Frontier Communications 2010 Annual Report Download - page 22

Volatility in asset values related to Frontier’s pension plan and our assumption of the Acquired
Business’ pension plan obligations may require us to make cash contributions to fund pension plan
liabilities.
During 2008 and 2009, the diminished availability of credit and liquidity in the United States and
throughout the global financial system resulted in substantial volatility in financial markets and the banking
system. These and other economic events have had an adverse impact on investment portfolios. Frontier’s
pension plan assets have increased from $608.6 million at December 31, 2009, to $1,290.3 million at December
31, 2010, an increase of $681.7 million, or 112%. This increase is a result of asset transfers from the Verizon
pension plan trusts of $581.3 million (including a receivable of $142.5 million as of December 31, 2010), less
ongoing benefit payments of $67.3 million, offset by $154.6 million of positive investment returns and cash
contributions of $13.1 million during 2010. As a 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, Frontier’s pension expenses increased in 2009 and 2010 as compared to 2008. While
pension asset values increased in 2010, Frontier made cash contributions to its pension plan of $13.1 million in
2010, and expects to make cash contributions of approximately $50 million in 2011. Further volatility in our
asset values or returns may require us to make additional cash contributions in future years.
Substantial debt and debt service obligations may adversely affect us.
We have a significant amount of indebtedness, which amounted to approximately $8.3 billion at December
31, 2010. We have access to a $750.0 million revolving credit facility and 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. Despite the substantial indebtedness
that we have, we are not prohibited from incurring additional indebtedness.
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;
•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.
We will require substantial capital to upgrade and enhance our operations.
The Acquired Business’ historical capital expenditures, excluding expenditures relating to the fiber-to-the-
home network, were significantly lower than our level of capital expenditures for our legacy operations when
compared on a per access line basis. Replacing or upgrading our infrastructure will require significant capital
expenditures, including any expected or unexpected expenditures necessary to make replacements or upgrades
to the existing infrastructure of the Acquired Business. If this capital is not available when needed or required
as a result of the regulatory approval process in connection with the Transaction, our 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, our plant may cause our capital expenditures to increase in the
future. In addition, our dividend, at an annual rate of $0.75 per share as of July 1, 2010, will utilize a
significant portion of our cash generated by operations and therefore could limit our ability to increase capital
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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES