Frontier Communications 2011 Annual Report Download - page 105

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
F-42
1987. The agreement contains “step-up” provisions that state that if any VJO member defaults on its purchase
obligation under the contract to purchase power from Hydro-Quebec, then the other VJO participants will assume
responsibility for the defaulting party’s share on a pro-rata basis. Our pro-rata share of the purchase power obligation
is 10%. If any member of the VJO defaults on its obligations under the Hydro-Quebec agreement, then the remaining
members of the VJO, including us, may be required to pay for a substantially larger share of the VJO’s total purchase
power obligation for the remainder of the agreement (which runs through 2015). U.S. GAAP rules require that we
disclose “the maximum potential amount of future payments (undiscounted) the guarantor could be required to make
under the guarantee.” U.S. GAAP rules also state that we must make such disclosure “… even if the likelihood of the
guarantor’s having to make any payments under the guarantee is remote…” As noted above, our obligation only arises
as a result of default by another VJO member, such as upon bankruptcy. Therefore, to satisfy the “maximum potential
amount” disclosure requirement we must assume that all members of the VJO simultaneously default, an unlikely
scenario given that all VJO members are regulated utility providers with regulated cost recovery. Despite the remote
chance that such an event could occur, or that the State of Vermont could or would allow such an event, assuming that
all the members of the VJO defaulted on January 1, 2012 and remained in default for the duration of the contract
(another 4 years), we estimate that our undiscounted purchase obligation for 2012 through 2015 would be
approximately $316.1 million. In such a scenario, the Company would then own the power and could seek to recover
its costs. We would do this by seeking to recover our costs from the defaulting members and/or reselling the power to
other utility providers or the northeast power grid. There is an active market for the sale of power. We could
potentially lose money if we were unable to sell the power at cost. We caution that we cannot predict with any degree
of certainty any potential outcome.
At December 31, 2011, we have outstanding performance letters of credit as follows:
($ in thousands)
Public Service Commission of West Virginia 100,000$
CNA 43,409
State of New York 1,042
Other 705
Total 145,156$
CNA serves as our agent with respect to general liability claims (auto, workers compensation and other insured perils
of the Company). As our agent, they administer all claims and make payments for claims on our behalf. We reimburse
CNA for such services upon presentation of their invoice. To serve as our agent and make payments on our behalf,
CNA requires that we establish a letter of credit in their favor. CNA could potentially draw against this letter of credit if
we failed to reimburse CNA in accordance with the terms of our agreement. The value of the letter of credit is reviewed
annually and adjusted based on claims history.
None of the above letters of credit restrict our cash balances.