Frontier Communications 2013 Annual Report Download - page 42

real property with a fair value of $23.4 million. We made net contributions to our pension plan of $28.6 million
in 2012. We made contributions to our pension plan of $76.7 million in 2011, consisting of cash payments of
$18.6 million and the contribution of real property with a fair value of $58.1 million.
Our pension plan contains provisions that provide certain employees with the option of receiving a lump
sum payment upon retirement. We record these payments as a settlement only if, in the aggregate, they exceed
the sum of the annual service and interest costs for the plan’s net periodic pension benefit cost. During 2013,
lump sum pension settlement payments to terminated or retired participants amounted to $164.6 million, which
exceeded the settlement threshold of $125.4 million. As a result, the Company was required to recognize a non-
cash settlement charge of $44.2 million in 2013 to accelerate the recognition of a portion of the previously
unrecognized actuarial losses in the pension plan. This non-cash charge reduced our recorded net income and
retained earnings, with an offset to accumulated other comprehensive loss in shareholders’ equity. The amount
of any future non-cash settlement charges will be dependent on the level of lump sum benefit payments made
in 2014 and beyond.
Income Taxes
We file a consolidated federal income tax return. We utilize the asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred income taxes are recorded for the tax effect of
temporary differences between the financial statement basis and the tax basis of assets and liabilities using tax
rates expected to be in effect when the temporary differences are expected to reverse.
U.S. GAAP requires applying a “more likely than not” threshold to the recognition and derecognition of
uncertain tax positions either taken or expected to be taken in the Company’s income tax returns. The total
amount of our gross tax liability for tax positions that may not be sustained under a “more likely than not”
threshold amounts to $9.3 million as of December 31, 2013 including interest of $0.6 million. The amount of
our uncertain tax positions for which the statutes of limitations are expected to expire during the next twelve
months and which would affect our effective tax rate is $2.4 million as of December 31, 2013.
Our effective tax rate was 29.0% in 2013 as compared to 33.0% in 2012 and 35.9% in 2011. Income taxes
for 2013 include a $6.5 million net benefit resulting from the adjustment of deferred tax balances, a $5.2
million benefit from federal research and development credits and the impact of a $1.8 million benefit from the
net reversal of reserves for uncertain tax positions, partially offset by the impact of a charge of $5.2 million
resulting from the settlement of the 2010 IRS audit, and a charge of $3.3 million resulting from non-deductible
transaction costs.
Income taxes for 2012 include the net reversal of reserves for uncertain tax positions for $12.3 million,
partially offset by increases in deferred tax balances to reflect changes in estimates and changes in state
effective rates and filing methods.
Income taxes for 2011 include the reduction of deferred tax balances based on the application of enacted
state tax statutes for $6.8 million and the net reversal of a reserve for uncertain tax positions for $9.9 million,
partially offset by the impact of a $10.8 million charge resulting from the enactment on May 25, 2011 of the
Michigan Corporate Income Tax that eliminated certain future tax deductions.
Contingencies
See Note 19 of the Notes to Consolidated Financial Statements included in Part IV of this report for a
discussion of commitments and contingencies. Our contingencies include the potential obligation associated
with our previous electric utility activities in the state of Vermont, along with ongoing regulatory issues and
legal cases in the normal course of our business, including billing disputes.
New Accounting Pronouncements
There were no new accounting standards issued and adopted by the Company in 2013, or that have been
issued but are not required to be adopted until future periods, with any material financial statement impact.
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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES