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. 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. Notwithstanding that the Company emerged from Chapter 11 protection on the Effective Date, one of the Chapter 11 Cases (Northern New England Telephone Operations LLC - Case No. 09-16365) remains open.

The Company's Northern New England operations are, or in the case of New Hampshire, were, subject to certain retail service quality plans in Maine, New Hampshire and Vermont pursuant to which the Company incurs SQI penalties resulting from the Company's failure to meet certain benchmarks for operating performance metrics set forth in the respective plans. The retail service quality plan in New Hampshire was eliminated effective August 10, 2012. Penalties resulting from these commitments are recorded as a reduction to revenue. The certain regulatory approvals relating to the Chapter 11 Cases and the Plan and certain modifications to the requirements imposed by state regulatory authorities as a condition to approval of the Merger (each a "Merger Order", and collectively, the "Merger Orders") or subsequent regulation plan in each state provide that any SQI penalties assessed under the plans be paid by the Company in the form of credits applied to retail customer bills. However, as the result of separate orders in New Hampshire and Vermont issued in 2012, certain previously assessed SQI penalties in each respective state may be used for expansion of broadband services to unserved and underserved areas in those states as described below.

As of March 31, 2013 and December 31, 2012, the Company has an estimated liability of $1.9 million and $2.1 million, respectively, for SQI penalties based on the Company's actual results relative to the benchmarks for the operating performance metrics set forth in the respective retail service quality plans. As of March 31, 2013 and December 31, 2012, the liability is located in other accrued liabilities.

For the plan year ended July 31, 2012, the Company incurred $1.7 million in Maine SQI penalties, which are being issued in the form of credits applied to retail customers' bills in the amount of $0.48 per access line per month over the twelve months beginning in December 2012.

During the quarter ended March 31, 2012, the Vermont Public Service Board ("VPSB") approved the Company's request to use $2.5 million of the SQI penalties incurred under the Vermont retail service quality plan to deploy broadband into unserved areas. At that time, these SQI penalties were reclassified from the claims reserve established to pay outstanding bankruptcy claims and various other bankruptcy related fees (the "Claims Reserve") to other accrued liabilities.

In New Hampshire, as the result of a New Hampshire PUC ("NHPUC") recommendation and the approval by the governor and executive council of New Hampshire of a certain broadband expansion agreement, the Company received authorization to move forward with the next phase of developing a detailed engineering plan for use of $2.8 million in SQI penalties incurred under the New Hampshire retail service quality plan, together with another $0.5 million of Company funds, to build out broadband connections to customers in rural areas beyond the commitments made in New Hampshire's Merger Order. On January 29, 2013, the NHPUC approved the Company's detailed engineering plan in its entirety. At December 31, 2012, these SQI penalties were reclassified from the Claims Reserve to other accrued liabilities given the NHPUC's subsequent approval to utilize these penalties for an alternative use.

Based on the Company's current estimate of its SQI penalties in the Northern New England operations, changes in the accrual impacting revenue and payments are as follows (in thousands):



	Three Months Ended March 31,
	2013			2012
Increase (decrease) in liability recorded as a reduction (increase) to revenue	$	142		$	(1,088	)
SQI penalties paid out in the form of customer rebates	$	(345	)	$	—

(d) Performance Assurance Plan Credits

As part of the Merger Orders, the Company adopted a PAP that measures the Company's performance in the provision of wholesale services to CLECs in the northern New England service territories of Maine, New Hampshire and Vermont. Penalties resulting from failure to meet the specified performance standards as defined in the provisions of the separate plans in each state are recorded as a reduction to revenue and, in general, are issued in the form of credits applied to affected CLEC bills. However, as a result of a Vermont order in 2012, certain previously assessed PAP penalties in Vermont will be used for expansion of broadband services to unserved areas of Vermont.

As of March 31, 2013 and December 31, 2012, the Company has recorded a reserve of $1.0 million and $1.4 million, respectively, for the estimated amount of PAP penalties incurred that have not yet been credited to CLECs. Penalties 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. Penalties for Vermont are recorded as other accrued liabilities since a significant portion of these penalty amounts are paid to the VUSF, while the remaining credits assessed in Vermont are paid by the Company in the form of credits applied to CLEC bills.

During the quarter ended March 31, 2012, the VPSB approved the Company's request to use $4.1 million of certain accrued PAP penalties to deploy broadband into unserved areas. At that time, these accrued PAP penalties were reclassified from the Claims Reserve to other accrued liabilities.

Based on the Company's current estimate of its PAP credits in the Northern New England operations, changes in the accrual impacting revenue and payments are as follows (in thousands):



	Three Months Ended March 31,
	2013			2012
Increase (decrease) in estimated reserve recorded as a reduction (increase) to revenue	$	1,601		$	205
PAP credits issued	$	(2,084	)	$	(588	)

During early 2011, the NHPUC ordered an audit of the Company's existing PAP in the state of New Hampshire, which commenced in October 2011 and is ongoing. The existing PAP in Maine and Vermont may also be subject to audit, as determined by the Maine PUC and the VPSB, respectively.

(e) Restricted Cash

As of March 31, 2013, the Company had $6.3 million of restricted cash, of which $0.7 million is reserved for payment of outstanding bankruptcy claims (the "Cash Claims Reserve"), $1.8 million is reserved for broadband build-out in Vermont, $3.2 million is reserved for broadband build-out in New Hampshire and $0.6 million is restricted for other purposes.

During the three months ended March 31, 2013, there was little activity in the Cash Claims Reserve. During the three months ended March 31, 2013, $1.0 million of restricted cash reserved for broadband build-out in Vermont was utilized and $0.1 million of restricted cash reserved for broadband build-out in New Hampshire was utilized. For further information on the establishment of restricted funds set aside for broadband build-out in Vermont and New Hampshire, see "—(c) Service Quality Penalties" and "—(d) Performance Assurance Plan Credits" herein.

(f) Magnitude of Bankruptcy Claims

Claims totaling $4.9 billion were filed with the Bankruptcy Court against the Company. As of May 2, 2013, through the claim resolution process, $3.8 billion of these claims have been settled and $1.1 billion of these claims have been disallowed by the Bankruptcy Court. Additionally, $10.1 million of these claims have been withdrawn by the respective creditors and $5.5 million of these claims remain open.

(g) Capital Expenditure Obligations

Under a regulatory settlement in New Hampshire, the Company is required to make certain capital expenditures in New Hampshire. Beginning from the date of the Merger, the Company is required to spend $285.4 million through March 31, 2013 in New Hampshire. This spend requirement was exceeded during fiscal year 2012.