Frontier Communications 2008 Annual Report Download - page 32

provide medical, dental, life insurance and other benefits for covered retired employees and their beneficiaries
and covered dependents. The pension plans for the majority of our current employees are frozen. The
accounting results for pension and post retirement benefit costs and obligations are dependent upon various
actuarial assumptions applied in the determination of such amounts. These actuarial assumptions include the
following: discount rates, expected long-term rate of return on plan assets, future compensation increases,
employee turnover, healthcare cost trend rates, expected retirement age, optional form of benefit and mortality.
We review these assumptions for changes annually with our independent actuaries. We consider our discount
rate and expected long-term rate of return on plan assets to be our most critical assumptions.
The discount rate is used to value, on a present basis, our pension and postretirement benefit obligation as
of the balance sheet date. The same rate is also used in the interest cost component of the pension and
postretirement benefit cost determination for the following year. The measurement date used in the selection of
our discount rate is the balance sheet date. Our discount rate assumption is determined annually with assistance
from our actuaries based on the pattern of expected future benefit payments and the prevailing rates available
on long-term, high quality corporate bonds that approximate the benefit obligation. In making this
determination we consider, among other things, the yields on the Citigroup Pension Discount Curve, the
Citigroup Above-Median Pension Curve, the general movement of interest rates and the changes in those rates
from one period to the next. This rate can change from year-to-year based on market conditions that impact
corporate bond yields. Our discount rate was 6.50% at year-end 2008 and 2007.
The expected long-term rate of return on plan assets is applied in determining the periodic pension and
postretirement benefit cost as a reduction in the computation of the expense. In developing the expected long-
term rate of return assumption, we considered published surveys of expected market returns, 10 and 20 year
actual returns of various major indices, and our own historical 5 year, 10 year and 20 year investment returns.
The expected long-term rate of return on plan assets is based on an asset allocation assumption of 35% to 55%
in fixed income securities, 35% to 55% in equity securities and 5% to 15% in alternative investments. We
review our asset allocation at least annually and make changes when considered appropriate. Our asset return
assumption is made at the beginning of our fiscal year. In 2008, we did not change our expected long-term rate
of return from the 8.25% used in 2007. Our pension plan assets are valued at actual market value as of the
measurement date.
We expect that our pension and other postretirement benefit expenses for 2009 will be $50.0 million to
$55.0 million (they were $11.2 million in 2008), and that we may be required to make a cash contribution to
our pension plan beginning in 2010. No contribution was made to our pension plan during 2008.
Income Taxes
Our effective tax rates in 2006, 2007 and 2008 were approximately at the statutory rates.
Contingencies
At December 31, 2006, we had a reserve of $8.0 million in connection with a potential environmental
claim in Bangor, Maine. This claim was settled with a payment of $7.625 million plus additional expenses
during the third quarter of 2007.
We currently do not have any contingencies in excess of $5.0 million recorded on our books.
Purchase Price Allocation—Commonwealth and GVN
The allocation of the approximate $1.1 billion paid to the “fair market value” of the assets and liabilities
of Commonwealth is a critical estimate. We finalized our estimate of the fair values assigned to plant, customer
list and goodwill, as more fully described in Notes 3 and 7 to the consolidated financial statements.
Additionally, the estimated expected life of a customer (used to amortize the customer list) is a critical
estimate.
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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES