Commitments and Contingencies

12 Months Ended

Dec. 31, 2012

Commitments and Contingencies

Commitments and Contingencies

(16)   Commitments and Contingencies

        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 rate making, 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, we do not believe that the ultimate resolution of these other proceedings, after considering available insurance coverage, will have a material adverse effect on our financial position, results of operations or cash flows.

        CenturyLink and QCII 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 a wholly owned subsidiary of CenturyLink and QCII, our business and financial condition could be similarly affected. You can find descriptions of these legal proceedings in CenturyLink's and QCII'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 these 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. Payments on capital leases are included in repayments of long-term debt, including current maturities in the consolidated statements of cash flows.

        The tables below summarize our capital lease activity:

	Successor				Predecessor
	Year Ended December 31, 2012		Nine Months Ended December 31, 2011		Three Months Ended March 31, 2011		Year Ended December 31, 2010
	(Dollars in millions)
Assets acquired through capital leases	$	—		2		16		116
Depreciation expense		50		41		11		28
Cash payments towards capital leases		41		35		11		25

	Successor
	December 31, 2012		December 31, 2011
Assets included in property, plant and equipment	$	188		192
Accumulated depreciation		85		41

        The future annual minimum payments under capital lease arrangements as of December 31, 2012 were as follows:

	Future Minimum Payments
	(Dollars in millions)
Capital lease obligations:
2013	$	46
2014		35
2015		21
2016		2
2017		1
2018 and thereafter		6
Total minimum payments		111
Less: amount representing interest and executory costs		(14	)
Present value of minimum payments		97
Less: current portion		(40	)
Long-term portion	$	57

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 successor year ended December 31, 2012 and the successor nine months ended December 31, 2011, our gross rental expense was $93 million and $125 million, respectively. Also, gross rental expense was $58 million and $200 million for the predecessor three months ended March 31, 2011 and the predecessor year ended December 31, 2010, respectively. We also received sublease rental income for the same periods of $8 million, $10 million, $4 million and $15 million, respectively.

        At December 31, 2012, our future minimum payments under operating leases were as follows:

	Future Minimum Payments
	(Dollars in millions)
Operating leases:
2013	$	55
2014		36
2015		30
2016		25
2017		20
2018 and thereafter		39
Total future minimum payments(1)	$	205

(1)

Minimum payments have not been reduced by minimum sublease rentals of $32 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 $179 million as of December 31, 2012. Of this amount, we expect to purchase $47 million in 2013, $63 million in 2014 through 2015, $56 million in 2016 through 2017 and $13 million in 2018 and thereafter. These amounts do not represent our entire anticipated purchases in the future, but represent only those items for which we are contractually committed.