Commitments and Contingencies

Legal Matters

From time to time, we are involved in other proceedings incidental to our business, including patent infringement allegations, administrative hearings of state public utility commissions relating primarily to our rates or services, actions relating to employee claims, various tax issues, environmental law issues, grievance hearings before labor regulatory agencies and miscellaneous third party tort actions. The outcome of these other proceedings is not predictable. However, based on current circumstances, we do not believe that the ultimate resolution of these other proceedings, after considering available defenses and any insurance coverage or indemnification rights, will have a material adverse effect on our financial position, results of operations or cash flows.

We are currently defending several patent infringement lawsuits asserted against us by non-practicing entities. These cases have progressed to various stages and one or more may go to trial in the coming 24 months if they are not otherwise resolved. Where applicable, we are seeking full or partial indemnification from our vendors and suppliers. As with all litigation, we are vigorously defending these actions and, as a matter of course, are prepared both to litigate the matters to judgment, as well as to evaluate and consider all reasonable settlement opportunities.

We are among hundreds of defendants nationwide in dozens of lawsuits filed over the past year by Sprint Communications Company and affiliates of Verizon Communications Inc. The plaintiffs in these suits have challenged the right of local exchange carriers to bill interexchange carriers for switched access charges for certain calls between mobile and wireline devices that are routed through an interexchange carrier. In the lawsuits, the plaintiffs are seeking refunds of access charges previously paid and relief from future access charges. In addition, these and some other interexchange carriers have ceased paying switched access charges on these calls. Recently the lawsuits involving us and many other carriers have been consolidated for pretrial purposes in the United States District Court for the District of Northern Texas. Some of the defendants, including us, have petitioned the Federal Communications Commission to address these issues on an industry-wide basis.

The outcome of these disputes and suits, as well as any related regulatory proceedings that could ensue, are currently not predictable. If we are required to stop assessing these charges or to pay refunds of any such charges, our financial results could be negatively affected.

CenturyLink and its affiliates are involved in several legal proceedings to which we are not a party that, if resolved against them, could have a material adverse effect on their business and financial condition. As an indirect wholly-owned subsidiary of CenturyLink, our business and financial condition could be similarly affected. You can find descriptions of these legal proceedings in CenturyLink's quarterly and annual reports filed with the SEC. Because we are not a party to any of the matters, we have not accrued any liabilities for the matters.

Capital Leases

We lease certain facilities and equipment under various capital lease arrangements. Depreciation of assets under capital leases is included in depreciation and amortization expense in our consolidated statements of operations. Payments on capital leases are included in repayments of long-term debt, including current maturities in our consolidated statements of cash flows.

The tables below summarize our capital lease activity:



	Years Ended December 31,
	2014		2013	2012
	(Dollars in millions)
Assets acquired through capital leases	$	3	—	—
Depreciation expense	32		42	50
Cash payments towards capital leases	32		40	41



	As of December 31,
	2014		2013
	(Dollars in millions)
Assets included in property, plant and equipment	$	137	168
Accumulated depreciation	108		109

The future annual minimum payments under capital lease arrangements as of December 31, 2014 were as follows:



	Future Minimum Payments
	(Dollars in millions)
Capital lease obligations:
2015	$	22
2016	2
2017	1
2018	1
2019	1
2020 and thereafter	7
Total minimum payments	34
Less: amount representing interest and executory costs	(8		)
Present value of minimum payments	26
Less: current portion	(20		)
Long-term portion	$	6

Operating Leases

We lease various equipment, office facilities, retail outlets, switching facilities and other network sites. These leases, with few exceptions, provide for renewal options and escalations that are either fixed or based on the consumer price index. Any rent abatements, along with rent escalations, are included in the computation of rent expense calculated on a straight-line basis over the lease term. The lease term for most leases includes the initial non-cancelable term plus any term under renewal options that are reasonably assured. For the years ended December 31, 2014, 2013 and 2012, our gross rental expense was $79 million, $83 million and $93 million, respectively. We also received sublease rental income for the same periods of $4 million, $4 million and $8 million, respectively.

At December 31, 2014, our future rental commitments for operating leases were as follows:



	Future Minimum Payments
	(Dollars in millions)
Operating leases:
2015	$	56
2016	50
2017	44
2018	38
2019	27
2020 and thereafter	36
Total future minimum payments⁽¹⁾	$	251

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⁽¹⁾	Minimum payments have not been reduced by minimum sublease rentals of $30 million due in the future under non-cancelable subleases.

Purchase Obligations

We have several commitments primarily for marketing activities and support services from a variety of vendors to be used in the ordinary course of business totaling $139 million at December 31, 2014. Of this amount, we expect to purchase $50 million in 2015, $72 million in 2016 through 2017, $16 million in 2018 through 2019 and $1 million in 2020 and thereafter. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we were contractually committed as of December 31, 2014.