(13)       Commitments and Contingencies

Operating Leases as Lessee

We lease business offices, have entered into site lease agreements and use satellite transponder and fiber capacity and certain equipment pursuant to operating lease arrangements. Many of our leases are for multiple years and contain renewal options. Rental costs under such arrangements amounted to $36.3 million, $31.0 million and $29.5 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Capital Leases as Lessee

We entered into a long-term capital lease agreement in 1991 with the wife of our President and CEO for property occupied by us as further described in Note 11, Related Party Transactions.

In 2006, through our subsidiary GCI Communication Corp., we entered into a capital lease agreement for transponder capacity on Intelsat, Ltd.'s (“Intelsat”) Galaxy 18 spacecraft that successfully launched in 2008. We are also leasing capacity on the Horizons 1 satellite, which is owned jointly by Intelsat and JSAT International, Inc. The Intelsat Galaxy 18 C-band and Ku-Band transponders are being leased over an expected term of 14 years. The present value of the lease payments, excluding telemetry, tracking and command services and back-up protection, was $98.6 million.

A summary of future minimum lease payments follows (amounts in thousands):

The leases generally provide that we pay the taxes, insurance and maintenance expenses related to the leased assets. Several of our leases include renewal options, escalation clauses and immaterial amounts of contingent rent expense. We expect that in the normal course of business leases that expire will be renewed or replaced by leases on other properties.

Operating Leases as Lessor and IRU Revenue

We enter into lease or service arrangements for IRU capacity on our fiber optic cable systems with third parties and for many of these leases or service arrangements, we received up-front cash payments. We have $45.8 million and $50.1 million in deferred revenue at December 31, 2011 and 2010 respectively, representing cash received from customers for which we will recognize revenue in the future. The arrangements under these operating lease or service arrangements expire on various dates through 2029. The revenue will be recognized over the term of the agreements.

A summary of minimum future lease or service arrangement cash receipts including IRUs and the provision of certain other service are as follows (amounts in thousands):

The cost of assets that are leased to customers is $258.6 million and $256.2 million as of December 31, 2011 and 2010, respectively. The carrying value of assets leased to customers is $153.1 million and $159.4 million as of December 31, 2011 and 2010, respectively.

Equipment Purchase Obligations

We have a non-cancelable agreement to purchase wireless equipment of $8.6 million, $7.0 million and $8.1 million during the years ending December 31, 2012, 2013 and 2014, respectively.

Guaranteed Service Levels

Certain customers have guaranteed levels of service with varying terms. In the event we are unable to provide the minimum service levels we may incur penalties or issue credits to customers.

Self-Insurance

Through December 31, 2011, we were self-insured for losses and liabilities related primarily to health and welfare claims up to $500,000 per incident and $2.0 million per year per beneficiary above which third party insurance applied. These limits will remain the same for 2012. A reserve of $1.6 million was recorded at December 31, 2011 and 2010, to cover estimated reported losses, estimated unreported losses based on past experience modified for current trends, and estimated expenses for settling claims. We are self-insured up to $500,000 per incident for losses and liabilities related to workers' compensation claims in Alaska and have an insurance policy for any losses in excess of $500,000 per incident. A reserve of $1.9 million and $1.8 million was recorded at December 31, 2011 and 2010, respectively, to cover estimated reported losses and estimated expenses for open and active claims. $1.1 million and $1.3 million was included in this reserve for the year ended December 31, 2011 and 2010, respectively, for the GCI-owned aircraft accident further discussed below. Actual losses will vary from the recorded reserves. While we use what we believe are pertinent information and factors in determining the amount of reserves, future additions to the reserves may be necessary due to changes in the information and factors used.

We are self-insured for damage or loss to certain of our transmission facilities, including our buried, undersea, and above-ground transmission lines. If we become subject to substantial uninsured liabilities due to damage or loss to such facilities, our financial position, results of operations or liquidity may be adversely affected.

Litigation, Disputes, and Regulatory Matters

We are involved in various lawsuits, billing disputes, legal proceedings, and regulatory matters that have arisen from time to time in the normal course of business. While the ultimate results of these items cannot be predicted with certainty we do not expect, at this time, that the resolution of them will have a material adverse effect on our financial position, results of operations or liquidity. In addition we are involved in the following matters:

• In September 2008, the FCC's Office of Inspector General ("OIG") initiated an investigation regarding Alaska DigiTel LLC's (“Alaska DigiTel”) compliance with program rules and requirements under the Lifeline Program. The request covered the period beginning January 1, 2004 through August 31, 2008 and related to amounts received for Lifeline service. Alaska DigiTel was an Alaska based wireless communications company of which we acquired an 81.9% equity interest on January 2, 2007 and the remaining 18.1% equity interest on August 18, 2008 and was subsequently merged with one of our wholly owned subsidiaries in April 2009. Prior to August 18, 2008, our control over the operations of Alaska DigiTel was limited as required by the FCC upon its approval of our initial acquisition completed in January 2007. We responded to this request on behalf of Alaska DigiTel and the GCI companies as affiliates. On January 18, 2011 we reached an agreement with the FCC and the Department of Justice to settle the matter, which required us to contribute $1.6 million to the United States Treasury and granted us a broad release of claims including those under the False Claims Act. The $1.6 million contribution, of which $154,000, $661,000 and $741,000 were recognized in selling, general and administrative expense in the income statements in the years ending December 31, 2010, 2009 and 2008, respectively, was paid in January 2011; and
• In August 2010, a GCI-owned aircraft was involved in an accident resulting in five fatalities and injuries to the remaining four passengers on board.  We had aircraft and liability insurance coverage in effect at the time of the accident. As of December 31, 2011, all claims paid out have been covered by insurance and were recorded net of these recoveries in our Consolidated Income Statements. While some of the claims have been resolved, we cannot predict the likelihood or nature of the total remaining claims, including environmental remediation, related to the accident.

Universal Service

As an ETC, we receive support from the USF to support the provision of wireline local access and wireless service in high cost areas. On November 29, 2011, the FCC published the High Cost Order which divided support to Alaska between Urban and Remote areas. Support for CETCs serving Urban areas that generally include Anchorage, Fairbanks, and Juneau will follow national reforms, capping support per provider per service area as of January 1, 2012, and commencing a five-step phase-down on July 1, 2012. In addition to broader reforms, the FCC tailored revisions specifically for CETCs serving Remote Alaska, intended to address the unique challenges for serving these areas. Support to these locations will be capped and distributed on a per-line basis until the later of July 1, 2014, or the implementation of a successor funding mechanism. A further rulemaking to consider successor funding mechanisms is underway. We cannot predict at this time the outcome of this proceeding or its effect on Remote high cost support available to us, but our revenue for providing local services in these areas would be materially adversely affected by a substantial reduction of USF support.

Cable Service Rate Reregulation

Federal law permits regulation of basic cable programming services rates. However, Alaska law provides that cable television service is exempt from regulation by the RCA unless 25% of a system's subscribers request such regulation by filing a petition with the RCA. At December 31, 2011, only the Juneau system is subject to RCA regulation of its basic service rates. No petition requesting regulation has been filed for any other system. The Juneau system serves 7% of our total basic service subscribers at December 31, 2011.

Code Division Multiple Access (“CDMA”) Network Expansion

During 2007 GCI signed an agreement with a customer to build-out our CDMA network with various milestones through 2012 to provide expanded roaming area coverage. If we fail to meet the schedule, the customer has the right to terminate the agreement and we may be required to pay up to $16.0 million as liquidated damages. We expect to meet the deadlines imposed by the build-out schedule and therefore expect our expenditures to result in an expansion of our wireless facilities rather than payment of the liquidated damages.

TERRA-Southwest

In January 2010 the RUS approved our wholly owned subsidiary, UUI's, application for an $88.2 million loan/grant combination to extend terrestrial broadband service for the first time to Bristol Bay and the Yukon-Kuskokwim Delta, an area in Alaska roughly the size of the state of North Dakota. UUI began construction on TERRA-SW in 2010 and began offering service on this new facility on December 30, 2011. TERRA-SW is now able to serve over 9,000 households and over 700 businesses in the 65 covered communities, as well as numerous public/non-profit/private community anchor institutions and entities, such as regional health care providers, school districts, and other regional and Alaska Native organizations.

TERRA-Northwest

In August 2011, we entered into a financing arrangement under the NMTC program that provided $16.5 million in net cash to help fund the extension of terrestrial broadband service for the first time to rural Northwestern Alaska communities via a high capacity hybrid fiber optic and microwave network. When completed, the project, called TERRA-NW, will connect to the TERRA-SW network and provide a high capacity backbone connection from the served communities to the Internet.

In September 2011 the RCA approved our application for a $5.3 million grant to help fund TERRA-NW. The grant was increased to $6.3 million in January 2012. The NMTC arrangement discussed above and this grant award partially fund backbone network facilities that we would not otherwise be able to construct within our return-on-investment requirements. As a requirement of the funding contracts, we have guaranteed completion of the first phase of the project by December 31, 2012, and completion of the second phase by December 31, 2014. We plan to fund an additional $12.7 million for TERRA-NW and begin construction in 2012 and expect to complete the project in 2014 or earlier if possible.