated indebtedness. See Note 7 for additional information. As a result of the closing of the transaction, we derecognized property, plant and equipment of $9.0 billion, goodwill of $1.3 billion, $0.7 billion of defined benefit pension and other postretirement benefit plan obligations and $0.6 billion of indebtedness assumed by Frontier.

We recorded a pre-tax gain of approximately $1.0 billion in Selling, general and administrative expense in our consolidated statement of income for the year ended December 31, 2016. The pre-tax gain included a $0.5 billion pension and postretirement benefit curtailment gain due to the elimination of the accrual of pension and other postretirement benefits for some or all future services of a significant number of employees covered by three of our defined benefit pension plans and one of our other postretirement benefit plans.

Acquisition of AOL Inc.
In May 2015, we entered into an Agreement and Plan of Merger with AOL Inc. (AOL) pursuant to which we commenced a tender offer to acquire all of the outstanding shares of common stock of AOL at a price of $50.00 per share, net to the seller in cash, without interest and less any applicable withholding taxes.

On June 23, 2015, we completed the tender offer and merger, and AOL became a wholly-owned subsidiary of Verizon. The aggregate cash consideration paid by Verizon at the closing of these transactions was approximately $3.8 billion. Holders of approximately 6.6 million shares exercised appraisal rights under Delaware law. In September 2018, we obtained court approval to settle this matter for total cash consideration of $0.2 billion of which an insignificant amount relates to interest, resulting in an insignificant gain. We paid the cash consideration in October 2018.

XO Holdings
In February 2016, we entered into a purchase agreement to acquire XO Holdings' wireline business (XO), which owned and operated one of the largest fiber-based Internet Protocol and Ethernet networks in the U.S. Concurrently, we entered into a separate agreement to utilize certain wireless spectrum from a wholly-owned subsidiary of XO Holdings, NextLink, that held XO's millimeter-wave wireless spectrum. The agreement included an option, subject to certain conditions, to acquire NextLink. In February 2017, we completed our acquisition of XO for total cash consideration of approximately $1.5 billion, of which $0.1 billion was paid in 2015, and we prepaid $0.3 billion in connection with the NextLink option which represented the fair value of the option.

In April 2017, we exercised our option to buy NextLink for approximately $0.5 billion, subject to certain adjustments, of which $0.3 billion was prepaid in the first quarter of 2017. The transaction closed in January 2018. The acquisition of NextLink was accounted for as an asset acquisition, as substantially all of the value related to the acquired spectrum. Upon closing, we recorded approximately $0.7 billion of wireless licenses, $0.1 billion of a deferred tax liability and $0.1 billion of other liabilities.

The consolidated financial statements include the results of XO's operations from the date the acquisition closed. If the acquisition of XO had been completed as of January 1, 2016, the results of operations of Verizon would not have been significantly different than our previously reported results of operations.

The acquisition of XO was accounted for as a business combination. The consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of the close of the acquisition. We recorded approximately $1.2 billion of property, plant and equipment, $0.1 billion of goodwill and $0.2 billion of other intangible assets. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired. The goodwill represents future economic benefits that we expect to achieve as a result of the acquisition. See Note 4 for additional information.

Acquisition of Yahoo! Inc.’s Operating Business
In July 2016, Verizon entered into a stock purchase agreement (the Purchase Agreement) with Yahoo! Inc. (Yahoo). Pursuant to the Purchase Agreement, upon the terms and subject to the conditions thereof, we agreed to acquire the stock of one or more subsidiaries of Yahoo holding all of Yahoo’s operating business for approximately $4.83 billion in cash, subject to certain adjustments (the Transaction).






In February 2017, Verizon and Yahoo entered into an amendment to the Purchase Agreement, pursuant to which the Transaction purchase price was reduced by $350 million to approximately $4.48 billion in cash, subject to certain adjustments. Subject to certain exceptions, the parties also agreed that certain user security and data breaches incurred by Yahoo (and the losses arising therefrom) were to be disregarded: (1) for purposes of specified conditions to Verizon’s obligations to close the Transaction; and (2) in determining whether a "Business Material Adverse Effect" under the Purchase Agreement had occurred.

Concurrently with the amendment of the Purchase Agreement, Yahoo and Yahoo Holdings, Inc., a wholly-owned subsidiary of Yahoo that Verizon agreed to purchase pursuant to the Transaction, also entered into an amendment to the related reorganization agreement, pursuant to which Yahoo (which changed its name to Altaba Inc. following the closing of the Transaction) retains 50% of certain post-closing liabilities arising out of governmental or third-party investigations, litigations or other claims related to certain user security and data breaches incurred by Yahoo prior to its acquisition by Verizon, including an August 2013 data breach disclosed by Yahoo on December 14, 2016. At that time, Yahoo disclosed that more than one billion of the approximately three billion accounts existing in 2013 had likely been affected. In accordance with the original Transaction agreements, Yahoo will continue to retain 100% of any liabilities arising out of any shareholder lawsuits (including derivative claims) and investigations and actions by the SEC.

In June 2017, we completed the Transaction. The aggregate purchase consideration at the closing of the Transaction was approximately $4.7 billion, including cash acquired of $0.2 billion.

Prior to the closing of the Transaction, pursuant to a related reorganization agreement, Yahoo transferred all of the assets and liabilities constituting Yahoo’s operating business to the subsidiaries that we acquired in the Transaction. The assets that we acquired did not include Yahoo’s ownership interests in Alibaba, Yahoo! Japan and certain other investments, certain undeveloped land recently divested by Yahoo, certain non-core intellectual property or its cash, other than the cash from its operating business we acquired. We received for our benefit and that of our current and certain future affiliates a non-exclusive, worldwide, perpetual, royalty-free license to all of Yahoo’s intellectual property that was not conveyed with the business.

In October 2017, based upon information that we received in connection with our integration of Yahoo's operating business, we disclosed that we believe that the August 2013 data breach previously disclosed by Yahoo affected all of its accounts.

The acquisition of Yahoo’s operating business has been accounted for as a business combination. The fair values of the assets acquired and liabilities assumed were determined using the income, cost, market and multiple period excess earnings approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in Accounting Standards Codification 820, Fair Value Measurements and Disclosures, other than long-term debt assumed in the acquisition. The income approach was primarily used to value the intangible assets, consisting primarily of acquired technology and customer relationships. The income approach indicates value for an asset based on the present value of cash flow projected to be generated by the asset. Projected cash flow is discounted at a required rate of return that reflects the relative risk of achieving the cash flow and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for property, plant and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation.






In June 2018, we finalized the accounting for the Yahoo acquisition. The following table summarizes the final accounting for of the assets acquired, including cash acquired of $0.2 billion, and liabilities assumed as of the close of the acquisition, as well as the fair value at the acquisition date of Yahoo’s noncontrolling interests:
(dollars in millions)
As of December 31, 2017

Measurement-period adjustments (1)

Adjusted Fair Value

Cash payment to Yahoo’s equity holders
$
4,673

$

$
4,673

Estimated liabilities to be paid
38


38

Total consideration
$
4,711

$

$
4,711

 
 
 
 
Assets acquired:
 
 
 
Goodwill
$
1,929

$
215

$
2,144

Intangible assets subject to amortization
1,873

1

1,874

Property, plant, and equipment
1,805

(6
)
1,799

Other
1,332

128

1,460

Total assets acquired
6,939

338

7,277

 
 
 
 
Liabilities assumed:
 
 
 
Total liabilities assumed
2,178

338

2,516

 
 
 
 
Net assets acquired:
4,761


4,761

Noncontrolling interest
(50
)

(50
)
Total consideration
$
4,711

$

$
4,711


(1) Adjustments to the fair value measurements to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. The most significant adjustments related to an increase in goodwill and the recognition of liabilities per certain pre-acquisition contingencies.

On the closing date of the Transaction, each unvested and outstanding Yahoo restricted stock unit award that was held by an employee who became an employee of Verizon was replaced with a Verizon restricted stock unit award, which is generally payable in cash upon the applicable vesting date. The value of those outstanding restricted stock units on the acquisition date was approximately $1.0 billion.

Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired. The goodwill was primarily attributable to increased synergies that were expected to be achieved from the integration of Yahoo’s operating business into our Media business. The goodwill related to this acquisition is included within Corporate and other. See Note 4 for additional information.

The consolidated financial statements include the results of Yahoo’s operating business from the date the acquisition closed. If the acquisition of Yahoo’s operating business had been completed as of January 1, 2016, the results of operations of Verizon would not have been significantly different than our previously reported results of operations.

Acquisition and Integration Related Charges
Related to the Yahoo Transaction, we recorded $0.5 billion of acquisition and integration related charges during the year ended December 31, 2018, of which $0.3 billion, $0.2 billion and an insignificant amount are related to Severance, Integration costs and Transaction costs, respectively. In connection with the Yahoo Transaction, we recorded acquisition and integration related charges of approximately $0.8 billion during the year ended December 31, 2017, of which $0.5 billion, $0.2 billion and $0.1 billion related to Severance, Integration costs and Transaction costs, respectively. These charges were recorded in Selling, general and administrative expense in our consolidated statements of income.

Fleetmatics Group PLC
In July 2016, we entered into an agreement to acquire Fleetmatics Group PLC, a public limited company incorporated in Ireland (Fleetmatics). Fleetmatics was a leading global provider of fleet and mobile workforce management solutions. Pursuant to the terms of the agreement, we acquired Fleetmatics for $60.00 per ordinary share in cash. The aggregate merger consideration was approximately $2.5 billion, including cash acquired of $0.1 billion. We completed the acquisition on November 7, 2016. As a result of the transaction, Fleetmatics became a wholly-owned subsidiary of Verizon.

The consolidated financial statements include the results of Fleetmatics’ operations from the date the acquisition closed. Had this acquisition been completed on January 1, 2016, the results of operations of Verizon would not have been significantly different than our previously reported results of operations. Upon closing, we recorded approximately $1.4 billion of goodwill and $1.1 billion of other intangibles.

The acquisition of Fleetmatics was accounted for as a business combination. The consideration was allocated to the assets acquired and liabilities assumed based on their fair values as of the close of the acquisition.






Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired. The goodwill recorded as a result of the Fleetmatics transaction represents future economic benefits we expect to achieve as a result of the acquisition. The goodwill related to this acquisition is included within Corporate and other. See Note 4 for additional information.

Telogis, Inc.
In July 2016, we acquired Telogis, Inc., a global cloud-based mobile enterprise management software business, for $0.9 billion of cash consideration. Upon closing, we recorded $0.5 billion of goodwill that is included within Corporate and other.

Data Center Sale
In December 2016, we entered into a definitive agreement, which was subsequently amended in March 2017, with Equinix, Inc. (Equinix) pursuant to which we agreed to sell 23 customer-facing data center sites in the U.S. and Latin America for approximately $3.6 billion, subject to certain adjustments (Data Center Sale). The transaction closed in May 2017.

For the years ended December 31, 2017 and 2016, these sites generated an insignificant amount of revenues and earnings. As a result of the closing of the transaction, we derecognized assets with a carrying value of $1.4 billion, primarily consisting of goodwill, property, plant and equipment and other intangible assets. The liabilities associated with the sale were insignificant.

In connection with the Data Center Sale and other insignificant divestitures, we recorded a net gain on sale of divested businesses of approximately $1.8 billion in Selling, general and administrative expense in our consolidated statement of income for the year ended December 31, 2017.

Straight Path
In May 2017, we entered into a purchase agreement to acquire Straight Path, a holder of millimeter wave spectrum configured for fifth-generation (5G) wireless services, for total consideration reflecting an enterprise value of approximately $3.1 billion. Under the terms of the purchase agreement, we agreed to pay: (1) Straight Path shareholders $184.00 per share, payable in Verizon shares; and (2) certain transaction costs payable in cash of approximately $0.7 billion, consisting primarily of a fee to be paid to the FCC. The transaction closed in February 2018 at which time we issued approximately 49 million shares of Verizon common stock, valued at approximately $2.4 billion, and paid the associated cash consideration.

The acquisition of Straight Path was accounted for as an asset acquisition, as substantially all of the value related to the acquired spectrum. Upon closing, we recorded approximately $4.5 billion of wireless licenses and $1.4 billion of a deferred tax liability. The spectrum acquired as part of the transaction is being used for our 5G technology deployment. See Note 4 for additional information.

WideOpenWest, Inc.
In August 2017, we entered into a definitive agreement to purchase certain fiber-optic network assets in the Chicago market from WideOpenWest, Inc. (WOW!), a leading provider of communications services. The transaction closed in December 2017. In addition, the parties entered into a separate agreement pursuant to which WOW! will complete the build-out of the network assets in 2019. The total cash consideration for the transactions is approximately $0.3 billion, of which $0.2 billion was paid in December 2017.

Other
During 2018, we entered into and completed various other transactions for $0.1 billion of cash consideration. During 2017 and 2016, we entered into and completed various other transactions for an insignificant amount of cash consideration.

Note 4. Wireless Licenses, Goodwill and Other Intangible Assets
Wireless Licenses
The carrying amounts of Wireless licenses are as follows:
 
(dollars in millions)
 
At December 31,
2018

 
2017

Wireless licenses
$
94,130

 
$
88,417



For the year ended December 31, 2018, we recorded approximately $4.5 billion of wireless licenses in connection with the Straight Path acquisition and $0.7 billion in connection with the NextLink acquisition. See Note 3 for additional information.
At December 31, 2018 and 2017, approximately $8.6 billion and $8.8 billion, respectively, of wireless licenses were under development for commercial service for which we were capitalizing interest costs. We recorded approximately $0.5 billion of capitalized interest on wireless licenses for each of the years ended December 31, 2018 and 2017, respectively.

The average remaining renewal period of our wireless license portfolio was 4.6 years as of December 31, 2018. See Note 1 for additional information.






As discussed in Note 1, we test our wireless licenses for potential impairment annually or more frequently if impairment indicators are present. In 2018, our quantitative impairment test consisted of comparing the estimated fair value of our aggregate wireless licenses estimated using the Greenfield approach to the aggregated carrying amount of the licenses as of the test date. In 2017 and 2016, we performed a qualitative assessment to determine whether it was more likely than not that the fair value of our wireless licenses was less than the carrying amount. Our assessments in 2018, 2017 and 2016 indicated that the fair value of our wireless licenses exceeded the carrying value and, therefore, did not result in impairment.

Goodwill
In November 2018, we announced a strategic reorganization of our business. As discussed in Note 1, the Company began reporting externally under the new structure as of April 1, 2019. The below table and the goodwill impairment assessment results described below relate to the previous reporting structure in effect as of December 31, 2018.

Changes in the carrying amount of Goodwill are as follows:
 
 
 
 
 
(dollars in millions)
 
 
Historical Wireless

 
Historical Wireline

 
Historical Other

 
Total

Balance at January 1, 2017
$
18,393

 
$
3,746

 
$
5,066

 
$
27,205

Acquisitions (Note 3)
4

 
208

 
1,956

 
2,168

Reclassifications, adjustments and other

 
1

 
(202
)
 
(201
)
Balance at December 31, 2017
18,397

 
3,955

 
6,820

 
29,172

Acquisitions (Note 3)

 
(77
)
 
225

 
148

Oath goodwill impairment

 

 
(4,591
)
 
(4,591
)
Reclassifications, adjustments and other

 
(7
)
 
(108
)
 
(115
)
Balance at December 31, 2018
$
18,397

 
$
3,871

 
$
2,346

 
$
24,614



We recognized goodwill of $2.1 billion within the Media reporting unit (included within Historical Other in the table above) as a result of the acquisition of Yahoo's operating business and $0.1 billion in the historical Wireline reporting unit as a result of the acquisition of XO. See Note 3 for additional information.

In the fourth quarter of 2018, we performed a quantitative impairment test for our historical Wireless, historical Wireline, historical Connect and Media reporting units. Based on our assessment, it was determined that the fair value exceeded the carrying amount of each of our reporting units except for our Media reporting unit. Verizon Media has continued to experience increased competitive and market pressures throughout 2018 that have resulted in lower than expected revenues and earnings. These pressures are expected to continue and have resulted in a loss of market positioning to our competitors in the digital advertising business. Oath has also achieved lower than expected benefits from the integration of the Yahoo and AOL businesses.

In connection with Verizon’s annual budget process in the fourth quarter, the new leadership at both Oath and Verizon completed a comprehensive five-year strategic planning review of Oath’s business prospects resulting in unfavorable adjustments to Oath’s financial projections. These revised projections were used as a key input into the Company’s annual goodwill impairment test performed in the fourth quarter.

Consistent with our accounting policy, we applied a combination of a market approach and a discounted cash flow method reflecting current assumptions and inputs, including our revised projections, discount rate and expected growth rates, which resulted in the fair value of the Media reporting unit being less than its carrying amount. As a result, we recorded a non-cash goodwill impairment charge of approximately $4.6 billion ($4.5 billion after-tax) in the fourth quarter of 2018 in our consolidated statement of income. The goodwill balance of the Media reporting unit was approximately $4.8 billion prior to the incurrence of this impairment charge.

We performed a quantitative impairment assessment for all of our reporting units in 2018 and for all of our reporting units, except for our historical Wireless reporting unit, in 2017 and 2016 for which a qualitative assessment was completed. For 2018, 2017 and 2016, our impairment tests indicated that the fair value for each of our historical Wireless, historical Wireline and historical Connect reporting units exceeded their respective carrying value and therefore, did not result in a goodwill impairment. For 2017 and 2016, our impairment tests indicated that the fair value for our Media reporting unit exceeded its carrying value and therefore, did not result in goodwill impairment.






Other Intangible Assets
The following table displays the composition of Other intangible assets, net:
 
 
 
 
 
 
 
(dollars in millions)
 
 
 
 
 
 
2018

 
 
 
 
 
2017

At December 31,
Gross
Amount

 
Accumulated
Amortization

 
Net
Amount

 
Gross
Amount

 
Accumulated
Amortization

 
Net
Amount

Customer lists (8 to 13 years)
$
3,951

 
$
(1,121
)
 
$
2,830

 
$
3,621

 
$
(691
)
 
$
2,930

Non-network internal-use software (3 to 7 years)
18,603

 
(12,785
)
 
5,818

 
18,010

 
(12,374
)
 
5,636

Other (2 to 25 years)
1,988

 
(861
)
 
1,127

 
2,474

 
(793
)
 
1,681

Total
$
24,542

 
$
(14,767
)
 
$
9,775

 
$
24,105

 
$
(13,858
)
 
$
10,247



During 2017, we recognized other intangible assets of $1.9 billion in Corporate and other as a result of the acquisition of Yahoo's operating business and $0.2 billion in our historical Wireline as a result of the acquisition of XO. See Note 3 for additional information.

The amortization expense for Other intangible assets was as follows:
Years
(dollars in millions)

2018
$
2,217

2017
2,213

2016
1,701



Estimated annual amortization expense for Other intangible assets is as follows:
Years
(dollars in millions)

2019
$
2,145

2020
1,801

2021
1,501

2022
1,230

2023
949



Note 5. Property, Plant and Equipment
The following table displays the details of Property, plant and equipment, which is stated at cost:
 
 
 
(dollars in millions)
 
At December 31,
Lives (years)
 
2018

 
2017

Land
-
 
$
807

 
$
806

Buildings and equipment
7 to 45
 
30,468

 
28,914

Central office and other network equipment
3 to 50
 
147,250

 
145,093

Cable, poles and conduit
7 to 50
 
49,859

 
47,972

Leasehold improvements
5 to 20
 
8,580

 
8,394

Work in progress
-
 
6,362

 
6,139

Furniture, vehicles and other
3 to 20
 
9,509

 
9,180

 
 
 
252,835

 
246,498

Less accumulated depreciation
 
 
(163,549
)
 
(157,930
)
Property, plant and equipment, net
 
 
$
89,286

 
$
88,568



Note 6. Leasing Arrangements
As Lessee
We lease certain facilities and equipment for use in our operations under both capital and operating leases. Certain operating leases contain renewal options with varying terms and conditions that may be exercised. Total rent expense under operating leases amounted to $4.1 billion in 2018, $3.8 billion in 2017, and $3.6 billion in 2016.






Amortization of capital leases is included in Depreciation and amortization expense in the consolidated statements of income. Capital lease amounts included in Property, plant and equipment are as follows:
 
(dollars in millions)
 
At December 31,
2018

 
2017

Capital leases
$
1,756

 
$
1,463

Less accumulated amortization
(998
)
 
(692
)
Total
$
758

 
$
771



The aggregate minimum rental commitments under noncancelable leases for the periods shown at December 31, 2018 are as follows:
 
 
 
(dollars in millions)

Years
Capital Leases

 
Operating Leases

2019
$
343

 
$
4,043

2020
245

 
3,678

2021
148

 
3,272

2022
100

 
2,871

2023
52

 
2,522

Thereafter
115

 
10,207

Total minimum rental commitments
$
1,003

 
$
26,593

Less interest and executory costs
$
(98
)
 
 
Present value of minimum lease payments
905

 
 
Less current installments
(316
)
 
 
Long-term obligation at December 31, 2018
$
589

 
 


Tower Monetization Transaction
During March 2015, we completed a transaction with American Tower Corporation (American Tower) pursuant to which American Tower acquired the exclusive rights to lease and operate approximately 11,300 of our wireless towers and corresponding ground leases for an upfront payment of $5.0 billion. We have subleased capacity on the towers from American Tower for a minimum of 10 years at current market rates, with options to renew. Under this agreement, total rent payments for the towers amounted to $0.3 billion for both the years ended December 31, 2018 and 2017. We expect to make minimum future lease payments of approximately $1.8 billion. We continue to include the towers in Property, plant and equipment, net in our consolidated balance sheets and depreciate them accordingly. Towers related to this transaction that were included in Property, plant and equipment, net, amounted to $0.4 billion for both the years ended December 31, 2018 and 2017. In addition, the minimum future payments for the ground leases of approximately $2.5 billion is included in our operating lease commitments. As part of the rights obtained during the transaction, American Tower is responsible for the payment of the leases, and we do not expect to be required to make payments unless American Tower defaults.






Note 7. Debt
Outstanding long-term debt obligations as of December 31, 2018 are as follows:
 
 
 
 
 
(dollars in millions)
 
At December 31,
Interest 
Rates %
 
Maturities
 
2018

 
2017

Verizon Communications
1.38 – 4.00
 
2018 – 2042
 
$
29,651

 
$
31,370

 
4.05 – 5.51
 
2020 – 2055
 
66,230

 
67,906

 
5.82 – 6.90
 
2026 – 2054
 
5,658

 
5,835

 
7.35 – 8.95
 
2029 – 2039
 
1,076

 
1,106

 
Floating
 
2018 – 2025
 
4,657

 
6,684

Verizon Wireless
6.80 – 7.88
 
2029 – 2032
 
234

 
234

Telephone subsidiaries—debentures
5.13 – 6.50
 
2028 – 2033
 
226

 
226

 
7.38 – 7.88
 
2022 – 2032
 
341

 
341

 
8.00 – 8.75
 
2022 – 2031
 
229

 
229

Other subsidiaries—notes payable, debentures and other
6.70 – 8.75
 
2018 – 2028
 
444

 
748

Verizon Wireless and other subsidiaries—asset-backed debt
1.42 – 3.55
 
2021 – 2023
 
7,962

 
6,293

 
Floating
 
2021 – 2023
 
2,139

 
2,620

Capital lease obligations (average rate of 4.1% and 3.6% in 2018 and 2017, respectively)
 
 
 
 
905

 
1,020

Unamortized discount, net of premium
 
 
 
 
(6,298
)
 
(7,133
)
Unamortized debt issuance costs
 
 
 
 
(541
)
 
(534
)
Total long-term debt, including current maturities
 
 
 
 
112,913

 
116,945

Less long-term debt maturing within one year
 
 
 
 
7,040

 
3,303

Total long-term debt
 
 
 
 
$
105,873

 
$
113,642

 
 
 
 
 
 
 
 
Total long-term debt, including current maturities
 
 
 
 
$
112,913

 
$
116,945

Plus short-term notes payable
 
 
 
 
150

 
150

Total debt
 
 
 
 
$
113,063

 
$
117,095



Maturities of long-term debt (secured and unsecured) outstanding, including current maturities, excluding unamortized debt issuance costs, at December 31, 2018 are as follows:
Years
(dollars in millions)

2019
$
7,058

2020
7,380

2021
6,999

2022
7,674

2023
5,903

Thereafter
78,439



During 2018, we received $10.8 billion of proceeds from long-term borrowings, which included $4.8 billion of proceeds from asset-backed debt transactions. The net proceeds were used for general corporate purposes including the repayment of debt. We used $14.6 billion to repay long-term borrowings and capital lease obligations, including $3.6 billion to prepay and repay asset-backed, long-term borrowings.

During 2017, we received $32.0 billion of proceeds from long-term borrowings, which included $4.3 billion of proceeds from asset-backed debt transactions. The net proceeds were used for general corporate purposes including the repayment of debt. We used $24.2 billion to repay long-term borrowings and capital lease obligations, including $0.4 billion to prepay asset-backed, long-term borrowings.






2018 Significant Debt Transactions
Tender Offers
(dollars in millions)
Principal Amount Purchased

Cash Consideration(1)

Verizon 1.750% - 5.012% notes due 2021-2055
$
2,881

$
2,829

Verizon 3.850% - 5.012% notes due 2039-2055
1,876

1,787

Total
$
4,757

$
4,616

(1) In addition to the purchase price, any accrued and unpaid interest on the purchased notes was paid to the date of purchase.

Exchange Offers and Cash Offers
(dollars in millions)
Principal Amount Exchanged/ Purchased

Principal Amount Issued/ Cash Paid in Exchange
 
Verizon 1.750% - 5.150% and floating rate notes due 2020-2024
$
4,633

$

 
Verizon 4.329% notes due 2028
 
4,252

 
Cash paid in exchange and cash offer
 
539

(1 
) 
Total
$
4,633

$
4,791

 
(1) In addition to the purchase price, any accrued and unpaid interest on the purchased notes was paid to the date of purchase.

Debt Redemptions, Repurchases and Repayments
(dollars in millions)
Principal Amount Redeemed/ Repurchased

% of Principal Paid

Verizon floating rate (LIBOR + 1.372%) notes due 2025
$
2,500

100.000
%
Open market repurchase of various Verizon notes
1,481

Various

Verizon 2.550% notes due 2019
213

100.000
%
Total
$
4,194

 


In 2018, we also repaid $0.4 billion for a Verizon floating rate note that matured in September 2018.

During February 2019, we notified investors of our intention to redeem in March 2019 in whole $0.5 billion aggregate principal amount of 5.900% notes due 2054.

Debt Issuances
(dollars in millions)
Principal Amount Issued

Net Proceeds (1)

Verizon 5.320% notes due 2053
$
730

$
725

Verizon floating rate (LIBOR + 1.100%) notes due 2025
1,789

1,782

Verizon retail notes
338

328

Total
$
2,857

$
2,835

(1) Net proceeds were net of discount and issuance costs.

In February 2019, we issued $1.0 billion aggregate principal amount of 3.875% notes due 2029, which we refer to as the "green bond." An amount equal to the net proceeds from the green bond will be used to fund, in whole or in part, "Eligible Green Investments." "Eligible Green Investments" include new and existing investments made by us during the period from two years prior to the issuance of the green bond through the maturity date of the green bond, in the following categories: (1) renewable energy; (2) energy efficiency; (3) green buildings; (4) sustainable water management; and (5) biodiversity and conservation.

Asset-Backed Debt
As of December 31, 2018, the carrying value of our asset-backed debt was $10.1 billion. Our asset-backed debt includes notes (the Asset-Backed Notes) issued to third-party investors (Investors) and loans (ABS Financing Facilities) received from banks and their conduit facilities (collectively, the Banks). Our consolidated asset-backed debt bankruptcy remote legal entities (each, an ABS Entity or collectively, the ABS Entities) issue the debt or are otherwise party to the transaction documentation in connection with our asset-backed debt transactions. Under the terms of our asset-backed debt, we transfer device payment plan agreement receivables from Cellco Partnership (Cellco) and certain other affiliates of Verizon (collectively, the Originators) to one of the ABS Entities, which in turn transfers such receivables to another ABS Entity that issues the debt. Verizon entities retain the equity interests in the ABS Entities, which represent the rights to all funds not needed to make required payments on the asset-backed debt and other related payments and expenses.

Our asset-backed debt is secured by the transferred device payment plan agreement receivables and future collections on such receivables. The device payment plan agreement receivables transferred to the ABS Entities and related assets, consisting primarily of restricted cash, will only





be available for payment of asset-backed debt and expenses related thereto, payments to the Originators in respect of additional transfers of device payment plan agreement receivables, and other obligations arising from our asset-backed debt transactions, and will not be available to pay other obligations or claims of Verizon’s creditors until the associated asset-backed debt and other obligations are satisfied. The Investors or Banks, as applicable, which hold our asset-backed debt have legal recourse to the assets securing the debt, but do not have any recourse to Verizon with respect to the payment of principal and interest on the debt. Under a parent support agreement, Verizon has agreed to guarantee certain of the payment obligations of Cellco and the Originators to the ABS Entities.

Cash collections on the device payment plan agreement receivables collateralizing our asset-backed debt securities are required at certain specified times to be placed into segregated accounts. Deposits to the segregated accounts are considered restricted cash and are included in Prepaid expenses and other, and Other assets in our consolidated balance sheets.

Proceeds from our asset-backed debt transactions are reflected in Cash flows from financing activities in our condensed consolidated statements of cash flows. The asset-backed debt issued and the assets securing this debt are included in our consolidated balance sheets.

Asset-Backed Notes
In 2018, we completed the following major Asset-Backed Notes transactions:
 
(dollars in millions)
 
 
Interest Rates %
 
Expected Weighted-average Life to Maturity
Principal Amount Issued

March
 
 
 
 
A-1a Senior class notes
2.820
 
2.49
$
725

A-1b Senior floating rate class notes
0.260
(1) 
2.49
275

B Junior class notes
3.050
 
3.14
91

C Junior class notes
3.200
 
3.36
92

March total
 
 
 
1,183

 
 
 
 
 
October
 
 
 
 
A-1a Senior class notes
3.230
 
2.51
1,226

A-1b Senior floating rate class notes
0.240
(1) 
2.51
200

B Junior class notes
3.380
 
3.24
98

C Junior class notes
3.550
 
3.41
76

October total
 
 
 
1,600

Total
 
 
 
$
2,783

(1) Rate is the percentage presented plus one-month London Interbank Offered Rate (LIBOR), which will be reset monthly. The applicable one-month LIBOR rate at December 31, 2018 was 2.520%

Under the terms of each series of Asset-Backed Notes, there is a two year revolving period during which we may transfer additional receivables to the ABS Entity. The two year revolving period of the Asset-Backed Notes we issued in July 2016 and November 2016 ended in July 2018 and November 2018 respectively, and we began to repay principal on the 2016-1 Class A senior Asset-Backed Notes and the 2016-2 Class A senior Asset-Backed Notes in August 2018 and December 2018, respectively. During 2018, we made aggregate repayments of $0.6 billion.

ABS Financing Facility
In May 2018, we entered into a second device payment plan agreement financing facility with a number of financial institutions (2018 ABS Financing Facility). Under the terms of the 2018 ABS Financing Facility, the financial institutions made advances under asset-backed loans backed by device payment plan agreement receivables of business customers for proceeds of $0.5 billion. The loan agreement entered into in connection with the 2018 ABS Financing Facility has a final maturity date in December 2021 and bears interest at a floating rate. There is a one year revolving period beginning from May 2018 during which we may transfer additional receivables to the ABS Entity. Subject to certain conditions, we may also remove receivables from the ABS Entity. Under the loan agreement, we have the right to prepay all or a portion of the advances at any time without penalty, but in certain cases, with breakage costs. If we choose to prepay, the amount prepaid shall be available for further drawdowns until May 2019, except in certain circumstances. As of December 31, 2018, the 2018 ABS Financing Facility is fully drawn and the outstanding borrowing under the 2018 ABS Financing Facility was $0.5 billion.

We entered into an ABS Financing Facility in September 2016 with a number of financial institutions (2016 ABS Financing Facility). Under the terms of the 2016 ABS Financing Facility, the financial institutions made advances under asset-backed loans backed by device payment plan agreement receivables of consumer customers. Two loan agreements were entered into in connection with the 2016 ABS Financing Facility in September 2016 and May 2017. The loan agreements have a final maturity date in March 2021 and bear interest at floating rates. The two year revolving period of the two loan agreements ended in September 2018. Under the loan agreements, we have the right to prepay all or a portion of the advances at any time without penalty, but in certain cases, with breakage costs. Subject to certain conditions, we may also remove receivables from the ABS Entity. As a result of a $1.5 billion drawdown and an aggregate amount of $3.0 billion of prepayments and repayments, aggregate outstanding borrowings under the two loans agreements were $0.9 billion as of December 31, 2018.






Variable Interest Entities
The ABS Entities meet the definition of a VIE for which we have determined that we are the primary beneficiary as we have both the power to direct the activities of the entity that most significantly impact the entity’s performance and the obligation to absorb losses or the right to receive benefits of the entity. Therefore, the assets, liabilities and activities of the ABS Entities are consolidated in our financial results and are included in amounts presented on the face of our consolidated balance sheets.

The assets and liabilities related to our asset-backed debt arrangements included in our consolidated balance sheets were as follows:

 
(dollars in millions)
 
At December 31,
2018

 
2017

Assets
 
 
 
Accounts receivable, net
$
8,861

 
$
8,101

Prepaid expenses and other
989

 
636

Other Assets
2,725

 
2,680

 
 
 
 
Liabilities
 
 
 
Accounts payable and accrued liabilities
7

 
5

Debt maturing within one year
5,352

 
1,932

Long-term debt
4,724

 
6,955



See Note 8 for additional information on device payment plan agreement receivables used to secure asset-backed debt.

Credit Facilities
In April 2018, we amended our $9.0 billion credit facility to increase the capacity to $9.5 billion and extend its maturity to April 4, 2022. As of December 31, 2018, the unused borrowing capacity under our $9.5 billion credit facility was approximately $9.4 billion. The credit facility does not require us to comply with financial covenants or maintain specified credit ratings, and it permits us to borrow even if our business has incurred a material adverse change. We use the credit facility for the issuance of letters of credit and for general corporate purposes.

In March 2016, we entered into a $1.0 billion credit facility insured by Eksportkreditnamnden Stockholm, Sweden, the Swedish export credit agency. As of December 31, 2018, the outstanding balance was $0.7 billion. We used this credit facility to finance network equipment-related purchases.

In July 2017, we entered into credit facilities insured by various export credit agencies providing us with the ability to borrow up to $4.0 billion to finance equipment-related purchases. The facilities have borrowings available, portions of which extend through October 2019, contingent upon the amount of eligible equipment-related purchases that we make. During 2018, we drew down $3.0 billion from these facilities, and $2.8 billion remained outstanding as of December 31, 2018. In January 2019, we drew down an additional $0.4 billion from these facilities.

Non-Cash Transaction
During the years ended December 31, 2018, 2017 and 2016, we financed, primarily through vendor financing arrangements, the purchase of approximately $1.1 billion, $0.5 billion, and $0.5 billion respectively, of long-lived assets consisting primarily of network equipment. At December 31, 2018 and December 31, 2017, $1.1 billion and $1.2 billion, respectively, relating to these financing arrangements, including those entered into in prior years and liabilities assumed through acquisitions, remained outstanding. These purchases are non-cash financing activities and therefore not reflected within Capital expenditures in our consolidated statements of cash flows.

Early Debt Redemptions
During 2018 and 2017, we recorded losses on early debt redemptions of $0.7 billion and $2.0 billion, respectively.

We recognize losses on early debt redemptions in Other income (expense), net, in our consolidated statements of income and within our Net cash used in financing activities in our consolidated statements of cash flows.

Guarantees
We guarantee the debentures of our operating telephone company subsidiaries. As of December 31, 2018, $0.8 billion aggregate principal amount of these obligations remained outstanding. Each guarantee will remain in place for the life of the obligation unless terminated pursuant to its terms, including the operating telephone company no longer being a wholly-owned subsidiary of Verizon.

We also guarantee the debt obligations of GTE LLC, as successor in interest to GTE Corporation, that were issued and outstanding prior to July 1, 2003. As of December 31, 2018, $0.4 billion aggregate principal amount of these obligations remain outstanding.






Debt Covenants
We and our consolidated subsidiaries are in compliance with all of our restrictive covenants in our debt agreements.

Note 8. Wireless Device Payment Plans
Under the Verizon device payment program, our eligible wireless customers purchase wireless devices under a device payment plan agreement. Customers that activate service on devices purchased under the device payment program pay lower service fees as compared to those under our fixed-term service plans, and their device payment plan charge is included on their wireless monthly bill. As of January 2017, we no longer offer Consumer customers new fixed-term, subsidized service plans for phones; however, we continue to offer subsidized plans to our Business customers. We also continue to service existing fixed-term subsidized plans for Consumer customers who have not yet purchased and activated devices under the Verizon device payment program.

Wireless Device Payment Plan Agreement Receivables
The following table displays device payment plan agreement receivables, net, that continue to be recognized in our consolidated balance sheets:
 
(dollars in millions)
 
At December 31,
2018

 
2017

Device payment plan agreement receivables, gross
$
19,313

 
$
17,770

Unamortized imputed interest
(546
)
 
(821
)
Device payment plan agreement receivables, net of unamortized imputed interest
18,767

 
16,949

Allowance for credit losses
(597
)
 
(848
)
Device payment plan agreement receivables, net
$
18,170

 
$
16,101

 
 
 
 
Classified in our consolidated balance sheets:
 
 
 
Accounts receivable, net
$
12,624

 
$
11,064

Other assets
5,546

 
5,037

Device payment plan agreement receivables, net
$
18,170

 
$
16,101



Included in our device payment plan agreement receivables, net at December 31, 2018 and December 31, 2017, are net device payment plan agreement receivables of $11.5 billion and $10.7 billion, respectively, that have been transferred to ABS Entities and continue to be reported in our consolidated balance sheet. See Note 7 for additional information. We believe the carrying value of our installment loans receivables approximate their fair value using a Level 3 expected cash flow model.

We may offer certain promotions that allow a customer to trade in their owned device in connection with the purchase of a new device. Under these types of promotions, the customer receives a credit for the value of the trade-in device. In addition, we may provide the customer with additional future credits that will be applied against the customer’s monthly bill as long as service is maintained. We recognize a liability for the trade-in device measured at fair value, which is determined by considering several factors, including the weighted-average selling prices obtained in recent resales of similar devices eligible for trade-in. Future credits are recognized when earned by the customer. Device payment plan agreement receivables, net does not reflect the trade-in device liability. At December 31, 2018 and December 31, 2017, the amount of trade-in liability was $0.1 billion and insignificant, respectively.

From time to time, we offer certain marketing promotions that allow our customers to upgrade to a new device after paying down a certain specified portion of the required device payment plan agreement amount as well as trading in their device in good working order. When a customer enters into a device payment plan agreement with the right to upgrade to a new device, we account for this trade-in right as a guarantee obligation.

For indirect channel wireless contracts with customers, we impute risk adjusted interest on the device payment plan agreement receivables. We record the imputed interest as a reduction to the related accounts receivable. Interest income, which is included within Service revenues and other in our consolidated statements of income, is recognized over the financed device payment term. See Note 2 for additional information on financing considerations with respect to wireless direct channel contracts with customers.

When originating device payment plan agreements, we use internal and external data sources to create a credit risk score to measure the credit quality of a customer and to determine eligibility for the device payment program. If a customer is either new to Verizon Wireless or has less than 210 days of customer tenure with Verizon Wireless (a new customer), the credit decision process relies more heavily on external data sources. If the customer has 210 days or more of customer tenure with Verizon Wireless (an existing customer), the credit decision process relies on internal data sources. Verizon Wireless’ experience has been that the payment attributes of longer tenured customers are highly predictive for estimating their reliability to make future payments. External data sources include obtaining a credit report from a national consumer credit reporting agency, if available. Verizon Wireless uses its internal data and/or credit data obtained from the credit reporting agencies to create a custom credit risk score. The custom credit risk score is generated automatically (except with respect to a small number of applications where the information needs manual intervention) from the applicant’s credit data using Verizon Wireless’ proprietary custom credit models, which are empirically derived, demonstrably and statistically sound. The credit risk score measures the likelihood that the potential customer will become severely delinquent and be disconnected for non-payment. For a small portion of new customer applications, a traditional credit report is not





available from one of the national credit reporting agencies because the potential customer does not have sufficient credit history. In those instances, alternate credit data is used for the risk assessment.

Based on the custom credit risk score, we assign each customer to a credit class, each of which has specified offers of credit including an account level spending limit and either a maximum amount of credit allowed per device or a required down payment percentage. During the fourth quarter of 2018 Verizon Wireless moved all customers, new and existing, from a required down payment percentage, between zero and 100%, to a maximum amount of credit per device.

Subsequent to origination, Verizon Wireless monitors delinquency and write-off experience as key credit quality indicators for its portfolio of device payment plan agreements and fixed-term service plans. The extent of our collection efforts with respect to a particular customer are based on the results of proprietary custom empirically derived internal behavioral scoring models that analyze the customer’s past performance to predict the likelihood of the customer falling further delinquent. These customer scoring models assess a number of variables, including origination characteristics, customer account history and payment patterns. Based on the score derived from these models, accounts are grouped by risk category to determine the collection strategy to be applied to such accounts. We continuously monitor collection performance results and the credit quality of our device payment plan agreement receivables based on a variety of metrics, including aging. Verizon Wireless considers an account to be delinquent and in default status if there are unpaid charges remaining on the account on the day after the bill’s due date.

The balance and aging of the device payment plan agreement receivables on a gross basis was as follows:
 
(dollars in millions)
 
At December 31,
2018

 
2017

Unbilled
$
18,043

 
$
16,591

Billed:
 
 
 
Current
986

 
975

Past due
284

 
204

Device payment plan agreement receivables, gross
$
19,313

 
$
17,770



Activity in the allowance for credit losses for the device payment plan agreement receivables was as follows:
 
(dollars in millions)
 
 
2018

 
2017

Balance at January 1,
$
848

 
$
688

Bad debt expense
459

 
718

Write-offs
(710
)
 
(558
)
Balance at December 31,
$
597

 
$
848



Sales of Wireless Device Payment Plan Agreement Receivables
In 2015 and 2016, we established programs pursuant to a Receivables Purchase Agreement (RPA) to sell from time to time, on an uncommitted basis, eligible device payment plan agreement receivables to a group of primarily relationship banks (Purchasers) on both a revolving and non-revolving basis, collectively the Programs. In December 2017, the RPA and all other related transaction documents were terminated. Under the Programs, eligible device payment plan agreement receivables were transferred to the Purchasers for upfront cash proceeds and additional consideration upon settlement of the receivables, referred to as the deferred purchase price.

There were no sales of device payment plan agreement receivables under the Programs during 2017. During 2016, we sold $3.3 billion of receivables, net of allowance and imputed interest, under the Revolving Program. We received cash proceeds from new transfers of $2.0 billion and cash proceeds from reinvested collections of $0.9 billion and recorded a deferred purchase price of $0.4 billion.

The sales of receivables under the RPA did not have a significant impact in our consolidated statements of income. The cash proceeds received from the Purchasers were recorded within Cash flows provided by operating activities in our consolidated statements of cash flows.

Deferred Purchase Price
The deferred purchase price was initially recorded in our consolidated balance sheets as an Other asset at fair value, based on the remaining device payment amounts expected to be collected, adjusted, as applicable, for the time value of money and by the timing and estimated value of the device trade-in in connection with upgrades. The estimated value of the device trade-in considered prices expected to be offered to us by independent third parties. This estimate contemplated changes in value after the launch of a device. The fair value measurements were considered to be Level 3 measurements within the fair value hierarchy. The collection of the deferred purchase price was contingent on collections from customers. During 2017, we repurchased all outstanding receivables previously sold to the Purchasers in exchange for the obligation to pay the associated deferred purchase price to the wholly-owned subsidiaries that were bankruptcy remote special purpose entities (Sellers). At December 31, 2017, our deferred purchase price receivable was fully satisfied.

Collections following the repurchase of receivables were $0.2 billion during both 2018 and 2017. Collections of deferred purchase price were $1.4 billion during 2017 and $1.1 billion during 2016. These collections were recorded in Cash flows used in investing activities in our consolidated statement of cash flows.






Variable Interest Entities
As the Programs were terminated in December 2017, VIEs related to the sale of wireless device payment plan receivables did not exist at December 31, 2018 or December 31, 2017.

During 2017, under the RPA, the Sellers’ sole business consisted of the acquisition of the receivables from Cellco and certain other affiliates of Verizon and the resale of the receivables to the Purchasers. The assets of the Sellers were not available to be used to satisfy obligations of any Verizon entities other than the Sellers. We determined that the Sellers were VIEs as they lack sufficient equity to finance their activities. Given that we had the power to direct the activities of the Sellers that most significantly impact the Sellers’ economic performance, we were deemed to be the primary beneficiary of the Sellers. As a result, we consolidated the assets and liabilities of the Sellers into our consolidated financial statements.

Continuing Involvement
At December 31, 2018 and 2017, the total portfolio of device payment plan agreement receivables that we were servicing was $19.3 billion and $17.8 billion, respectively. There were no derecognized device payment plan agreement receivables outstanding at December 31, 2017. As of December 31, 2017, we have collected and remitted approximately $10.1 billion, net of fees and no amounts remained to be remitted to the Purchasers.

During the year ended December 31, 2017, Verizon had continuing involvement with the sold receivables as it serviced the receivables. We continued to service the customer and their related receivables on behalf of the Purchasers, including facilitating customer payment collection, in exchange for a monthly servicing fee. While servicing the receivables, the same policies and procedures were applied to the sold receivables that applied to owned receivables, and we continued to maintain normal relationships with our customers. The credit quality of the customers we continued to service was consistent throughout the periods presented.

In addition, we had continuing involvement related to the sold receivables as we were responsible for absorbing additional credit losses pursuant to the agreements. Credit losses on receivables sold were $0.1 billion during 2017.

Note 9. Fair Value Measurements and Financial Instruments
Recurring Fair Value Measurements
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2018:
 
 
 
 
 
(dollars in millions)
 
 
Level 1(1)

 
Level 2(2)

 
Level 3(3)

 
Total

Assets:
 
 
 
 
 
 
 
Other assets:
 
 
 
 
 
 
 
Fixed income securities
$

 
$
405

 
$

 
$
405

Interest rate swaps

 
3

 

 
3

Cross currency swaps

 
220

 

 
220

Interest rate caps

 
14

 

 
14

Total
$

 
$
642

 
$

 
$
642

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
813

 
$

 
$
813

Cross currency swaps

 
536

 

 
536

Forward starting interest rate swaps

 
60

 

 
60

Interest rate caps

 
4

 

 
4

Total
$

 
$
1,413

 
$

 
$
1,413







The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2017:
 
 
 
 
 
(dollars in millions)
 
 
Level 1 (1)

 
Level 2 (2)

 
Level 3 (3)

 
Total

Assets:
 
 
 
 
 
 
 
Other assets:
 
 
 
 
 
 
 
Equity securities
$
74

 
$

 
$

 
$
74

Fixed income securities

 
366

 

 
366

Interest rate swaps

 
54

 

 
54

Cross currency swaps

 
450

 

 
450

Interest rate caps

 
6

 

 
6

Total
$
74

 
$
876

 
$

 
$
950

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$

 
$
413

 
$

 
$
413

Cross currency swaps

 
46

 

 
46

Total
$

 
$
459

 
$

 
$
459


(1) Quoted prices in active markets for identical assets or liabilities
(2) Observable inputs other than quoted prices in active markets for identical assets and liabilities
(3) Unobservable pricing inputs in the market

Equity securities measured at fair value on a recurring basis consist of investments in common stock of domestic and international corporations measured using quoted prices in active markets. Equity securities in the table above excludes certain of our equity investments, which were previously accounted for under the cost method, as they do not have readily determinable fair values. Beginning January 1, 2018 these investments have been measured using a quantitative approach under the practicability exception offered by ASU 2016-01. Such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer and are included in Investments in unconsolidated businesses in our consolidated balance sheets. As of December 31, 2018, the carrying amount of our investments without readily determinable fair values was $0.2 billion. During 2018, there were insignificant adjustments due to observable price changes and we recognized an insignificant impairment charge.

Fixed income securities consist primarily of investments in municipal bonds. For fixed income securities that do not have quoted prices in active markets, we use alternative matrix pricing resulting in these debt securities being classified as Level 2.

Derivative contracts are valued using models based on readily observable market parameters for all substantial terms of our derivative contracts and thus are classified within Level 2. We use mid-market pricing for fair value measurements of our derivative instruments. Our derivative instruments are recorded on a gross basis.

We recognize transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers between Level 1 and Level 2 during 2018 and 2017.

Fair Value of Short-term and Long-term Debt
The fair value of our debt is determined using various methods, including quoted prices for identical terms and maturities, which is a Level 1 measurement, as well as quoted prices for similar terms and maturities in inactive markets and future cash flows discounted at current rates, which are Level 2 measurements. The fair value of our short-term and long-term debt, excluding capital leases, was as follows:
 
 
 
 
 
(dollars in millions)
 
At December 31,
2018
 
 
2017
 
 
Carrying
Amount

 
Fair
Value

 
Carrying
Amount

 
Fair
Value

Short- and long-term debt, excluding capital leases
$
112,159

 
$
118,535

 
$
116,075

 
$
128,658








Derivative Instruments
The following table sets forth the notional amounts of our outstanding derivative instruments:
 
 
 
(dollars in millions)

At December 31,
2018

 
2017

Interest rate swaps
$
19,813

 
$
20,173

Cross currency swaps
16,638

 
16,638

Forward starting interest rate swaps
4,000

 

Interest rate caps
2,218

 
2,840

Foreign exchange forwards
600

 



Interest Rate Swaps
We enter into interest rate swaps to achieve a targeted mix of fixed and variable rate debt. We principally receive fixed rates and pay variable rates based on the LIBOR, resulting in a net increase or decrease to Interest expense. These swaps are designated as fair value hedges and hedge against interest rate risk exposure of designated debt issuances. We record the interest rate swaps at fair value in our consolidated balance sheets as assets and liabilities. Changes in the fair value of the interest rate swaps are recorded to Interest expense, which are offset by changes in the fair value of the hedged debt due to changes in interest rates.

During 2018, we entered into interest rate swaps with a total notional value of $0.7 billion and settled interest rate swaps with a total notional value of $1.1 billion. During 2017, we entered into interest rate swaps with a total notional value of $7.5 billion and settled interest rate swaps with a total notional value of $0.5 billion.

The ineffective portion of these interest rate swaps was insignificant for the years ended December 31, 2018 and 2017.

The following amounts were recorded in Long-term debt in our consolidated balance sheets related to cumulative basis adjustments for fair value hedges:
 
(dollars in millions)
 
At December 31,
2018

 
2017
Carrying amount of hedged liabilities
$
18,903

 
$
19,723

Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities
(785
)
 
(316
)


Cross Currency Swaps
We have entered into cross currency swaps designated as cash flow hedges to exchange our British Pound Sterling, Euro, Swiss Franc and Australian Dollar-denominated cash flows into U.S. dollars and to fix our cash payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses.

During 2018, a pre-tax loss of $0.7 billion was recognized in Other comprehensive income (loss) with respect to these swaps.

During 2017, we entered into cross currency swaps with a total notional value of $14.0 billion and settled $10.2 billion notional amount of cross currency swaps. A pre-tax gain of $1.4 billion was recognized in Other comprehensive income (loss) with respect to these swaps.

A portion of the gains and losses recognized in Other comprehensive income (loss) was reclassified to Other income (expense), net to offset the related pre-tax foreign currency transaction gain or loss on the underlying hedged item.

Forward Starting Interest Rate Swaps
We have entered into forward starting interest rate swaps designated as cash flow hedges in order to manage our exposure to interest rate changes on future forecasted transactions.

During 2018, we entered into forward starting interest rate swaps with a total notional value of $4.0 billion. During 2018, a pre-tax loss of $0.1 billion was recognized in Other comprehensive income (loss).

We hedge our exposure to the variability in future cash flows of based on the expected maturities of the related forecasted debt issuance.

Net Investment Hedges
We have designated certain foreign currency instruments as net investment hedges to mitigate foreign exchange exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against changes in foreign exchange rates. The notional amount of the Euro-denominated debt as a net investment hedge was $0.8 billion and $0.9 billion at December 31, 2018 and 2017, respectively.






Undesignated Derivatives
We also have the following derivative contracts which we use as economic hedges but for which we have elected not to apply hedge accounting.

Interest Rate Caps
We enter into interest rate caps to mitigate our interest exposure to interest rate increases on our ABS Financing Facility and Asset-Backed Notes. During 2017, we entered into interest rate caps with a notional value of $0.3 billion. During both 2018 and 2017, we recognized an insignificant amount in Interest expense.

Foreign Exchange Forwards
We enter into British Pound Sterling and Euro foreign exchange forwards to mitigate our foreign exchange rate risk related to non-functional currency denominated monetary assets and liabilities of international subsidiaries. During 2018, we entered into foreign exchange forwards with a total notional value of $2.8 billion and settled foreign exchange forwards with a total notional value of $2.2 billion.

Treasury Rate Locks
We entered into treasury rate locks with a total notional value of $2.0 billion to hedge the tender offers conducted in September 2018 for eight series of notes issued by Verizon with coupon rates ranging from 3.850% to 5.012% and maturity dates ranging from 2039 to 2055 (September Tender Offers). Upon the early settlement of the September Tender Offers, we settled these hedges. During 2018, we recognized an insignificant loss related to treasury rate locks in Other income (expense), net.

Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk consist primarily of temporary cash investments, short-term and long-term investments, trade receivables, including device payment plan agreement receivables, certain notes receivable, including lease receivables and derivative contracts.

Counterparties to our derivative contracts are major financial institutions with whom we have negotiated derivatives agreements (ISDA master agreements) and credit support annex (CSA) agreements which provide rules for collateral exchange. Our CSA agreements entered into prior to the fourth quarter of 2017 generally require collateralized arrangements with our counterparties in connection with uncleared derivatives. During 2017, we paid an insignificant amount of cash to extend amendments to certain of our collateral exchange arrangements, which eliminated the requirement to post collateral for a specified period of time. Additionally, during the fourth quarter of 2017, we began negotiating and executing new ISDA master agreements and CSA agreements with our counterparties. The negotiations and executions of new agreements continued in 2018. The newly executed CSA agreements contain rating based thresholds such that we or our counterparties may be required to hold or post collateral based upon changes in outstanding positions as compared to established thresholds and changes in credit ratings. At December 31, 2018, we posted collateral of approximately $0.1 billion related to derivative contracts under collateral exchange arrangements, which were recorded as Prepaid expenses and other in our consolidated balance sheet. We did not post any collateral at December 31, 2017. While we may be exposed to credit losses due to the nonperformance of our counterparties, we consider the risk remote and do not expect that any such nonperformance would result in a significant effect on our results of operations or financial condition due to our diversified pool of counterparties.

Note 10. Stock-Based Compensation
Verizon Long-Term Incentive Plan
In May 2017, Verizon’s shareholders approved the 2017 Long-Term Incentive Plan (the 2017 Plan) and terminated Verizon's authority to grant new awards under the Verizon 2009 Long-Term Incentive Plan (the 2009 Plan). The 2017 Plan provides for broad-based equity grants to employees, including executive officers, and permits the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance stock units and other awards. Upon approval of the 2017 Plan, Verizon reserved the number of shares that were remaining but not issued under the 2009 Plan. Shares subject to outstanding awards under the 2009 Plan that expire, are canceled or otherwise terminated will also be available for the awards under the 2017 Plan. As of December 31, 2018, 89 million shares are reserved for future issuance under the 2017 Plan.

Restricted Stock Units
Restricted Stock Units (RSUs) granted under the 2017 Plan generally vest in three equal installments on each anniversary of the grant date. The RSUs that are paid in stock upon vesting and are thus classified as equity awards are measured using the grant date fair value of Verizon common stock and are not remeasured at the end of each reporting period. The RSUs that are settled in cash are classified as liability awards and the liability is measured at its fair value at the end of each reporting period. All RSUs granted under the 2017 Plan have dividend equivalent units, which will be paid to participants at the time the RSU award is paid, and in the same proportion as the RSU award.

In February 2018, Verizon announced a broad-based employee special award of RSUs under the 2017 Plan to eligible full-time and part-time employees. These RSUs will vest in two equal installments on each anniversary of the grant date, and will be paid in cash.

In connection with our acquisition of Yahoo’s operating business, on the closing date of the Transaction each unvested and outstanding Yahoo RSU award that was held by an employee who became an employee of Verizon was replaced with a Verizon RSU award, which is generally





payable in cash upon the applicable vesting date. These awards are classified as liability awards and are measured at fair value at the end of each reporting period.

Performance Stock Units
The 2017 Plan also provides for grants of Performance Stock Units (PSUs) that generally vest at the end of the third year after the grant. As defined by the 2017 Plan, the Human Resources Committee of the Board of Directors determines the number of PSUs a participant earns based on the extent to which the corresponding performance goals have been achieved over the three-year performance cycle. The PSUs are classified as liability awards because the PSU awards are paid in cash upon vesting. The PSU award liability is measured at its fair value at the end of each reporting period and, therefore, will fluctuate based on the price of Verizon common stock as well as performance relative to the targets. All PSUs granted under the 2017 Plan have dividend equivalent units, which will be paid to participants at the time that PSU award is determined and paid, and in the same proportion as the PSU award. The granted and cancelled activity for the PSU award includes adjustments for the performance goals achieved.

The following table summarizes Verizon’s Restricted Stock Unit and Performance Stock Unit activity:
 
Restricted Stock Units
Performance

(shares in thousands)
Equity Awards

 
Liability Awards

 
 Stock Units

Outstanding January 1, 2016
13,903

 

 
17,203

Granted
4,409

 

 
6,391

Payments
(4,890
)
 

 
(4,702
)
Cancelled/Forfeited
(114
)
 

 
(1,143
)
Outstanding Adjustments

 

 
170

Outstanding December 31, 2016
13,308

 

 
17,919

Granted
4,216

 
25,168

 
6,564

Payments
(4,825
)
 
(8,487
)
 
(6,031
)
Cancelled/Forfeited
(66
)
 
(2,690
)
 
(217
)
Outstanding December 31, 2017
12,633

 
13,991

 
18,235

Granted
4,134

 
15,157

 
5,779

Payments
(5,977
)
 
(6,860
)
 
(4,526
)
Cancelled/Forfeited
(213
)
 
(2,362
)
 
(2,583
)
Outstanding December 31, 2018
10,577

 
19,926

 
16,905



As of December 31, 2018, unrecognized compensation expense related to the unvested portion of Verizon’s RSUs and PSUs was approximately $1.1 billion and is expected to be recognized over approximately two years.

The equity RSUs granted in 2018 and 2017 have weighted-average grant date fair values of $49.19 and $49.93 per unit, respectively. During 2018, 2017 and 2016, we paid $0.8 billion, $0.8 billion and $0.4 billion, respectively, to settle RSUs and PSUs classified as liability awards.

Stock-Based Compensation Expense
After-tax compensation expense for stock-based compensation related to RSUs and PSUs described above included in Net income attributable to Verizon was $0.7 billion, $0.4 billion and $0.4 billion for 2018, 2017 and 2016, respectively.

Note 11. Employee Benefits
We maintain non-contributory defined benefit pension plans for certain employees. In addition, we maintain postretirement health care and life insurance plans for certain retirees and their dependents, which are both contributory and non-contributory, and include a limit on our share of the cost for certain recent and future retirees. In accordance with our accounting policy for pension and other postretirement benefits, operating expenses include pension and benefits related credits and/or charges based on actuarial assumptions, including projected discount rates, an estimated return on plan assets, and health care trend rates. These estimates are updated in the fourth quarter to reflect actual return on plan assets and updated actuarial assumptions or upon a remeasurement. The adjustment is recognized in the income statement during the fourth quarter or upon a remeasurement event pursuant to our accounting policy for the recognition of actuarial gains and losses.

Pension and Other Postretirement Benefits
Pension and other postretirement benefits for certain employees are subject to collective bargaining agreements. Modifications in benefits have been bargained from time to time, and we may also periodically amend the benefits in the management plans. The following tables summarize benefit costs, as well as the benefit obligations, plan assets, funded status and rate assumptions associated with pension and postretirement health care and life insurance benefit plans.






Obligations and Funded Status
 
 
 
 
 
(dollars in millions)
 
 
Pension
 
 
Health Care and Life
 
At December 31,
2018

 
2017

 
2018

 
2017

Change in Benefit Obligations
 
 
 
 
 
 
 
Beginning of year
$
21,531

 
$
21,112

 
$
19,460

 
$
19,650

Service cost
284

 
280

 
127

 
149

Interest cost
690

 
683

 
615

 
659

Plan amendments
230

 

 
(8
)
 
(545
)
Actuarial (gain) loss, net
(1,418
)
 
1,377

 
(2,729
)
 
627

Benefits paid
(1,475
)
 
(1,932
)
 
(1,101
)
 
(1,080
)
Curtailment and termination benefits
181

 
11

 

 

Settlements paid
(456
)
 

 

 

End of year
19,567

 
21,531

 
16,364

 
19,460

 
 
 
 
 
 
 
 
Change in Plan Assets
 
 
 
 
 
 
 
Beginning of year
19,175

 
14,663

 
1,119

 
1,363

Actual return on plan assets
(494
)
 
2,342

 
(26
)
 
134

Company contributions
1,066

 
4,141

 
1,183

 
702

Benefits paid
(1,475
)
 
(1,932
)
 
(1,101
)
 
(1,080
)
Settlements paid
(456
)
 

 

 

Divestiture (Note 3)

 
(39
)
 

 

End of year
17,816

 
19,175

 
1,175

 
1,119

 
 
 
 
 
 
 
 
Funded Status
 
 
 
 
 
 
 
End of year
$
(1,751
)
 
$
(2,356
)
 
$
(15,189
)
 
$
(18,341
)

 
 
 
 
 
(dollars in millions)
 
 
Pension
 
 
Health Care and Life
 
At December 31,
2018

 
2017

 
2018

 
2017

Amounts recognized on the balance sheet
 
 
 
 
 
 
 
Noncurrent assets
$
3

 
$
21

 
$

 
$

Current liabilities
(71
)
 
(63
)
 
(292
)
 
(637
)
Noncurrent liabilities
(1,683
)
 
(2,314
)
 
(14,897
)
 
(17,704
)
Total
$
(1,751
)
 
$
(2,356
)
 
$
(15,189
)
 
$
(18,341
)
Amounts recognized in Accumulated Other Comprehensive Income (Pre-tax)
 
 
 
 
 
 
 
Prior service cost (benefit)
$
585

 
$
404

 
$
(4,698
)
 
$
(5,667
)
Total
$
585

 
$
404

 
$
(4,698
)
 
$
(5,667
)


The accumulated benefit obligation for all defined benefit pension plans was $19.6 billion and $21.5 billion at December 31, 2018 and 2017, respectively.

2018 Collective Bargaining Negotiations
The extension agreement ratified in August 2018 extended our collective bargaining agreements with the Communications Workers of America and the International Brotherhood of Electrical Workers that were due to expire on August 3, 2019 for four years until August 5, 2023.  The collective bargaining agreements cover approximately 34,000 employees. Amendments triggered by the collective bargaining negotiations were made to certain pension plans for certain union represented employees and retirees. The impact of the plan amendments was an increase in our defined benefit pension plans plan obligations and a net decrease to Accumulated other comprehensive income of $0.2 billion (net of taxes of $0.2 billion). The annual impact of the amount recorded in Accumulated other comprehensive income that will be reclassified to net periodic benefit cost is minimal.

2017 Postretirement Plan Amendments
During 2017, amendments were made to certain postretirement plans related to retiree medical benefits for management and certain union represented employees and retirees.  The impact of the plan amendments was a reduction in our postretirement benefit plan obligations of approximately $0.5 billion, which has been recorded as a net increase to Accumulated other comprehensive income of $0.3 billion (net of taxes of $0.2 billion).  The impact of the amount recorded in Accumulated other comprehensive income that will be reclassified to net periodic benefit cost is insignificant. 






2016 Collective Bargaining Negotiations
During 2016, we adopted changes to our defined benefit pension plans and other postretirement benefit plans to reflect the agreed upon terms and conditions of the collective bargaining agreements ratified in June 2016. The impact includes a net increase to Accumulated other comprehensive income of $2.9 billion (net of taxes of $1.8 billion). The amount recorded in Accumulated other comprehensive income will be reclassified to net periodic benefit cost on a straight-line basis over the average remaining service period of the respective plans’ participants, which, on a weighted-average basis, is 12.2 years for defined benefit pension plans and 7.8 years for other postretirement benefit plans. The above-noted reclassification resulted in a decrease to net periodic benefit cost and increase to pre-tax income of approximately $0.7 billion, $0.7 billion and $0.4 billion, respectively, during 2018, 2017 and 2016.

Information for pension plans with an accumulated benefit obligation in excess of plan assets follows:
 
(dollars in millions)
 
At December 31,
2018

 
2017

Projected benefit obligation
$
19,510

 
$
21,300

Accumulated benefit obligation
19,461

 
21,242

Fair value of plan assets
17,757

 
18,923



Net Periodic Benefit Cost (Income)
The following table summarizes the components of net periodic benefit cost (income) related to our pension and postretirement health care and life insurance plans:
 
 
 
 
 
 
 
 
 
(dollars in millions)
 
 
Pension
 
 
Health Care and Life
 
Years Ended December 31,
2018

 
2017

 
2016

 
2018

 
2017

 
2016

Service cost - Cost of services
$
230

 
$
215

 
$
252

 
$
104

 
$
116

 
$
150

Service cost - Selling, general and administrative expense
54

 
65

 
70

 
23

 
33

 
43

Service cost
284

 
280

 
322

 
127

 
149

 
193

 
 
 
 
 
 
 
 
 
 
 
 
Amortization of prior service cost (credit)
48

 
39

 
21

 
(976
)
 
(949
)
 
(657
)
Expected return on plan assets
(1,293
)
 
(1,262
)
 
(1,045
)
 
(44
)
 
(53
)
 
(54
)
Interest cost
690

 
683

 
677

 
615

 
659

 
746

Remeasurement loss (gain), net
369

 
337

 
1,198

 
(2,658
)
 
546

 
1,300

Curtailment and termination benefits
181

 
11

 
4

 

 

 

Other components
(5
)
 
(192
)
 
855

 
(3,063
)
 
203

 
1,335

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
279

 
$
88

 
$
1,177

 
$
(2,936
)
 
$
352

 
$
1,528



The service cost component of net periodic benefit cost (income) is recorded in Cost of services and Selling, general and administrative expense in the consolidated statements of income while the other components, including mark-to-market adjustments, if any, are recorded in Other income (expense), net.

Other pre-tax changes in plan assets and benefit obligations recognized in other comprehensive (income) loss are as follows:
 
 
 
 
 
 
 
(dollars in millions)
 
 
Pension
 
 
Health Care and Life
 
At December 31,
2018

 
2017

 
2016

 
2018

 
2017

 
2016

Prior service cost (benefit)
$
230

 
$

 
$
428

 
$
(8
)
 
$
(544
)
 
$
(5,142
)
Reversal of amortization items
 
 
 
 
 
 
 
 
 
 
 
Prior service (benefit) cost
(48
)
 
(39
)
 
(21
)
 
976

 
949

 
657

Amounts reclassified to net income

 

 
87

 

 

 
451

Total recognized in other comprehensive loss (income) (pre-tax)
$
182

 
$
(39
)
 
$
494

 
$
968

 
$
405

 
$
(4,034
)


Amounts reclassified to net income for the year ended December 31, 2016 includes the reclassification to Selling, general and administrative expense of a pre-tax pension and postretirement benefit curtailment gain of $0.5 billion ($0.3 billion net of taxes) due to the transfer of employees to Frontier, which caused the elimination of a significant amount of future service in three of our defined benefit pension plans and one of our other postretirement benefit plans requiring us to recognize a portion of the prior service credits. See Note 3 for additional information.

The estimated prior service cost for the defined benefit pension plans that will be amortized from Accumulated other comprehensive income into net periodic benefit (income) cost over the next fiscal year is $0.1 billion. The estimated prior service cost for the defined benefit postretirement





plans that will be amortized from Accumulated other comprehensive income into net periodic benefit income over the next fiscal year is $1.0 billion.

Assumptions
The weighted-average assumptions used in determining benefit obligations follow:
 
Pension
 
 
Health Care and Life
 
At December 31,
2018

 
2017

 
2018

 
2017

Discount Rate
4.40
%
 
3.70
%
 
4.30
%
 
3.60
%
Rate of compensation increases
3.00

 
3.00

 
N/A

 
N/A


The weighted-average assumptions used in determining net periodic cost follow:
 
Pension
 
 
Health Care and Life
 
At December 31,
2018

 
2017

 
2016

 
2018

 
2017

 
2016

Discount rate in effect for determining service cost
4.10
%
 
4.70
%
 
4.50
%
 
3.90
%
 
4.60
%
 
4.20
%
Discount rate in effect for determining interest cost
3.40

 
3.40

 
3.20

 
3.20

 
3.50

 
4.20

Expected return on plan assets
7.00

 
7.70

 
7.00

 
4.80

 
4.50

 
4.80

Rate of compensation increases
3.00

 
3.00

 
3.00

 
N/A

 
N/A

 
N/A



In determining our pension and other postretirement benefit obligations, we used a weighted-average discount rate of 4.40% in 2018. The rates were selected to approximate the composite interest rates available on a selection of high-quality bonds available in the market at December 31, 2018. The bonds selected had maturities that coincided with the time periods during which benefits payments are expected to occur, were non-callable and available in sufficient quantities to ensure marketability (at least $0.3 billion par outstanding).

In order to project the long-term target investment return for the total portfolio, estimates are prepared for the total return of each major asset class over the subsequent 10-year period. Those estimates are based on a combination of factors including the current market interest rates and valuation levels, consensus earnings expectations and historical long-term risk premiums. To determine the aggregate return for the pension trust, the projected return of each individual asset class is then weighted according to the allocation to that investment area in the trust’s long-term asset allocation policy.

The assumed health care cost trend rates follow:
 
Health Care and Life
 
At December 31,
2018

 
2017

 
2016

Healthcare cost trend rate assumed for next year
6.30
%
 
7.00
%
 
6.50
%
Rate to which cost trend rate gradually declines
4.50

 
4.50

 
4.50

Year the rate reaches the level it is assumed to remain thereafter
2027

 
2026

 
2025



A one-percentage point change in the assumed health care cost trend rate would have the following effects:
 
(dollars in millions)
 
One-Percentage Point
Increase

 
Decrease

Effect on 2018 service and interest cost
$
20

 
$
(19
)
Effect on postretirement benefit obligation as of December 31, 2018
462

 
(485
)


Plan Assets
The Company’s overall investment strategy is to achieve a mix of assets that allows us to meet projected benefit payments while taking into consideration risk and return. While target allocation percentages will vary over time, the current target allocation for plan assets is designed so that 52.5% of the assets have the objective of achieving a return in excess of the growth in liabilities (comprised of public equities, private equities, real estate, hedge funds and emerging debt) and 45.5% of the assets are invested as liability hedging assets (where cash flows from investments better match projected benefit payments, typically longer duration fixed income) and 2.0% is in cash. This allocation will shift as funded status improves to a higher allocation of liability hedging assets. Target policies will be revisited periodically to ensure they are in line with fund objectives. Both active and passive management approaches are used depending on perceived market efficiencies and various other factors. Due to our diversification and risk control processes, there are no significant concentrations of risk, in terms of sector, industry, geography or company names.

Pension and healthcare and life plans assets do not include significant amounts of Verizon common stock.






Pension Plans
The fair values for the pension plans by asset category at December 31, 2018 are as follows:
 
(dollars in millions)
 
Asset Category
Total

 
Level 1

 
Level 2

 
Level 3

Cash and cash equivalents
$
1,701

 
$
1,694

 
$
7

 
$

Equity securities
2,253

 
2,220

 
20

 
13

Fixed income securities
 
 
 
 
 
 
 
U.S. Treasuries and agencies
1,684

 
1,557

 
127

 

Corporate bonds
3,645

 
124

 
3,244

 
277

International bonds
1,113

 
19

 
1,076

 
18

Other

 

 

 

Real estate
727

 

 

 
727

Other
 
 
 
 
 
 
 
Private equity
664

 

 

 
664

Hedge funds
459

 

 
373

 
86

Total investments at fair value
12,246

 
5,614

 
4,847

 
1,785

Investments measured at NAV
5,570

 

 

 

Total
$
17,816

 
$
5,614

 
$
4,847

 
$
1,785


The fair values for the pension plans by asset category at December 31, 2017 are as follows:
 
(dollars in millions)
 
Asset Category
Total

 
Level 1

 
Level 2

 
Level 3

Cash and cash equivalents
$
2,889

 
$
2,874

 
$
15

 
$

Equity securities
2,795

 
2,794

 

 
1

Fixed income securities
 
 
 
 
 
 
 
U.S. Treasuries and agencies
1,382

 
1,234

 
148

 

Corporate bonds
2,961

 
139

 
2,718

 
104

International bonds
1,068

 
17

 
1,031

 
20

Other
396

 
4

 
392

 

Real estate
627

 

 

 
627

Other
 
 
 
 
 
 
 
Private equity
580

 

 

 
580

Hedge funds
845

 

 
660

 
185

Total investments at fair value
13,543

 
7,062

 
4,964

 
1,517

Investments measured at NAV
5,632

 

 

 

Total
$
19,175

 
$
7,062

 
$
4,964

 
$
1,517



The following is a reconciliation of the beginning and ending balance of pension plan assets that are measured at fair value using significant unobservable inputs:
 
(dollars in millions)
 
 
Equity
Securities

 
Corporate
Bonds

 
International
Bonds

 
Real
Estate

 
Private
Equity

 
Hedge
Funds

 
Total

Balance at January 1, 2017
$

 
$
97

 
$
14

 
$
655

 
$
624

 
$
4

 
$
1,394

Actual gain (loss) on plan assets

 
(1
)
 

 
76

 
78

 

 
153

Purchases (sales)
119

 
27

 
22

 
(70
)
 
(114
)
 
183

 
167

Transfers out
(118
)
 
(19
)
 
(16
)
 
(34
)
 
(8
)
 
(2
)
 
(197
)
Balance at December 31, 2017
1

 
104

 
20

 
627

 
580

 
185

 
1,517

Actual gain (loss) on plan assets
1

 
(7
)
 
3

 
134

 
25

 

 
156

Purchases (sales)
11

 
177

 
(5
)
 
(34
)
 
59

 
62

 
270

Transfers out

 
3

 

 

 

 
(161
)
 
(158
)
Balance at December 31, 2018
$
13

 
$
277

 
$
18

 
$
727

 
$
664

 
$
86

 
$
1,785








Health Care and Life Plans
The fair values for the other postretirement benefit plans by asset category at December 31, 2018 are as follows:
 
(dollars in millions)
 
Asset Category
Total

 
Level 1

 
Level 2

 
Level 3

Cash and cash equivalents
$
471

 
$
431

 
$
40

 
$

Equity securities
239

 
239

 

 

Fixed income securities
 
 
 
 
 
 
 
U.S. Treasuries and agencies
24

 
24

 

 

Corporate bonds
96

 
96

 

 

International bonds
18

 
18

 

 

Total investments at fair value
848

 
808

 
40

 

Investments measured at NAV
327

 

 

 

Total
$
1,175

 
$
808

 
$
40

 
$


The fair values for the other postretirement benefit plans by asset category at December 31, 2017 are as follows:
 
(dollars in millions)
 
Asset Category
Total

 
Level 1

 
Level 2

 
Level 3

Cash and cash equivalents
$
71

 
$
1

 
$
70

 
$

Equity securities
294

 
294

 

 

Fixed income securities
 
 
 
 
 
 
 
U.S. Treasuries and agencies
23

 
22

 
1

 

Corporate bonds
141

 
141

 

 

International bonds
60

 
18

 
42

 

Total investments at fair value
589

 
476

 
113

 

Investments measured at NAV
530

 


 


 


Total
$
1,119

 
$
476

 
$
113

 
$



The following are general descriptions of asset categories, as well as the valuation methodologies and inputs used to determine the fair value of each major category of assets.

Cash and cash equivalents include short-term investment funds (less than 90 days to maturity), primarily in diversified portfolios of investment grade money market instruments and are valued using quoted market prices or other valuation methods. The carrying value of cash equivalents approximates fair value due to the short-term nature of these investments.

Investments in securities traded on national and foreign securities exchanges are valued by the trustee at the last reported sale prices on the last business day of the year or, if no sales were reported on that date, at the last reported bid prices. Government obligations, corporate bonds, international bonds and asset-backed debt are valued using matrix prices with input from independent third-party valuation sources. Over-the-counter securities are valued at the bid prices or the average of the bid and ask prices on the last business day of the year from published sources or, if not available, from other sources considered reliable such as multiple broker quotes.

Commingled funds not traded on national exchanges are priced by the custodian or fund's administrator at their net asset value (NAV). Commingled funds held by third-party custodians appointed by the fund managers provide the fund managers with a NAV. The fund managers have the responsibility for providing this information to the custodian of the respective plan.

The investment manager of the entity values venture capital, corporate finance, and natural resource limited partnership investments. Real estate investments are valued at amounts based upon appraisal reports prepared by either independent real estate appraisers or the investment manager using discounted cash flows or market comparable data. Loans secured by mortgages are carried at the lesser of the unpaid balance or appraised value of the underlying properties. The values assigned to these investments are based upon available and current market information and do not necessarily represent amounts that might ultimately be realized. Because of the inherent uncertainty of valuation, estimated fair values might differ significantly from the values that would have been used had a ready market for the securities existed. These differences could be material.

Forward currency contracts, futures, and options are valued by the trustee at the exchange rates and market prices prevailing on the last business day of the year. Both exchange rates and market prices are readily available from published sources. These securities are classified by the asset class of the underlying holdings.

Hedge funds are valued by the custodian at NAV based on statements received from the investment manager. These funds are valued in accordance with the terms of their corresponding offering or private placement memoranda.






Commingled funds, hedge funds, venture capital, corporate finance, natural resource and real estate limited partnership investments for which fair value is measured using the NAV per share as a practical expedient are not leveled within the fair value hierarchy and are included as a reconciling item to total investments.

Employer Contributions
In 2018, we made $1.0 billion discretionary contribution to our qualified pension plans and $0.7 billion discretionary contribution to a retiree benefit account to fund health and welfare benefits. Qualified pension plans contributions are estimated to be $0.3 billion, nonqualified pension plans contributions are estimated to be $0.1 billion, and contributions to our other postretirement benefit plans are estimated to be $0.5 billion in 2019.

Estimated Future Benefit Payments
The benefit payments to retirees are expected to be paid as follows:
 
 
 
(dollars in millions)

Year
Pension Benefits

 
Health Care and Life

2019
$
2,771

 
$
1,086

2020
1,796

 
1,113

2021
1,578

 
1,130

2022
1,526

 
1,135

2023
1,500

 
1,137

2024 to 2028
5,008

 
5,689



Savings Plan and Employee Stock Ownership Plans
We maintain four leveraged employee stock ownership plans (ESOP). We match a certain percentage of eligible employee contributions to certain savings plans with shares of our common stock from this ESOP. At December 31, 2018, the number of allocated shares of common stock in this ESOP was 51 million. There were no unallocated shares of common stock in this ESOP at December 31, 2018. All leveraged ESOP shares are included in earnings per share computations.

Total savings plan costs were $1.1 billion in 2018, $0.8 billion in 2017 and $0.7 billion in 2016.

Severance Benefits
The following table provides an analysis of our severance liability recorded in accordance with the accounting standard regarding employers’ accounting for postemployment benefits:
 
 
 
 
 
 
 
(dollars in millions)
 
Year
Beginning of Year

 
Charged to
Expense

 
Payments

 
Other

 
End of Year

2016
$
800

 
$
417

 
$
(583
)
 
$
22

 
$
656

2017
656

 
581

 
(564
)
 
(46
)
 
627

2018
627

 
2,093

 
(560
)
 
(4
)
 
2,156



Severance, Pension and Benefits (Credits) Charges
During 2018, we recorded net pre-tax pension and benefits credits of $2.1 billion in accordance with our accounting policy to recognize actuarial gains and losses in the period in which they occur. The pension and benefits remeasurement credits of $2.3 billion, which were recorded in Other income (expense), net in our consolidated statements of income, were primarily driven by an increase in our discount rate assumption used to determine the current year liabilities of our pension plans and postretirement benefit plans from a weighted-average of 3.7% at December 31, 2017 to a weighted-average of 4.4% at December 31, 2018 ($2.6 billion), and mortality and other assumption adjustments of $1.7 billion, $1.6 billion of which related to healthcare claims and trend adjustments, offset by the difference between our estimated return on assets of 7.0% and our actual return on assets of (2.7)% ($1.9 billion). The credits were partially offset by $0.2 billion due to the effect of participants retiring under the voluntary separation program.

In September 2018, Verizon announced a voluntary separation program for select U.S.-based management employees. Approximately 10,400 eligible employees will separate from the Company under this program by the end of June 2019, with nearly half of these employees having exited in December of 2018. Principally as a result of this program but also as a result of other headcount reduction initiatives, the Company recorded a severance charge of $1.8 billion ($1.4 billion after-tax) during the year ended December 31, 2018, which was recorded in Selling, general and administrative expense in our consolidated statement of income. During 2018, we also recorded $0.3 billion in severance costs under our other existing separation plans.

During 2017, we recorded net pre-tax severance, pension and benefits charges of $1.4 billion, exclusive of acquisition related severance charges, in accordance with our accounting policy to recognize actuarial gains and losses in the period in which they occur. The pension and benefits remeasurement charges of approximately $0.9 billion, which were recorded in Other income (expense), net in our consolidated statements of





income, were primarily driven by a decrease in our discount rate assumption used to determine the current year liabilities of our pension and postretirement benefit plans from a weighted-average of 4.2% at December 31, 2016 to a weighted-average of 3.7% at December 31, 2017 ($2.6 billion). The charges were partially offset by the difference between our estimated return on assets of 7.0% and our actual return on assets of 14.0% ($1.2 billion), a change in mortality assumptions primarily driven by the use of updated actuarial tables (MP-2017) issued by the Society of Actuaries ($0.2 billion) and other assumption adjustments ($0.3 billion). As part of these charges, we also recorded severance costs of $0.5 billion under our existing separation plans, which were recorded in Selling, general and administrative expense in our consolidated statements of income.

During 2016, we recorded net pre-tax severance, pension and benefits charges of $2.9 billion in accordance with our accounting policy to recognize actuarial gains and losses in the period in which they occur. The pension and benefits remeasurement charges of $2.5 billion, which were recorded in Other income (expense), net in our consolidated statements of income, were primarily driven by a decrease in our discount rate assumption used to determine the current year liabilities of our pension and other postretirement benefit plans from a weighted-average of 4.6% at December 31, 2015 to a weighted-average of 4.2% at December 31, 2016 ($2.1 billion), updated health care trend cost assumptions ($0.9 billion), the difference between our estimated return on assets of 7.0% and our actual return on assets of 6.0% ($0.2 billion) and other assumption adjustments ($0.3 billion). These charges were partially offset by a change in mortality assumptions primarily driven by the use of updated actuarial tables (MP-2016) issued by the Society of Actuaries ($0.5 billion) and lower negotiated prescription drug pricing ($0.5 billion). As part of these charges, we also recorded severance costs of $0.4 billion under our existing separation plans, which were recorded in Selling, general and administrative expense in our consolidated statements of income.

The net pre-tax severance, pension and benefits charges during 2016 were comprised of a net pre-tax pension remeasurement charge of $0.2 billion measured as of March 31, 2016 related to settlements for employees who received lump-sum distributions in one of our defined benefit pension plans, a net pre-tax pension and benefits remeasurement charge of $0.8 billion measured as of April 1, 2016 related to curtailments in three of our defined benefit pension and one of our other postretirement plans, a net pre-tax pension and benefits remeasurement charge of $2.7 billion measured as of May 31, 2016 in two defined benefit pension plans and three other postretirement benefit plans as a result of our accounting for the contractual healthcare caps and bargained for changes, a net pre-tax pension remeasurement charge of $0.1 billion measured as of May 31, 2016 related to settlements for employees who received lump-sum distributions in three of our defined benefit pension plans, a net pre-tax pension remeasurement charge of $0.6 billion measured as of August 31, 2016 related to settlements for employees who received lump-sum distributions in five of our defined benefit pension plans, and a net pre-tax pension and benefits credit of $1.9 billion as a result of our fourth quarter remeasurement of our pension and other postretirement assets and liabilities based on updated actuarial assumptions.

Note 12. Taxes
The components of income before provision (benefit) for income taxes are as follows:
 
(dollars in millions)
 
Years Ended December 31,
2018

 
2017

 
2016

Domestic
$
19,801

 
$
19,645

 
$
20,047

Foreign
(178
)
 
949

 
939

Total
$
19,623

 
$
20,594

 
$
20,986



The components of the provision (benefit) for income taxes are as follows:
 
(dollars in millions)
 
Years Ended December 31,
2018

 
2017

 
2016

Current
 
 
 
 
 
Federal
$
2,187

 
$
3,630

 
$
7,451

Foreign
267

 
200

 
148

State and Local
741

 
677

 
842

Total
3,195

 
4,507

 
8,441

Deferred
 
 
 
 
 
Federal
175

 
(14,360
)
 
(933
)
Foreign
30

 
(66
)
 
(2
)
State and Local
184

 
(37
)
 
(128
)
Total
389

 
(14,463
)
 
(1,063
)
Total income tax provision (benefit)
$
3,584

 
$
(9,956
)
 
$
7,378








The following table shows the principal reasons for the difference between the effective income tax rate and the statutory federal income tax rate:
Years Ended December 31,
2018

 
2017

 
2016

Statutory federal income tax rate
21.0
 %
 
35.0
 %
 
35.0
 %
State and local income tax rate, net of federal tax benefits
3.7

 
1.6

 
2.2

Affordable housing credit
(0.6
)
 
(0.6
)
 
(0.7
)
Employee benefits including ESOP dividend
(0.3
)
 
(0.5
)
 
(0.5
)
Impact of tax reform re-measurement

 
(81.6
)
 

Internal restructure
(9.1
)
 
(0.6
)
 
(0.7
)
Noncontrolling interests
(0.5
)
 
(0.6
)
 
(0.6
)
Non-deductible goodwill
4.7

 
1.0

 
2.2

Other, net
(0.6
)
 
(2.0
)
 
(1.7
)
Effective income tax rate
18.3
 %
 
(48.3
)%
 
35.2
 %


The effective income tax rate for 2018 was 18.3% compared to (48.3)% for 2017. The increase in the effective tax rate and the provision for income taxes was primarily due to the non-recurring, non-cash income tax benefit of $16.8 billion recorded in 2017 for the re-measurement of U.S. deferred tax liabilities at the lower 21% U.S. federal corporate income tax rate, as a result of the enactment of the TCJA on December 22, 2017. In addition, the current period provision for income taxes includes the tax impact of the Oath goodwill impairment charge not deductible for tax purposes, offset by the current year reduction in the statutory U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018 under the TCJA and a non-recurring deferred tax benefit of approximately $2.1 billion as a result of an internal reorganization of legal entities within the historical Wireless business.

In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin (SAB) 118 to provide guidance for companies that had not completed their accounting for the income tax effects of the TCJA. Due to the complexities involved in accounting for the enactment of the TCJA, SAB 118 allowed for a provisional estimate of the impacts of the TCJA in our earnings for the year ended December 31, 2017, as well as up to a one year measurement period that ended on December 22, 2018, for any subsequent adjustments to such provisional estimate.  Pursuant to SAB 118, Verizon recorded a provisional estimate of $16.8 billion for the impacts of the TCJA, primarily due to the re-measurement of its U.S. deferred income tax liabilities at the lower 21% U.S. federal corporate income tax rate, with no significant impact from the transition tax on repatriation, the implementation of the territorial tax system, or limitations on the deduction of interest expense. Verizon has completed its analysis of the impacts of the TCJA, including analyzing the effects of any Internal Revenue Service (IRS) and U.S. Treasury guidance issued, and state tax law changes enacted, within the maximum one year measurement period resulting in no significant adjustments to the $16.8 billion provisional amount previously recorded.

The effective income tax rate for 2017 was (48.3)% compared to 35.2% for 2016. The decrease in the effective income tax rate and the provision for income taxes was primarily due to a non-recurring, non-cash income tax benefit recorded in 2017 as a result of the enactment of the TCJA described above.

The amounts of cash taxes paid by Verizon are as follows:
 
(dollars in millions)
 
Years Ended December 31,
2018

 
2017

 
2016

Income taxes, net of amounts refunded
$
2,213

 
$
4,432

 
$
9,577

Employment taxes
1,066

 
1,207

 
1,196

Property and other taxes
1,598

 
1,737

 
1,796

Total
$
4,877

 
$
7,376

 
$
12,569









Deferred Tax Assets and Liabilities
Deferred taxes arise because of differences in the book and tax bases of certain assets and liabilities. Significant components of deferred tax assets and liabilities are as follows:
 
(dollars in millions)
 
At December 31,
2018

 
2017

Deferred Tax Assets
 
 
 
Employee benefits
$
5,403

 
$
6,174

Tax loss and credit carry forwards
3,576

 
4,176

Other - assets
1,650

 
1,938

 
10,629

 
12,288

Valuation allowances
(2,741
)
 
(3,293
)
Deferred tax assets
7,888

 
8,995

 
 
 
 
Deferred Tax Liabilities
 
 
 
Spectrum and other intangible amortization
21,976

 
21,148

Depreciation
15,662

 
14,767

Other - liabilities
3,976

 
4,281

Deferred tax liabilities
41,614

 
40,196

Net deferred tax liability
$
33,726

 
$
31,201



At December 31, 2018, undistributed earnings of our foreign subsidiaries indefinitely invested outside the U.S. amounted to approximately $3.0 billion. The majority of Verizon's cash flow is generated from domestic operations and we are not dependent on foreign cash or earnings to meet our funding requirements, nor do we intend to repatriate these undistributed foreign earnings to fund U.S. operations.  Furthermore, a portion of these undistributed earnings represents amounts that legally must be kept in reserve in accordance with certain foreign jurisdictional requirements and are unavailable for distribution or repatriation.  As a result, we have not provided U.S. deferred taxes on these undistributed earnings because we intend that they will remain indefinitely reinvested outside of the U.S. and therefore unavailable for use in funding U.S. operations.  Determination of the amount of unrecognized deferred taxes related to these undistributed earnings is not practicable.

At December 31, 2018, we had net after-tax loss and credit carry forwards for income tax purposes of approximately $3.6 billion that primarily relate to state and foreign taxes. Of these net after-tax loss and credit carry forwards, approximately $2.1 billion will expire between 2019 and 2038 and approximately $1.5 billion may be carried forward indefinitely.

During 2018, the valuation allowance decreased approximately $0.6 billion. The balance of the valuation allowance at December 31, 2018 and the 2018 activity is primarily related to state and foreign taxes.

Unrecognized Tax Benefits
A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows:
 
 
 
(dollars in millions)
 
 
2018

 
2017

 
2016

Balance at January 1,
$
2,355

 
$
1,902

 
$
1,635

Additions based on tax positions related to the current year
160

 
219

 
338

Additions for tax positions of prior years
699

 
756

 
188

Reductions for tax positions of prior years
(248
)
 
(419
)
 
(153
)
Settlements
(40
)
 
(42
)
 
(18
)
Lapses of statutes of limitations
(55
)
 
(61
)
 
(88
)
Balance at December 31,
$
2,871

 
$
2,355

 
$
1,902



Included in the total unrecognized tax benefits at December 31, 2018, 2017 and 2016 is $2.3 billion, $1.9 billion and $1.5 billion, respectively, that if recognized, would favorably affect the effective income tax rate.

We recognized the following net after-tax expenses related to interest and penalties in the provision for income taxes:
Years Ended December 31,
(dollars in millions)

2018
$
(75
)
2017
(77
)
2016
(25
)







The after-tax accruals for the payment of interest and penalties in the consolidated balance sheets are as follows:
At December 31,
(dollars in millions)

2018
$
348

2017
269



Verizon and/or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state, local and foreign jurisdictions. As a large taxpayer, we are under audit by the IRS and multiple state and foreign jurisdictions for various open tax years. The IRS is currently examining the Company’s U.S. income tax returns for tax years 2013-2014 and Cellco Partnership's U.S. income tax return for tax year 2013-2014. Tax controversies are ongoing for tax years as early as 2005. The amount of the liability for unrecognized tax benefits will change in the next twelve months due to the expiration of the statute of limitations in various jurisdictions and it is reasonably possible that various current tax examinations will conclude or require reevaluations of the Company’s tax positions during this period. An estimate of the range of the possible change cannot be made until these tax matters are further developed or resolved.

Note 13. Segment Information
Reportable Segments
As discussed in Note 1, in November 2018, we announced a strategic reorganization of our business. Under the new structure, effective April 1, 2019, there are two reportable segments that we operate and manage as strategic business units - Consumer and Business. In conjunction with the new reporting structure, we recast our segment disclosures for all periods presented. We measure and evaluate our reportable segments based on segment operating income, consistent with the chief operating decision maker’s assessment of segment performance.

Our segments and their principal activities consist of the following:
Segment
 
Description
Verizon Consumer Group
 
Our Consumer segment provides consumer-focused wireless and wireline communications services and products. Our wireless services are provided across one of the most extensive wireless networks in the United States under the Verizon Wireless brand and through wholesale and other arrangements. Our wireline services are provided in nine states in the Mid-Atlantic and Northeastern U.S., as well as Washington D.C., over our 100% fiber-optic network under the Fios brand and over a traditional copper-based network to customers who are not served by Fios.
 
 
 
Verizon
Business Group
 
Our Business segment provides wireless and wireline communications services and products, video and data services, corporate networking solutions, security and managed network services, local and long distance voice services and network access to deliver various Internet of Things services and products. We provide these products and services to businesses, government customers and wireless and wireline carriers across the U.S. and select products and services to customers around the world.

Our Consumer segment's wireless and wireline products and services are available to our retail customers, as well as resellers that purchase wireless network access from us on a wholesale basis. Our Business segment’s wireless and wireline products and services are organized by the primary customer groups targeted by these offerings: Global Enterprise; Small and Medium Business; Public Sector and Other; and Wholesale.

Corporate and other includes the results of our media business,Verizon Media, and other businesses, investments in unconsolidated businesses, unallocated corporate expenses, certain pension and other employee benefit related costs and interest and financing expenses. Corporate and other also includes the historical results of divested businesses and other adjustments and gains and losses that are not allocated in assessing segment performance due to their nature. Although such transactions are excluded from the business segment results, they are included in reported consolidated earnings. Gains and losses from these transactions that are not individually significant are included in segment results as these items are included in the chief operating decision maker’s assessment of segment performance.

We completed our acquisition of Yahoo's operating business on June 13, 2017 and as such results are included since the acquisition date.

In May 2017, we completed the Data Center Sale, where we sold 23 customer-facing data center sites in the U.S. and Latin America to Equinix. The results of operations for this divestiture and other insignificant transactions are included within Corporate and other for all periods presented to reflect comparable segment operating results consistent with the information regularly reviewed by our chief operating decision maker.

The reconciliation of segment operating revenues and expenses to consolidated operating revenues and expenses below includes the effects of special items that the chief operating decision maker does not consider in assessing segment performance, primarily because of their nature.

On January 1, 2018, we adopted ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." Components other than the service component of net periodic pension cost and periodic postretirement benefit cost (income), inclusive of the mark-to-market pension and benefit remeasurements, have been reclassified from operating to non-operating charges (benefits) in our consolidated statements of income. The adoption of ASU 2017-07 did not change how we present our segment results.






The following table provides operating financial information for our two reportable segments:
 
(dollars in millions)
 
2018
Consumer

 
Business

 
Total 
Reportable
Segments

External Operating Revenues
 
 
 
 
 
Service
$
64,207

 
$

 
$
64,207

Wireless equipment
18,874

 

 
18,874

Other
6,447

 

 
6,447

Global Enterprise

 
11,197

 
11,197

Small and Medium Business

 
10,732

 
10,732

Public Sector and Other

 
5,830

 
5,830

Wholesale

 
3,713

 
3,713

Intersegment revenues
234

 
62

 
296

Total Operating Revenues(1)
89,762

 
31,534

 
121,296

 
 
 
 
 
 
Cost of services
15,335

 
10,859

 
26,194

Cost of wireless equipment
18,763

 
4,560

 
23,323

Selling, general and administrative expense
15,701

 
7,689

 
23,390

Depreciation and amortization expense
11,952

 
4,258

 
16,210

Total Operating Expenses
61,751

 
27,366

 
89,117

Operating Income
$
28,011

 
$
4,168

 
$
32,179

(1) Service and other revenues and Wireless equipment revenues included in our Business segment amounted to approximately $28.1 billion and $3.4 billion, respectively, for the year ended December 31, 2018.

 
(dollars in millions)
 
2017
Consumer

 
Business

 
Total 
Reportable
Segments

External Operating Revenues
 
 
 
 
 
Service
$
63,769

 
$

 
$
63,769

Wireless equipment
17,292

 

 
17,292

Other
5,735

 

 
5,735

Global Enterprise

 
11,444

 
11,444

Small and Medium Business

 
9,793

 
9,793

Public Sector and Other

 
5,652

 
5,652

Wholesale

 
3,978

 
3,978

Intersegment revenues
258

 
46

 
304

Total Operating Revenues(1)
87,054

 
30,913

 
117,967

 
 
 
 
 
 
Cost of services
14,981

 
11,094

 
26,075

Cost of wireless equipment
17,713

 
4,434

 
22,147

Selling, general and administrative expense
17,292

 
7,448

 
24,740

Depreciation and amortization expense
11,308

 
4,483

 
15,791

Total Operating Expenses
61,294

 
27,459

 
88,753

Operating Income
$
25,760

 
$
3,454

 
$
29,214

(1) Service and other revenues and Wireless equipment revenues included in our Business segment amounted to approximately $29.3 billion and $1.6 billion, respectively, for the year ended December 31, 2017.





 
(dollars in millions)
 
2016
Consumer

 
Business

 
Total 
Reportable
Segments

External Operating Revenues
 
 
 
 
 
Service
$
67,407

 
$

 
$
67,407

Wireless equipment
16,372

 

 
16,372

Other
5,505

 

 
5,505

Global Enterprise

 
11,359

 
11,359

Small and Medium Business

 
9,016

 
9,016

Public Sector and Other

 
5,115

 
5,115

Wholesale

 
4,001

 
4,001

Intersegment revenues
217

 
46

 
263

Total Operating Revenues(1)
89,501

 
29,537

 
119,038

 
 
 
 
 
 
Cost of services
15,101

 
11,436

 
26,537

Cost of wireless equipment
18,247

 
3,991

 
22,238

Selling, general and administrative expense
18,832

 
6,827

 
25,659

Depreciation and amortization expense
10,792

 
4,472

 
15,264

Total Operating Expenses
62,972

 
26,726

 
89,698

Operating Income
$
26,529

 
$
2,811

 
$
29,340

(1) Service and other revenues and Wireless equipment revenues included in our Business segment amounted to approximately $28.4 billion and $1.1 billion, respectively, for the year ended December 31, 2016.

The following table provides Fios revenues for our two reportable segments:
 
(dollars in millions)
 
Years Ended December 31,
2018

 
2017

 
2016

Consumer
$
11,056

 
$
10,903

 
$
10,503

Business
883

 
788

 
733

Total Fios revenue
$
11,939

 
$
11,691

 
$
11,236


The following table provides Wireless service revenue under our current reportable structure and includes intersegment activity:
 
(dollars in millions)
 
Years Ended December 31,
2018

 
2017

 
2016

Consumer
$
52,458

 
$
51,954

 
$
55,649

Business
10,484

 
11,094

 
10,807

Total Wireless service revenue
$
62,942

 
$
63,048

 
$
66,456



Reconciliation to Consolidated Financial Information
A reconciliation of the reportable segment operating revenues to consolidated operating revenues is as follows:
 
(dollars in millions)
 
Years Ended December 31,
2018

 
2017

 
2016

Operating Revenues
 
 
 
 
 
Total reportable segments
$
121,296

 
$
117,967

 
$
119,038

Corporate and other
9,936

 
8,098

 
5,172

Reconciling items:
 
 
 
 
 
Operating results from divested businesses (Note 3)

 
368

 
2,115

Eliminations
(369
)
 
(399
)
 
(345
)
Consolidated Operating Revenues
$
130,863

 
$
126,034

 
$
125,980








A reconciliation of the total of the reportable segments’ operating income to consolidated income before provision for income taxes is as follows:
 
(dollars in millions)
 
Years Ended December 31,
2018

 
2017

 
2016

Operating Income
 
 
 
 
 
Total reportable segments
$
32,179

 
$
29,214

 
$
29,340

Corporate and other
(1,326
)
 
(1,119
)
 
(1,236
)
Reconciling items:
 
 
 
 
 
Severance charges (Note 11)
(2,157
)
 
(497
)
 
(421
)
Other components of net periodic pension and benefit (charges) credits (Note 11)
(823
)

(800
)
 
(578
)
Net gain on sale of divested businesses (Note 3)

 
1,774

 
1,007

Acquisition and integration related charges (Note 3)
(553
)
 
(884
)
 

Gain on spectrum license transaction (Note 3)

 
270

 
142

Operating results from divested businesses

 
149

 
995

Oath goodwill impairment
(4,591
)
 

 

Product realignment charges
(451
)
 
(682
)
 

Consolidated operating income
22,278

 
27,425

 
29,249

Equity in losses of unconsolidated businesses
(186
)
 
(77
)
 
(98
)
Other income (expense), net
2,364

 
(2,021
)
 
(3,789
)
Interest expense
(4,833
)
 
(4,733
)
 
(4,376
)
Income Before (Provision) Benefit For Income Taxes
$
19,623

 
$
20,594

 
$
20,986



No single customer accounted for more than 10% of our total operating revenues during the years ended December 31, 2018, 2017 and 2016. International operating revenues are not significant.

The chief operating decision maker does not review disaggregated assets on a segment basis; therefore, such information is not presented. Depreciation included in the measure of segment profitability is primarily allocated based on proportional usage.

Note 14. Comprehensive Income
Comprehensive income consists of net income and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income. Significant changes in the components of Other comprehensive income, net of provision for income taxes are described below.

Accumulated Other Comprehensive Income
The changes in the balances of Accumulated other comprehensive income by component are as follows:
(dollars in millions)
Foreign
currency
translation
adjustments

 
Unrealized gains (losses) on cash flow hedges

 
Unrealized gains (losses) on marketable securities

 
Defined benefit
pension and
postretirement
plans

 
Total

Balance at January 1, 2016
$
(554
)
 
$
(278
)
 
$
101

 
$
1,281

 
$
550

Other comprehensive income (loss)
(159
)
 
(225
)
 
(13
)
 
2,881

 
2,484

Amounts reclassified to net income

 
423

 
(42
)
 
(742
)
 
(361
)
Net other comprehensive income (loss)
(159
)
 
198

 
(55
)
 
2,139

 
2,123

Balance at December 31, 2016
(713
)
 
(80
)
 
46

 
3,420

 
2,673

Other comprehensive income
245

 
818

 
10

 
327

 
1,400

Amounts reclassified to net income

 
(849
)
 
(24
)
 
(541
)
 
(1,414
)
Net other comprehensive income (loss)
245

 
(31
)
 
(14
)
 
(214
)
 
(14
)
Balance at December 31, 2017
(468
)
 
(111
)
 
32

 
3,206

 
2,659

Opening balance sheet adjustment (Note 1)
(15
)
 
(24
)
 
(13
)
 
682

 
630

Adjusted opening balance
(483
)
 
(135
)
 
19

 
3,888

 
3,289

Other comprehensive income (loss)
(117
)
 
(574
)
 

 
(164
)
 
(855
)
Amounts reclassified to net income

 
629

 
1

 
(694
)
 
(64
)
Net other comprehensive income (loss)
(117
)
 
55

 
1

 
(858
)
 
(919
)
Balance at December 31, 2018
$
(600
)
 
$
(80
)
 
$
20

 
$
3,030

 
$
2,370



The amounts presented above in net other comprehensive income (loss) are net of taxes. The amounts reclassified to net income related to unrealized gain (loss) on cash flow hedges in the table above are included in Other income (expense), net and Interest expense in our consolidated statements of income. See Note 9 for additional information. The amounts reclassified to net income related to unrealized gain (loss) on marketable securities in the table above are included in Other income (expense), net in our consolidated statements of income. The amounts reclassified to





net income related to defined benefit pension and postretirement plans in the table above are included in Other income (expense), net in our consolidated statements of income. See Note 11 for additional information.

Note 15. Additional Financial Information
The tables that follow provide additional financial information related to our consolidated financial statements:

Income Statement Information
 
(dollars in millions)
 
Years Ended December 31,
2018

 
2017

 
2016

Depreciation expense
$
15,186

 
$
14,741

 
$
14,227

Interest costs on debt balances
5,399

 
5,256

 
4,961

Net amortization of debt discount
174

 
155

 
119

Capitalized interest costs
(740
)
 
(678
)
 
(704
)
Advertising expense
2,682

 
2,643

 
2,744

 
 
 
 
 
 
Other income (expense), net
 
 
 
 
 
Interest income
$
94

 
$
82

 
$
59

Other components of net periodic benefit (cost) income
3,068

 
(11
)
 
(2,190
)
Other, net
(798
)
 
(2,092
)
 
(1,658
)
 
$
2,364

 
$
(2,021
)
 
$
(3,789
)


Balance Sheet Information
 
(dollars in millions)
 
At December 31,
2018

 
2017

Accounts payable and accrued liabilities
 
 
 
Accounts payable
$
7,232

 
$
7,063

Accrued expenses
5,948

 
6,756

Accrued vacation, salaries and wages
6,268

 
4,521

Interest payable
1,570

 
1,409

Taxes payable
1,483

 
1,483

 
$
22,501

 
$
21,232

 
 
 
 
Other current liabilities
 
 
 
Dividends payable
$
2,512

 
$
2,429

Contract liability(1)
4,207

 
4,050

Other
1,520

 
1,873

 
$
8,239

 
$
8,352



(1) Prior to the adoption of Topic 606, liabilities related to contracts with customers included advance billing and deferred revenues. These balances have been reclassified to conform to current year presentation.






Cash Flow Information
 
(dollars in millions)
 
Years Ended December 31,
2018

 
2017

 
2016

Cash Paid
 
 
 
 
 
Interest, net of amounts capitalized
$
4,408

 
$
4,369

 
$
4,085

Income taxes, net of amounts refunded
2,213

 
4,432

 
9,577

 
 
 
 
 
 
Other, net Cash Flows from Operating Activities
 
 
 
 
 
Changes in device payment plan agreement non-current receivables
$
(509
)
 
$
(579
)
 
$
(3,303
)
Other, net
728

 
1,255

 
204

 
$
219

 
$
676

 
$
(3,099
)
 
 
 
 
 
 
Other, net Cash Flows from Financing Activities
 
 
 
 
 
Net debt related costs
$
(141
)
 
$
(3,599
)
 
$
(1,991
)
Change in short-term obligations, excluding current maturities
(790
)
 
(170
)
 
(149
)
Other, net
(893
)
 
(670
)
 
(765
)
 
$
(1,824
)
 
$
(4,439
)
 
$
(2,905
)


In March 2017, the Verizon Board of Directors authorized a share buyback program to repurchase up to 100 million shares of the Company's common stock. The program will terminate when the aggregate number of shares purchased reaches 100 million, or at the close of business on February 28, 2020, whichever is sooner. During the years ended December 31, 2018, 2017, and 2016, Verizon did not repurchase any shares of Verizon’s common stock under our authorized share buyback programs. At December 31, 2018, the maximum number of shares that could be purchased by or on behalf of Verizon under our share buyback program was 100 million.

Common stock has been used from time to time to satisfy some of the funding requirements of employee and shareholder plans. During the years ended December 31, 2018, 2017, and 2016, we issued 3.5 million, 2.8 million and 3.5 million common shares from Treasury stock, respectively, which had an insignificant aggregate value.

Note 16. Commitments and Contingencies
In the ordinary course of business, Verizon is involved in various commercial litigation and regulatory proceedings at the state and federal level. Where it is determined, in consultation with counsel based on litigation and settlement risks, that a loss is probable and estimable in a given matter, the Company establishes an accrual. In none of the currently pending matters is the amount of accrual material. An estimate of the reasonably possible loss or range of loss in excess of the amounts already accrued cannot be made at this time due to various factors typical in contested proceedings, including: (1) uncertain damage theories and demands; (2) a less than complete factual record; (3) uncertainty concerning legal theories and their resolution by courts or regulators; and (4) the unpredictable nature of the opposing party and its demands. We continuously monitor these proceedings as they develop and adjust any accrual or disclosure as needed. We do not expect that the ultimate resolution of any pending regulatory or legal matter in future periods, including the Hicksville matter described below, will have a material effect on our financial condition, but it could have a material effect on our results of operations for a given reporting period.

Reserves have been established to cover environmental matters relating to discontinued businesses and past telecommunications activities. These reserves include funds to address contamination at the site of a former Sylvania facility in Hicksville NY, which had processed nuclear fuel rods in the 1950s and 1960s. In September 2005, the Army Corps of Engineers (ACE) accepted the site into its Formerly Utilized Sites Remedial Action Program. As a result, the ACE has taken primary responsibility for addressing the contamination at the site. An adjustment to the reserves may be made after a cost allocation is conducted with respect to the past and future expenses of all of the parties. Adjustments to the environmental reserve may also be made based upon the actual conditions found at other sites requiring remediation.

Verizon is currently involved in approximately 30 federal district court actions alleging that Verizon is infringing various patents. Most of these cases are brought by non-practicing entities and effectively seek only monetary damages; a small number are brought by companies that have sold products and could seek injunctive relief as well. These cases have progressed to various stages and a small number may go to trial in the coming 12 months if they are not otherwise resolved.

In connection with the execution of agreements for the sales of businesses and investments, Verizon ordinarily provides representations and warranties to the purchasers pertaining to a variety of nonfinancial matters, such as ownership of the securities being sold, as well as indemnity from certain financial losses. From time to time, counterparties may make claims under these provisions, and Verizon will seek to defend against those claims and resolve them in the ordinary course of business.

Subsequent to the sale of Verizon Information Services Canada in 2004, we continue to provide a guarantee to publish directories, which was issued when the directory business was purchased in 2001 and had a 30-year term (before extensions). The preexisting guarantee continues, without modification, despite the subsequent sale of Verizon Information Services Canada and the spin-off of our domestic print and Internet yellow pages directories business. The possible financial impact of the guarantee, which is not expected to be adverse, cannot be reasonably





estimated as a variety of the potential outcomes available under the guarantee result in costs and revenues or benefits that may offset each other. We do not believe performance under the guarantee is likely.

As of December 31, 2018, letters of credit totaling approximately $0.6 billion, which were executed in the normal course of business and support several financing arrangements and payment obligations to third parties, were outstanding.

We have several commitments, totaling $22.2 billion, primarily to purchase programming and network services, equipment, software and marketing services, which will be used or sold in the ordinary course of business, from a variety of suppliers. Of this total amount, $8.8 billion is attributable to 2019, $9.1 billion is attributable to 2020 through 2021, $2.1 billion is attributable to 2022 through 2023 and $2.2 billion is attributable to years thereafter. These amounts do not represent our entire anticipated purchases in the future, but represent only those items that are the subject of contractual obligations. Our commitments are generally determined based on the noncancelable quantities or termination amounts. Purchases against our commitments totaled approximately $9.0 billion for 2018, $8.2 billion for 2017, and $8.1 billion for 2016. Since the commitments to purchase programming services from television networks and broadcast stations have no minimum volume requirement, we estimated our obligation based on number of subscribers at December 31, 2018, and applicable rates stipulated in the contracts in effect at that time. We also purchase products and services as needed with no firm commitment.

Note 17. Quarterly Financial Information (Unaudited)
 
(dollars in millions, except per share amounts)
 
Quarter Ended
First Quarter

 
Second Quarter

 
Third Quarter

 
Fourth Quarter

 
Full Year

2018
 
 
 
 
 
 
 
 
 
Operating Revenues
$
31,772

 
$
32,203

 
$
32,607

 
$
34,281

 
$
130,863

Operating Income
7,349

 
6,617

 
7,675

 
637

 
22,278

Net Income
4,666

 
4,246

 
5,062

 
2,065

 
16,039

Net Income Attributable to Verizon
4,545

 
4,120

 
4,924

 
1,939

 
15,528

Basic Earnings Per Share Attributable to Verizon(1)
$
1.11

 
$
1.00

 
$
1.19

 
$
0.47

 
$
3.76

Diluted Earnings Per Share Attributable to Verizon(1)
$
1.11

 
$
1.00

 
$
1.19

 
$
0.47

 
$
3.76

 
 
 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
Operating Revenues
$
29,814

 
$
30,548

 
$
31,717

 
$
33,955

 
$
126,034

Operating Income
6,963

 
8,013

 
6,990

 
5,459

 
27,425

Net Income
3,553

 
4,478

 
3,736

 
18,783

 
30,550

Net Income Attributable to Verizon
3,450

 
4,362

 
3,620

 
18,669

 
30,101

Basic Earnings Per Share Attributable to Verizon(1)
$
0.85

 
$
1.07

 
$
0.89

 
$
4.57

 
$
7.37

Diluted Earnings Per Share Attributable to Verizon(1)
$
0.84

 
$
1.07

 
$
0.89

 
$
4.56

 
$
7.36


(1) Net income attributable to Verizon per common share is computed independently for each quarter and the sum of the quarters may not equal the annual amount.

Results of operations for 2018 and 2017 include the following after-tax charges (credits) attributable to Verizon:
 
 
 
 
 
 
 
 
 
(dollars in millions)
 
 
2018
 
2017
 
First Quarter

 
Second Quarter

 
Third Quarter

 
Fourth Quarter

 
First Quarter

 
Second Quarter

 
Third Quarter

 
Fourth Quarter

Severance, pension and benefits charges (credits)
$

 
$
250

 
$
(335
)
 
$
108

 
$

 
$
118

 
$

 
$
732

Early debt redemption costs
184

 

 
352

 

 
512

 

 
274

 
409

Acquisition and integration related charges
82

 
92

 
103

 
142

 

 
355

 
100

 
95

Gain on spectrum license transactions

 

 

 

 
(77
)
 

 

 
(91
)
Net gain on sale of divested businesses

 

 

 

 

 
(931
)
 

 

Product realignment charges

 
509

 

 

 

 

 

 
461

Corporate tax reform

 

 

 

 

 

 

 
(16,761
)
Oath goodwill impairment

 

 

 
4,527

 

 

 

 

Historical Wireless legal entity restructuring

 

 

 
(2,065
)
 

 

 

 







Historical Wireless Legal Entity Restructuring
During the fourth quarter of 2018, we completed an internal reorganization of legal entities within the historical Wireless business and recorded a non-recurring deferred tax benefit of approximately $2.1 billion in our consolidated statement of income for the year ended December 31, 2018, which reduced our deferred tax liability by the same amount.

Corporate Tax Reform
During the fourth quarter of 2017, we recorded a one-time corporate tax reduction of approximately $16.8 billion in (Provision) benefit for income taxes in our consolidated statement of income for the year ended December 31, 2017. Verizon has completed its analysis of the impacts of the TCJA, including analyzing the effects of any IRS and U.S. Treasury guidance issued, and state tax law changes enacted, within the maximum one year measurement period resulting in no significant adjustments to the provisional amount previously recorded.