Frontier Communications 2013 Annual Report Download - page 50

Depreciation and amortization expense for 2013 decreased $97.3 million, or 8%, to $1,169.5 million, as
compared to 2012. Amortization expense decreased $94.1 million in 2013, primarily due to the amortization
related to the customer base that is amortized on an accelerated method, lower amortization expense associated
with the accelerated write-off of certain software licenses no longer required for operations as a result of the
completed systems conversions related to the 2010 Transaction during the first quarter of 2012 and certain
Frontier legacy properties that were fully amortized in 2012. Depreciation expense decreased $3.2 million in
2013, primarily due to a lower net asset base, partially offset by changes in the remaining useful lives of certain
assets.
Depreciation and amortization expense for 2012 decreased $136.4 million, or 10%, to $1,266.8 million, as
compared to 2011. Amortization expense decreased primarily due to lower amortization expense associated
with certain Frontier legacy properties that were fully amortized in 2012 and the amortization related to the
customer base that is amortized on an accelerated method. Depreciation expense decreased primarily due to a
lower net asset base and changes in the remaining useful lives of certain plant assets.
We annually commission an independent study to update the estimated remaining useful lives of our plant
assets. The latest study was completed in the fourth quarter of 2013, and after review and analysis of the
results, we adopted new lives for certain plant assets as of October 1, 2013. This change had an immaterial
impact on depreciation expense for 2013. Our “composite depreciation rate” for plant assets was 6.24% as a
result of the study. We anticipate depreciation expense of approximately $800 million to $820 million for 2014
for our current business operations.
Amortization expense for 2013, 2012 and 2011 included $328.0 million, $410.8 million and $465.4
million, respectively, for intangible assets (primarily customer base) that were acquired in the 2010 Transaction
based on an estimated useful life of nine years for the residential customer base and 12 years for the business
customer base, amortized on an accelerated method. We anticipate amortization expense of approximately $285
million for 2014 for our current business operations.
PENSION SETTLEMENT COSTS
($ in thousands) 2013 2012 2011
Pension settlement costs . ......................................................... $44,163 $— $—
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 individuals 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 $44.2 million in 2013, to accelerate the recognition of a portion of the previously
unrecognized actuarial losses in the pension plan. This non-cash charge reduced our recorded net income and
retained earnings, with an offset to accumulated other comprehensive loss in shareholders’ equity. The amount
of any future non-cash settlement charges will be dependent on the level of lump sum benefit payments made
in 2014 and beyond.
ACQUISITION AND INTEGRATION COSTS
($ in thousands) Amount
$ Increase
(Decrease)
% Increase
(Decrease) Amount
$ Increase
(Decrease)
% Increase
(Decrease) Amount
2013 2012 2011
Acquisition and integration costs . . . . . . . $9,652 $(72,085) (88%) $81,737 $(61,409) (43%) $143,146
In 2013, acquisition costs included expenses incurred in connection with the AT&T Transaction (legal,
financial advisory, accounting, regulatory and other related costs). In prior years, integration costs included
expenses incurred in connection with the 2010 Transaction to integrate the network and information technology
platforms and to enable other integration and cost savings initiatives. The Company incurred $9.7 million,
$81.7 million and $143.1 million of operating expenses during 2013, 2012 and 2011, respectively. We also
incurred $54.1 million and $76.5 million in capital expenditures related to integration activities during 2012
and 2011, respectively. All integration activities related to the 2010 Transaction were completed as of the end
of 2012. We anticipate closing the AT&T Transaction during the second half of 2014.
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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES