(13)

Commitments and Contingencies

(a) Leases

The Company does not have any leases with contingent rental payments or any leases with contingency renewal, purchase options, or escalation clauses.

(b) Legal Proceedings

From time to time, the Company is involved in litigation and regulatory proceedings arising out of its operations. With the exception of the Chapter 11 Cases, the Company’s management believes that it is not currently a party to any legal or regulatory proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on the Company’s financial position or results of operations.

On the Petition Date, FairPoint Communications and substantially all of its direct and indirect subsidiaries filed voluntary petitions for relief under the Chapter 11 Cases. On January 13, 2011, the Bankruptcy Court entered the Confirmation Order, which confirmed the Plan. On the Effective Date, the Company substantially consummated the reorganization through a series of transactions contemplated by the Plan, and the Plan became effective pursuant to its terms.

On June 30, 2011, the Bankruptcy Court entered a final decree closing certain of the Company’s bankruptcy cases due to the closed cases being fully administered. Of the 80 original bankruptcy cases, only five remain open. These cases are FairPoint Communications, Inc. (Case No. 09-16335), Northern New England Telephone Operations LLC (Case No. 09-16365), Telephone Operating Company of Vermont LLC (Case No. 09-16410), MJD Services Corp. (Case No. 09-16366) and Enhanced Communications of Northern New England Inc. (Case No. 09-16349).

(c) Service Quality Penalties

The Company is subject to certain retail service quality requirements in the states of Maine, New Hampshire and Vermont. Failure to meet these requirements in any of these states may result in penalties being assessed by the respective state regulatory body. The Merger Orders provide that any penalties assessed by the states be paid by the Company in the form of credits applied to retail customer bills.

During February 2010, the Company entered into the Regulatory Settlements with the representatives for each of Maine, New Hampshire and Vermont regarding modification of each state’s Merger Order, which have since been approved by the regulatory authorities in these states. The Regulatory Settlements in New Hampshire and Vermont deferred fiscal 2008 and 2009 SQI penalties, as applicable, until December 31, 2010 and included a clause whereby such penalties would be forgiven in part or in whole if the Company met certain metrics for the twelve-month period ending December 31, 2010. As a result of improvements on certain SQI metrics, the Company expects to receive waivers of 60% in New Hampshire and 80% in Vermont under this clause, and, accordingly, reduced its accrual by $12.7 million in the three months ended December 31, 2010. However, the Company’s SQI metrics in the state of New Hampshire are currently subject to an audit ordered by the NHPUC. Therefore, the amount of the waiver in New Hampshire is subject to change depending on the results of the audit. In addition, the Regulatory Settlement for Maine deferred the Company’s fiscal 2008 and 2009 SQI penalties until March 2010.

As of June 30, 2011 and December 31, 2010, the Company has recognized an estimated liability for service quality penalties based on metrics defined by the state regulatory authorities in Maine, New Hampshire and Vermont. Based on the Company’s current estimate of its service quality penalties in these states, a decrease of $2.5 million in the estimated liability was recorded as an increase to revenue for the three months ended June 30, 2011 and the 157 days ended June 30, 2011 due to an improvement in the Company’s service performance, revisions to accruals and recent changes in Maine regulation which eliminated the multiplier rebate penalties beginning in fiscal 2011. An increase of $0.4 million, $2.0 million and $6.3 million in the estimated liability was recorded as a reduction to revenue for the 24 days ended January 24, 2011 and the three and six months ended June 30, 2010, respectively. Beginning in March 2010, the Company began to issue SQI rebates related to the Maine 2008 and 2009 SQI penalties to customers over a twelve month period. During the three months ended June 30, 2011, the 157 days ended June 30, 2011, the 24 days ended January 24, 2011 and the three and six months ended June 30, 2010, the Company paid out $2.4 million, $4.2 million, $0.6 million, $1.7 million and $2.1 million, respectively, of SQI penalties in the form of customer rebates, all of which were related to Maine fiscal 2008 and 2009 penalties. The Company has recorded a total liability of $13.8 million and $20.8 million on the consolidated balance sheets at June 30, 2011 and December 31, 2010, respectively, of which $9.1 million and $12.5 million, respectively, are included in other accrued liabilities. The remainder of the June 30, 2011 and December 31, 2010 liability is included in claims payable and estimated claims accrual and liabilities subject to compromise, respectively.

(d) Performance Assurance Plan Credits

As part of the Merger Orders, the Company adopted a PAP for certain services provided on a wholesale basis to CLECs in the states of Maine, New Hampshire and Vermont. Failure to meet specified performance standards in any of these states may result in performance credits being assessed in accordance with the provisions of the PAP in each state. As of June 30, 2011 and 2010, the Company has recorded a reserve for the estimated amount of PAP credits based on metrics defined by the PAP. Credits assessed in Maine and New Hampshire are recorded as a reduction to accounts receivable since they are paid by the Company in the form of credits applied to CLEC bills. PAP credits for Vermont are recorded as liabilities since a majority of these credits are paid to the Vermont Universal Service Fund, while the remaining credits assessed in Vermont are paid by the Company in the form of credits applied to CLEC bills. Based on the Company’s current estimate of its PAP credits in these states, a decrease of $0.9 million, a decrease of $0.1 million, an increase of $0.6 million, an increase of $1.3 million and an increase of $3.9 million in the estimated reserve was recorded as an increase/reduction to revenue for the three months ended June 30, 2011, the 157 days ended June 30, 2011, the 24 days ended January 24, 2011 and the three and six months ended June 30, 2010, respectively. During the three months ended June 30, 2011, the 157 days ended June 30, 2011, the 24 days ended January 24, 2011 and the three and six months ended June 30, 2010, the Company paid out $0.8 million, $2.9 million, $0.5 million, $2.3 million and $4.1 million, respectively, of PAP credits. The Company has recorded a total reserve of $5.5 million and $8.4 million on the consolidated balance sheets at June 30, 2011 and December 31, 2010, respectively. At June 30, 2011 and December 31, 2010, $4.1 million of the total reserve is recorded to the Claims Reserve and Liabilities Subject to Compromise, respectively.

The NHPUC has ordered an audit of the Company’s existing PAP in the state of New Hampshire, which has not yet commenced. The existing PAP in Maine and Vermont may also be subject to audit, as determined by the Maine Public Utilities Commission and the Vermont Public Service Board, respectively.

(e) Capital Expenditure Obligations

Under regulatory settlements in each of Maine, New Hampshire and Vermont, the Company is required to make certain capital expenditures in each of these states. Beginning from the date of the Merger, the Company is required to spend $141.0 million through March 31, 2011 in Maine, $350.4 million through March 31, 2015 in New Hampshire and $120.0 million through March 31, 2011 in Vermont. The Company has exceeded the expenditure requirements with a deadline of March 31, 2011 in Maine and Vermont and expects to meet the expenditure requirements with a deadline of March 31, 2015 in New Hampshire.