Frontier Communications 2010 Annual Report Download - page 51

Download and view the complete annual report

Please find page 51 of the 2010 Frontier Communications annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 104

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104

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, 2010 was approximately 97% 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, 2010 and 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 $275.3
million of our outstanding borrowings at December 31, 2010 have fixed interest rates. In addition, our undrawn
$750.0 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, 2010, a near-term change in interest rates would not materially affect our
consolidated financial position, results of operations or cash flows.
Sensitivity analysis of interest rate exposure
At December 31, 2010, the fair value of our long-term debt was estimated to be approximately $8.4
billion, based on our overall weighted average borrowing rate of 8.04% and our overall weighted average
maturity of approximately 10 years. As of December 31, 2010, the weighted average maturity applicable to our
obligations has been reduced from the weighted average maturity as of December 31, 2009 by approximately
2.0 years due to the $3.45 billion of debt that was assumed by Frontier upon consummation of the Transaction.
Equity Price Exposure
Our exposure to market risks for changes in security prices as of December 31, 2010 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 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 and 2010. The Company’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
approximately $142.5 million that represents a receivable of the Plan 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. We expect that we will make cash contributions to our pension plan
of approximately $50 million in 2011.
50
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES