Frontier Communications 2010 Annual Report Download - page 99

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(20) Commitments and Contingencies:
We anticipate total capital expenditures of approximately $750 million to $780 million for 2011 related to
our Frontier legacy properties and the Acquired Business. Although we from time to time make short-term
purchasing commitments to vendors with respect to these expenditures, we generally do not enter into firm,
written contracts for such activities.
In connection with the Transaction, the Company undertook activities to plan and implement systems
conversions and other initiatives necessary to effectuate the closing (Phase 1). The Company incurred operating
expenses, including deal costs, of approximately $135.6 million and capital expenditures of approximately
$90.6 million in 2010 related to these integration initiatives in Phase 1. The Company continues to engage in
activities to enable the Company to implement its “go to market” strategy in its new markets and to complete
the conversions of all the remaining systems into one platform (Phase 2). The Company also incurred $1.5
million of integration costs and $6.4 million in capital expenditures related to the commencement of these
Phase 2 activities during 2010. The Company currently expects to incur operating expenses and capital
expenditures of approximately $90 million and $60 million, respectively, in 2011 related to these Phase 2
initiatives.
In addition, the Federal Communications Commission (FCC) and certain state regulatory commissions, in
connection with granting their approvals of the Transaction, specified certain capital expenditure and operating
requirements for the acquired Territories for specified periods of time post-closing. These requirements focus
primarily on certain capital investment commitments to expand broadband availability and speeds to at least
85% of the households throughout the acquired Territories with minimum speeds of 3 megabits per second
(Mbps) by the end of 2013 and 4 Mbps by the end of 2015. To satisfy all or part of certain capital investment
commitments to three state regulatory commissions, we placed an aggregate amount of $115.0 million in cash
into escrow accounts and obtained the letter of credit for $190.0 million in the third quarter of 2010. Another
$72.4 million of cash in an escrow account, with an associated liability (reflected in Other liabilities), was
acquired in connection with the Merger to be used for service quality initiatives in the state of West Virginia.
As of December 31, 2010, the Company had a restricted cash balance in these escrow accounts in the aggregate
amount of $187.5 million. The aggregate amount of these escrow accounts and the letter of credit will decrease
over time as Frontier makes the required capital expenditures in the respective states.
We are party to various legal proceedings arising in the normal course of our business covering a wide
range of matters or types of claims including general contract, rights of access, tax, consumer protection,
trademark and patent infringement, employment, regulatory and tort. Litigation is subject to uncertainty and the
outcome of individual matters is not predictable. However, we believe that the ultimate resolution of all such
matters, after considering insurance coverage or other indemnities to which Frontier is entitled, will not have a
material adverse effect on our financial position, results of operations, or our cash flows.
We conduct certain of our operations in leased premises and also lease certain equipment and other assets
pursuant to operating leases. The lease arrangements have terms ranging from 1 to 99 years and several contain
rent escalation clauses providing for increases in monthly rent at specific intervals. When rent escalation
clauses exist, we record annual rental expense based on the total expected rent payments on a straight-line basis
over the lease term. Certain leases also have renewal options. Renewal options that are reasonably assured are
F-40
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements