Frontier Communications 2010 Annual Report Download - page 40

$581.3 million, including approximately $142.5 million that represents a receivable of the Plan as of December
31, 2010, were transferred into the Plan during the second half of 2010, with the receivable to be settled by the
transfer of assets by the end of the third quarter of 2011. We sponsor a noncontributory defined benefit pension
plan covering a significant number of our current and former Frontier legacy 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. 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 Towers-Watson Index, 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 5.25% at year-end 2010, and 5.75% at year-
end 2009.
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 and 2010, our expected long-term rate of
return on plan assets was 8.0%. Our actual return on plan assets in 2010 was 12.1%. For 2011, we will continue
to assume a rate of return of 8.0%. 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 2011 will be approximately $70
million to $80 million before amounts capitalized into the cost of capital expenditures (they were $68.4 million
in 2010 before amounts capitalized into the cost of capital expenditures, including the plan expenses of the
Acquired Business for the second half of 2010), and that we will make a cash contribution to our pension plan
of approximately $50 million in 2011. We made cash contributions of $13.1 million in 2010. No contributions
were made to our pension plan during 2008 or 2009.
Income Taxes
Our effective tax rate in 2010 increased to 42.5%, primarily related to the write-off of certain deferred tax
assets of approximately $11.3 million related to Merger transaction costs which were not tax deductible. Prior
to the closing of the Merger, these costs were deemed to be tax deductible as the Transaction had not yet been
successfully completed. These costs were incurred to facilitate the Merger and once the Merger closed, these
costs must be capitalized for tax purposes.
Our effective tax rates in 2008 and 2009 were approximately at the statutory rates.
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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES