Frontier Communications 2013 Annual Report Download - page 105

Total rental expense included in our consolidated statements of operations for the years ended December
31, 2013, 2012 and 2011 was $84.4 million, $79.3 million and $70.2 million, respectively.
In our normal course of business, we have obligations under certain non-cancelable arrangements for
services. During 2012, we entered into a “take or pay” arrangement for the purchase of future long distance and
carrier services. Our remaining commitments under the arrangement are $145.5 million and $140.8 million for
the years ending December 31, 2014 and 2015, respectively. As of December 31, 2013, we expect to utilize the
services included within the arrangement and no liability for the “take or pay” provision has been recorded.
We are party to contracts with several unrelated long distance carriers. The contracts provide fees based on
traffic they carry for us subject to minimum monthly fees.
At December 31, 2013, the estimated future payments for obligations under our noncancelable long
distance contracts and service agreements are as follows:
($ in thousands) Amount
Year ending December 31:
2014........................ $28,653
2015........................ 20,796
2016........................ 9,694
2017........................ 4,295
2018........................ 1,204
Thereafter. . ................. 6,000
Total ....................... $70,642
We sold all of our utility businesses as of April 1, 2004. However, we have retained a potential payment
obligation associated with our previous electric utility activities in the State of Vermont. The Vermont Joint
Owners (VJO), a consortium of 14 Vermont utilities, including us, entered into a purchase power agreement
with Hydro-Quebec in 1987. The agreement contains “step-up” provisions that state 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). ASC Topic 840 requires that we disclose “the maximum potential amount of future
payments (undiscounted) that the guarantor could be required to make under the guarantee.” ASC Topic 840
also states 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, 2014 and remained in default for the
duration of the contract (another 2 years), we estimate that our undiscounted purchase obligation for 2014
through 2015 would be approximately $287.4 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.
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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements