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, based on current circumstances we do not believe that the ultimate resolution of these other proceedings, after considering available defenses and insurance coverage, 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 settlement opportunities.

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 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 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:



	Successor				Predecessor
	Year Ended December 31, 2013		Year Ended December 31, 2012	Nine Months Ended December 31, 2011	Three Months Ended March 31, 2011
	(Dollars in millions)
Assets acquired through capital leases	$	—	—	2	16
Depreciation expense	42		50	41	11
Cash payments towards capital leases	40		41	35	11



	Successor
	December 31, 2013		December 31, 2012
	(Dollars in millions)
Assets included in property, plant and equipment	$	168	188
Accumulated depreciation	109		85

The future annual minimum payments under capital lease arrangements as of December 31, 2013 were as follows:



	Future Minimum Payments
	(Dollars in millions)
Capital lease obligations:
2014	$	33
2015	23
2016	2
2017	1
2018	1
2019 and thereafter	5
Total minimum payments	65
Less: amount representing interest and executory costs	(10		)
Present value of minimum payments	55
Less: current portion	(31		)
Long-term portion	$	24

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 years ended December 31, 2013 and 2012 and the successor nine months ended December 31, 2011, our gross rental expense was $83 million, $93 million, and $125 million, respectively. Also, gross rental expense was $58 million for the predecessor three months ended March 31, 2011. We also received sublease rental income for the same periods of $4 million, $8 million, $10 million, and $4 million, respectively.

At December 31, 2013, our future minimum payments under operating leases were as follows:



	Future Minimum Payments
	(Dollars in millions)
Operating leases:
2014	$	59
2015	51
2016	46
2017	41
2018	34
2019 and thereafter	61
Total future minimum payments⁽¹⁾	$	292

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⁽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 $284 million as of December 31, 2013. Of this amount, we expect to purchase $100 million in 2014, $134 million in 2015 through 2016, $46 million in 2017 through 2018 and $4 million in 2019 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.