Frontier Communications 2009 Annual Report Download - page 101

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At December 31, 2009, the estimated future payments for obligations under our noncancelable long
distance contracts and service agreements are as follows:
($ in thousands)
Year Amount
2010. . . .......... $11,026
2011. . . .......... 6,407
2012. . . .......... 4,421
2013. . . .......... 4,125
2014. . . .......... 4,125
Thereafter........ 165
Total $30,269
We sold all of our utility businesses as of April 1, 2004. However, we have retained a potential payment
obligation associated with our previous electric utility activities in the State of Vermont. The Vermont Joint
Owners (VJO), a consortium of 14 Vermont utilities, including us, entered into a purchase power agreement
with Hydro-Quebec in 1987. The agreement contains “step-up” provisions that state that if any VJO member
defaults on its purchase obligation under the contract to purchase power from Hydro-Quebec, then the other
VJO participants will assume responsibility for the defaulting party’s share on a pro-rata basis. Our pro-rata
share of the purchase power obligation is 10%. If any member of the VJO defaults on its obligations under the
Hydro-Quebec agreement, then the remaining members of the VJO, including us, may be required to pay for a
substantially larger share of the VJO’s total power purchase obligation for the remainder of the agreement
(which runs through 2015). U.S. GAAP rules require that we disclose “the maximum potential amount of future
payments (undiscounted) the guarantor could be required to make under the guarantee.” U.S. GAAP rules also
state that we must make such disclosure “even if the likelihood of the guarantor’s having to make any
payments under the guarantee is remote” As noted above, our obligation only arises as a result of default by
another VJO member, such as upon bankruptcy. Therefore, to satisfy the “maximum potential amount”
disclosure requirement we must assume that all members of the VJO simultaneously default, a highly unlikely
scenario given that the two members of the VJO that have the largest potential payment obligations are publicly
traded with credit ratings equal to or superior to ours, and that all VJO members are regulated utility providers
with regulated cost recovery. Despite the remote chance that such an event could occur, or that the State of
Vermont could or would allow such an event, assuming that all the members of the VJO defaulted on January
1, 2010 and remained in default for the duration of the contract (another 6 years), we estimate that our
undiscounted purchase obligation for 2010 through 2015 would be approximately $0.6 billion. In such a
scenario the Company would then own the power and could seek to recover its costs. We would do this by
seeking to recover our costs from the defaulting members and/or reselling the power to other utility providers
or the northeast power grid. There is an active market for the sale of power. We could potentially lose money if
we were unable to sell the power at cost. We caution that we cannot predict with any degree of certainty any
potential outcome.
At December 31, 2009, we have outstanding performance letters of credit as follows:
($ in thousands)
CNA ....................... $26,618
State of New York . . ........ 1,042
Total ....................... $27,660
CNA serves as our agent with respect to general liability claims (auto, workers compensation and other
insured perils of the Company). As our agent, they administer all claims and make payments for claims on our
behalf. We reimburse CNA for such services upon presentation of their invoice. To serve as our agent and
make payments on our behalf, CNA requires that we establish a letter of credit in their favor. CNA could
potentially draw against this letter of credit if we failed to reimburse CNA in accordance with the terms of our
agreement. The value of the letter of credit is reviewed annually and adjusted based on claims history.
None of the above letters of credit restrict our cash balances.
F-39
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements