Frontier Communications 2009 Annual Report Download - page 54

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Disclosure of primary market risks and how they are managed
We are exposed to market risk in the normal course of our business operations due to ongoing investing
and funding activities, including those associated with our pension assets. Market risk refers to the potential
change in fair value of a financial instrument as a result of fluctuations in interest rates and equity prices. We
do not hold or issue derivative instruments, derivative commodity instruments or other financial instruments for
trading purposes. As a result, we do not undertake any specific actions to cover our exposure to market risks,
and we are not party to any market risk management agreements other than in the normal course of business.
Our primary market risk exposures are interest rate risk and equity price risk as follows:
Interest Rate Exposure
Our exposure to market risk for changes in interest rates relates primarily to the interest-bearing portion of
our investment portfolio. Our long-term debt as of December 31, 2009 was approximately 94% fixed rate debt
with minimal exposure to interest rate changes. We had no interest rate swap agreements related to our fixed
rate debt in effect at December 31, 2009.
Our objectives in managing our interest rate risk are to limit the impact of interest rate changes on
earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, all but $278.1
million of our outstanding borrowings at December 31, 2009 have fixed interest rates. In addition, our undrawn
$250.0 million revolving credit facility has interest rates that float with LIBOR, as defined. Consequently, we
have limited material future earnings or cash flow exposures from changes in interest rates on our long-term
debt. An adverse change in interest rates would increase the amount that we pay on our variable obligations and
could result in fluctuations in the fair value of our fixed rate obligations. Based upon our overall interest rate
exposure at December 31, 2009, a near-term change in interest rates would not materially affect our
consolidated financial position, results of operations or cash flows.
On January 15, 2008, we terminated all of our interest rate swap agreements representing $400.0 million
notional amount of indebtedness associated with our Senior Notes due in 2011 and 2013. Cash proceeds on the
swap terminations of approximately $15.5 million were received in January 2008. The related gain has been
deferred on the consolidated balance sheet, and is being amortized into interest expense over the term of the
associated debt.
Sensitivity analysis of interest rate exposure
At December 31, 2009, the fair value of our long-term debt was estimated to be approximately $4.6
billion, based on our overall weighted average borrowing rate of 7.85% and our overall weighted average
maturity of approximately 11.5 years. As of December 31, 2009, the weighted average maturity applicable to
our obligations had been extended over the weighted average maturity as of December 31, 2008 by
approximately 1.5 years due to the debt offerings and refinancing activities that occurred during 2009.
Equity Price Exposure
Our exposure to market risks for changes in security prices as of December 31, 2009 is limited to our
pension assets. We have no other security investments of any material amount.
During 2008 and 2009, the diminished availability of credit and liquidity in the United States and
throughout the global financial system has resulted in substantial volatility in financial markets and the banking
system. These and other economic events have had an adverse impact on investment portfolios.
The decline in the value of our pension plan assets during 2008 resulted in an increase in our pension
expense in 2009. The Company’s pension plan assets have increased from $589.8 million at December 31,
2008 to $608.6 million at December 31, 2009, an increase of $18.8 million, or 3%. This increase is a result of
positive investment returns of $90.2 million, or 15%, partially offset by ongoing benefit payments of $71.4
million, or 12%, during 2009. We expect that we will make a $10.0 million cash contribution to our pension
plan in 2010.
52
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES