Frontier Communications 2009 Annual Report Download - page 43

updating the estimated remaining useful lives of our property, plant and equipment assets is performed
annually. We adopted the lives proposed in the study effective October 1, 2009. Our “composite depreciation
rate” decreased from 5.6% to 5.2% as a result of the study. We anticipate depreciation expense of
approximately $335.0 million to $355.0 million for 2010 related to our currently owned properties. We
periodically reassess the useful life of our intangible assets to determine whether any changes to those lives are
required.
Pension and Other Postretirement Benefits
Our estimates of pension expense, other postretirement benefits including retiree medical benefits and
related liabilities are “critical accounting estimates.” We sponsor a noncontributory defined benefit pension
plan covering a significant number of our current and former employees and other postretirement benefit plans
that 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.
All of the employees who are still accruing pension benefits are represented employees. The accounting results
for pension and other postretirement 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 value basis, our pension and other postretirement benefit
obligations 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 affect
corporate bond yields. Our discount rate was 5.75% at year-end 2009, and 6.50% at year-end 2008.
The expected long-term rate of return on plan assets is applied in the determination of 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 2009, we changed our expected long-term rate
of return on plan assets to 8.0% from the 8.25% used in 2008. For 2010, we will assume a rate of return of
8.00%. Our pension plan assets are valued at fair value as of the measurement date.
We expect that our pension and other postretirement benefit expenses for 2010 will be $45.0 million to
$55.0 million (they were $48.6 million in 2009), and that we will make a $10.0 million cash contribution to our
pension plan in 2010. No contributions were made to our pension plan during 2007, 2008 or 2009.
Income Taxes
Our effective tax rates in 2007, 2008 and 2009 were approximately at the statutory rates.
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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES