Employee Benefits and Stock-Based Compensation

The Company records non-cash compensation expense for its outperform stock appreciation rights ("OSOs"), performance restricted stock units, restricted stock units, 401(k) matching contributions, and, prior to 2014, other stock-based compensation expense associated with the Company's discretionary bonus grants.

The following table summarizes non-cash compensation expense and capitalized non-cash compensation for each of the three years ended December 31, 2015, 2014 and 2013 (dollars in millions):



	2015			2014			2013
OSOs	$	6		$	8		$	21
Restricted Stock Units	65			34			38
Performance Restricted Stock Units	35			14			—
401(k) Match Expense	36			23			24
Restricted Stock Unit Bonus Grant	—			(5		)	59
Management Incentive and Retention Plan	—			—			10
	142			74			152
Capitalized Non-Cash Compensation	(1		)	(1		)	(1		)
	$	141		$	73		$	151

The Company capitalizes non-cash compensation for those employees directly involved in the construction of the network, installation of services for customers or the development of business support systems.

OSOs and restricted stock units are granted under the Level 3 Communications, Inc. Stock Incentive Plan, as amended (the "Stock Plan"), which term extends through May 21, 2025. The Stock Plan provides for accelerated vesting of stock awards upon retirement if an employee meets certain age and years of service requirements and certain other requirements. Under the Stock Compensation guidance, if an employee meets the age and years of service requirements under the accelerated vesting provision, the award would be expensed at grant or expensed over the period from the grant date to the date the employee meets the requirements, even if the employee has not actually retired. The Company recognized non-cash compensation expense for employees that met the age and years of service requirements for accelerated vesting at retirement of $14 million, $4 million and $5 million in 2015, 2014 and 2013, respectively.

Outperform Stock Appreciation Rights

OSOs were awarded through the end of 2013, and will continue to be outstanding through 2016. The Company's OSO program was designed so that the Company's stockholders would receive a market return on their investment before OSO holders receive any return on their OSOs. The Company believes that the OSO program directly aligned management's and stockholders' interests by basing stock option value on the Company's ability to outperform the market in general, as measured by the Standard & Poor's ("S&P") 500® Index. Participants in the OSO program do not realize any value from awards unless the Company's common stock price outperforms the S&P 500® Index during the life of the grant. When the stock price gain is greater than the corresponding gain on the S&P 500® Index, the value received for awards under the OSO plan is based on a formula involving a multiplier related to the level by which the Company's common stock outperforms the S&P 500® Index. To the extent that Level 3's common stock outperforms the S&P 500® Index, the value of OSO units to a holder may exceed the value of non-qualified stock options.

The initial strike price, as determined on the day prior to the OSO grant date, is adjusted over time (the "Adjusted Strike Price"), until the settlement date. The adjustment is an amount equal to the percentage appreciation or depreciation in the value of the S&P 500® Index from the date of grant to the date of exercise. The value of the OSO increased for increasing levels of outperformance. OSO units have a multiplier range from zero to four depending upon the performance of Level 3 common stock relative to the S&P 500® Index as shown in the following table.



If Level 3 Stock Outperforms the S&P 500® Index by:		Then the Pre-multiplier Gain Multiplied by a Success Multiplier of:
0% or Less		—
More than 0% but Less than 11%		Outperformance percentage multiplied by 4/11
11% or More		4.00

The Pre-multiplier Gain is the Level 3 common stock price minus the Adjusted Strike Price on the date of settlement.

Upon settlement of an OSO, the Company shall deliver or pay to the grantee the difference between the fair market value of a share of Level 3 common stock as of the day prior to the settlement date, less the Adjusted Strike Price (the "Exercise Consideration"). The Exercise Consideration may be paid in cash, Level 3 common stock or any combination of cash or Level 3 common stock at the Company's discretion. The number of shares of Level 3 common stock to be delivered by the Company to the grantee is determined by dividing the Exercise Consideration to be paid in Level 3 common stock by the fair market value of a share of Level 3 common stock as of the date prior to the settlement date. Fair market value was defined in the OSO agreement as the closing price per share of Level 3 common stock on the national securities exchange on which the common stock is traded. Settlement of the OSO units does not require any cash outlay by the employee.

OSO units have a three year life and vest 100% and are fully settled on the third anniversary of the date of the award. Recipients have no discretion on the timing to exercise OSO units, thus the expected life of all such OSO units was three years.

As of December 31, 2015, there was $1 million of unamortized compensation expense related to granted OSO units. The weighted average period over which this cost will be recognized is 0.60 years.

The fair value of the OSO units last granted in 2013 was calculated by applying a modified Black-Scholes model with the assumptions identified below. The Company utilized a modified Black-Scholes model due to the additional variables required to calculate the effect of the market conditions and success multiplier of the OSO program. The Company believes that given the relative short life of the OSOs and the other variables used in the model, the modified Black-Scholes model provides a reasonable estimate of the fair value of the OSO units at the time of grant.



		Year Ended December 31, 2013
S&P 500 Expected Dividend Yield Rate		2.24%
Expected Life		3 years
S&P 500 Expected Volatility Rate		19%
Level 3 Common Stock Expected Volatility Rate		39%
Expected S&P 500 Correlation Factor		0.44
Calculated Theoretical Value		101%
Estimated Forfeiture Rate		15%

The fair value of each OSO unit equaled the calculated theoretical value multiplied by the Level 3 common stock price on the grant date.

As described above, recipients have no discretion on the timing to exercise OSO units. Thus the expected life of all such OSO units was three years. The Company estimates the stock price volatility using a combination of historical and implied volatility as Level 3 believes it is consistent with the approach most marketplace participants would consider using all available information to estimate expected volatility. The Company has determined that expected volatility is more reflective of market conditions and provides a more accurate indication of volatility than using solely historical volatility. In reaching this conclusion, the Company has considered many factors including the extent to which its future expectations of volatility over the respective term is likely to differ from historical measures.

The fair value for OSO units awarded to participants during the year ended December 31, 2013 was approximately $17 million.

Transactions involving OSO units awarded are summarized in the table below. The Option Price Per Unit identified in the table below represents the initial strike price, as determined on the day prior to the OSO grant date for those grants.



	Units		Initial Strike Price Per Unit					Weighted Average Initial Strike Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Term (years)
										(in millions)
Balance January 1, 2013	2,066,419		$	14.10	-	$	36.60	$	23.40	$	6.6	1.73
OSOs granted	748,481		$	20.29	-	$	26.69	$	22.64
OSOs forfeited	(271,883	)	$	14.10	-	$	36.60	$	22.33
OSOs expired	(286,924	)	$	16.35	-	$	24.30	$	21.48
OSOs exercised	(107,228	)	$	14.10	-	$	14.10	$	14.10
Balance December 31, 2013	2,148,865		$	14.10	-	$	36.60	$	23.99	$	31.6	1.46
OSOs granted	—		$	—	-	$	—	$	—
OSOs forfeited	(52,901	)	$	16.99	-	$	27.53	$	22.99
OSOs expired	(106,844	)	$	36.60	-	$	36.60	$	36.60
OSOs exercised	(771,251	)	$	14.70	-	$	27.53	$	24.26
Balance December 31, 2014	1,217,869		$	16.99	-	$	27.53	$	22.76	$	88.0	0.90
OSOs granted	—		$	—	-	$	—	$	—
OSOs forfeited	(12,945	)	$	20.29	-	$	26.69	$	22.81
OSOs expired	—		$	—	-	$	—	$	—
OSOs exercised	(589,944	)	$	22.15	-	$	22.97	$	22.32
Balance December 31, 2015	614,980		$	20.29	-	$	26.69	$	22.77	$	48.5	0.37



					OSO Units Outstanding at December 31, 2015				OSO units Exercisable at December 31, 2015
Range of Exercise Prices					Number Outstanding	Weighted Average Remaining Life (years)	Weighted Average Initial Strike Price		Number Exercisable	Weighted Average Initial Strike Price
$	20.29	-	$	26.69	614,980	0.37	$	22.77	—	$	—

In the table above, the weighted average initial strike price represents the values used to calculate the theoretical value of OSO units on the grant date and the intrinsic value represents the value of OSO units that have outperformed the S&P 500® Index as of December 31, 2015, 2014 and 2013, respectively.

The total realized value of OSO units settled was $13 million, $19 million and $2 million for the years ended December 31, 2015, 2014 and 2013, respectively. The Company issued 622,755, 732,593 and 90,879 shares of Level 3 common stock upon the exercise of OSO units for the years ended December 31, 2015, 2014 and 2013, respectively. The number of shares of Level 3 common stock issued upon settlement of an OSO unit varies based upon the relative performance of Level 3 stock price and the S&P 500® Index between the initial grant date and settlement date of the OSO unit.

Restricted Stock and Units and Performance Restricted Stock Units

Restricted stock units are generally granted annually on July 1 to certain eligible recipients, including the Board of Directors, at no cost. Restrictions on transfer lapse over one to four year periods.

In April 2014, the Company began granting Performance Restricted Stock Units ("PRSUs"). PRSUs are designed to provide participants with a long-term stake in the Company’s success with both retention and performance components. Under these awards, a participant becomes vested in a number of PRSUs based on the Company's achievement of specified levels of financial performance during the performance period set forth in the applicable award letter issued pursuant to the award agreement, so long as the participant remains continuously employed by the Company until the applicable scheduled vesting date, subject to certain change in control provisions as outlined in the award agreement. The performance objective is based on the Company’s financial performance measures. Participants will be entitled to an award within a range of 50% at a minimum achievement level and 200% at a maximum achievement level.

PRSUs use a two-year performance measurement period and vest 50% on the second anniversary of the grant date (after the relevant performance has been measured) and the second 50% vest on the third anniversary of grant date.

The fair value of restricted stock units awarded totaled $144 million, $96 million and $34 million for the years ended December 31, 2015, 2014 and 2013, respectively. The fair value of these awards was calculated using the value of Level 3 common stock on the grant date and are being amortized over the periods in which the restrictions lapse. As of December 31, 2015, unamortized compensation cost related to nonvested restricted stock and restricted stock units was $109 million and the weighted average period over which this cost will be recognized is 2.17 years.

The changes in nonvested restricted stock and restricted stock units are shown in the following table:



	Number		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2013	3,636,976		$	24.71
Stock and units granted	1,617,592		$	21.26
Lapse of restrictions	(1,841,757	)	$	25.19
Stock and units forfeited	(488,461	)	$	23.10
Nonvested at December 31, 2013	2,924,350		$	22.77
Stock and units granted	1,650,772		$	43.48
Lapse of restrictions	(1,150,080	)	$	22.92
Stock and units forfeited	(206,305	)	$	27.14
Nonvested at December 31, 2014	3,218,737		$	32.95
Stock and units granted	2,087,942		$	50.60
Lapse of restrictions	(1,194,519	)	$	31.70
Stock and units forfeited	(358,227	)	$	44.25
Nonvested at December 31, 2015	3,753,933		$	42.09

The changes in nonvested performance restricted stock units are shown in the following table:



	Number		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2014	—		$	—
Stock and units granted	605,111		$	39.30
Lapse of restrictions	(1,750	)	$	39.14
Stock and units forfeited	(35,480	)	$	39.14
Nonvested at December 31, 2014	567,881		$	39.31
Stock and units granted	713,657		$	53.82
Lapse of restrictions	—		$	—
Stock and units forfeited	(53,073	)	$	49.25
Nonvested at December 31, 2015	1,228,465		$	47.31

The total fair value of restricted stock and restricted stock units and PRSUs whose restrictions lapsed in the years ended December 31, 2015, 2014 and 2013 was $38 million, $27 million and $46 million, respectively.

Management Incentive and Retention Plan

Effective March 2012, the Company adopted a Management Incentive and Retention Plan ("MIRP") as a means of encouraging key management personnel to remain employed with the Company or one of its subsidiaries and to reward the achievement of established performance criteria. The MIRP provided an opportunity to receive two types of awards: a retention award and an incentive award. Participants' retention and incentive awards had a cash component only or a cash component and an equity component. The equity component was granted in the form of restricted stock units under the Stock Plan. The MIRP has terminated pursuant to its terms and there are no remaining unamortized compensation costs related to MIRP.

A summary of the retention restricted stock units granted under the MIRP is shown in the following table:



	Number		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2013	465,000		$	25.92
Stock and units granted	—		$	—
Lapse of restrictions	(270,000	)	$	25.92
Stock and units forfeited	—		$	—
Nonvested at December 31, 2013	195,000		$	25.92
Stock and units granted	—
Lapse of restrictions	(195,000	)	$	25.92
Stock and units forfeited	—
Nonvested at December 31, 2014	—

No retention restricted stock units were awarded during the years ended December 31, 2015 and 2014 under the MIRP, and all prior awards were vested as of December 31, 2014.

Defined Contribution Plans

The Company sponsors a number of defined contribution plans. The principal defined contribution plans are discussed individually below. Other defined contribution plans are not individually significant and therefore have been summarized in aggregate below.

The Company and its subsidiaries offer their qualified employees the opportunity to participate in a defined contribution retirement plan qualifying under the provisions of Section 401(k) of the Internal Revenue Code ("401(k) Plan"). Each employee is eligible to contribute, on a tax deferred basis, a portion of annual earnings generally not to exceed $18,000 in 2015 and $18,000 in 2016. The Company matches 100% of employee contributions up to 4% of eligible earnings or applicable regulatory limits.

The Company's matching contributions are made with Level 3 common stock based on the closing stock price on each pay date. The Company's matching contributions are made through units in the Level 3 Stock Fund, which represent shares of Level 3 common stock. The Level 3 Stock Fund is the mechanism that is used for Level 3 to make employer matching and other contributions to employees through the Level 3 401(k) Plan. Prior to January 2016, employees were not able to purchase units in the Level 3 Stock Fund but effective January 2016, employees may allocate account balances to the Level 3 Stock Fund subject to a limitation on the total percentage of the employee's 401(K) account balances maintained in the Level 3 Stock Fund. Employees are able to diversify the Company's matching contribution as soon as it is made, even if they are not fully vested, subject to insider trading rules and regulations. The Company's matching contributions vest ratably over the first three years of service or over such shorter period until the employee has completed three years of service at such time the employee is then 100% vested in all Company matching contributions, including future contributions. The Company made 401(k) Plan matching contributions of $36 million, $23 million and $24 million for the years ended December 31, 2015, 2014 and 2013, respectively. The Company's matching contributions are recorded as non-cash compensation and included in network related expenses of $5 million, $4 million and $4 million for the years ended December 31, 2015, 2014 and 2013, respectively, and in selling, general and administrative expenses of $31 million, $19 million and $20 million for the years ended December 31, 2015, 2014 and 2013, respectively. Former tw telecom employees became eligible to participate in the Level 3 401(k) Plan starting January 1, 2015.

The tw telecom 401(k) Plan ("tw telecom 401(k) Plan") provided 100% matching cash contributions up to a maximum 5% of eligible compensation. The Company's contributions to the tw telecom 401(k) Plan vest immediately. Expenses recorded by the Company relating to the tw telecom 401(k) Plan for the two months in 2014 subsequent to the completion of the Merger were approximately $2 million.

Other defined contribution plans sponsored by the Company are individually not significant. On an aggregate basis the expenses recorded by the Company relating to these plans was approximately $6 million, $6 million and $5 million for the years ended December 31, 2015, 2014 and 2013, respectively.

Defined Benefit Plans

The Company has certain contributory and non-contributory employee pension plans, which are not significant to the financial position or operating results of the Company. The Company recognizes in its balance sheet the funded status of its defined benefit post-retirement plans, which is measured as the difference between the fair value of the plan assets and the plan benefit obligations. The Company is also required to recognize changes in the funded status within accumulated other comprehensive income, net of tax to the extent such changes are not recognized in earnings as components of periodic net benefit cost. The fair value of the plan assets was $142 million and $151 million as of December 31, 2015 and 2014, respectively. The total plan benefit obligations were $158 million and $176 million as of December 31, 2015 and 2014, respectively. Therefore, the total funded status was an obligation of $16 million and $25 million as of December 31, 2015 and 2014, respectively.

Annual Discretionary Bonus Grant

The Company's annual discretionary bonus program is intended to motivate employees to achieve the Company's financial and business goals. Each participant is provided a target award expressed as a percentage of base salary. Actual awards under the program are based on corporate results as well as achievement of specific individual performance criteria during the bonus plan period, and may be paid in cash, restricted stock units, or a combination of the two, at the sole discretion of the Compensation Committee of the Board of Directors. The annual discretionary bonus will be paid in cash for the 2015 bonus plan, was paid in cash for the 2014 bonus plan and was paid partially in cash and equity for the 2013 bonus plan. The Company paid out 1.4 million immediately-vested restricted stock units in 2014 for the 2013 bonus plan.