Frontier Communications 2009 Annual Report Download - page 22

result of the continued accrual of pension benefits under the applicable pension plan and the cumulative
negative investment returns arising from the contraction of the global financial markets since 2007, Frontier’s
pension expenses increased in 2009. While the pension asset values have increased in 2009, Frontier expects to
make a cash contribution to its pension plan of $10.0 million in 2010. Once the merger is consummated, the
Company will maintain Frontier’s pension plan and will be responsible for contributions to fund the plan’s
liabilities, and may be required to continue making these cash contributions in respect of liabilities under
Frontier’s pension plan. The Company will also, upon consummation of the merger, maintain pension plans that
assume the Spinco business’s pension plan liabilities for active employees. The applicable Verizon tax-qualified
pension plans will transfer assets to the Spinco pension plans pursuant to applicable law and the terms of the
employee matters agreement entered into among Verizon, Spinco and Frontier. The aggregate transfer related to
the tax-qualified pension plans for active union employees will be sufficient for full funding of projected
benefit obligations in the aggregate. Following the merger, the Company will be responsible for making any
required contributions to the new pension plans to fund liabilities of the plans, and the ongoing pension
expenses of the Spinco business may require the Company to make cash contributions in respect of the Spinco
business’s pension plan liabilities.
Substantial debt and debt service obligations may adversely affect us.
We have a significant amount of indebtedness, which amounted to approximately $4.8 billion at December
31, 2009. We may also obtain additional long-term debt and working capital lines of credit to meet future
financing needs, subject to certain restrictions under the terms of our existing indebtedness, which would
increase our total debt. If the Verizon Transaction is completed the Company will have additional indebtedness
in the amount of approximately $3.4 billion, at the closing of the Verizon Transaction. Despite the substantial
additional indebtedness that the Company would then have, the Company would not be prohibited from
incurring even more indebtedness. If the Verizon Transaction is completed and the Company was to incur
additional indebtedness, the risks that result from our substantial indebtedness could be magnified.
The potential significant negative consequences on our financial condition and results of operations that
could result from our substantial debt include:
•limitations on our ability to obtain additional debt or equity financing, particularly in light of the current
credit environment;
•instances in which we are unable to meet the financial covenants contained in our debt agreements or to
generate cash sufficient to make required debt payments, which circumstances have the potential of
accelerating the maturity of some or all of our outstanding indebtedness;
•the allocation of a substantial portion of our cash flow from operations to service our debt, thus reducing
the amount of our cash flow available for other purposes, including operating costs, capital expenditures
and dividends that could improve our competitive position, results of operations or stock price;
•requiring us to sell debt or equity securities or to sell some of our core assets, possibly on unfavorable
terms, to meet payment obligations;
•compromising our flexibility to plan for, or react to, competitive challenges in our business and the
communications industry; and
•the possibility of our being put at a competitive disadvantage with competitors who do not have as much
debt as us, and competitors who may be in a more favorable position to access additional capital
resources.
The Company will require substantial capital to upgrade and enhance its operations.
Verizon’s historical capital expenditures in connection with the Spinco business, excluding FiOS, have
been significantly lower than Frontier’s level of capital expenditures. Replacing or upgrading the Company’s
infrastructure will require significant capital expenditures, including any expected or unexpected expenditures
necessary to make replacements or upgrades to the existing infrastructure of the Spinco business. If this capital
is not available when needed, the Company’s business will be adversely affected. Responding to increases in
competition, offering new services, and improving the capabilities of, or reducing the maintenance costs
associated with, the Company’s plant may cause the Company’s capital expenditures to increase in the future.
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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES