Frontier Communications 2014 Annual Report Download - page 107

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Total rental expense included in our consolidated statements of income for the years ended
December 31, 2014, 2013 and 2012 was $100 million, $84 million and $79 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 commitment under the arrangement is $141 million for the
year ending December 31, 2015. As of December 31, 2014, we expect to utilize the services included
within the arrangement and no liability for the “take or pay” provision has been recorded.
We are party to contracts with several unrelated long distance carriers. The contracts provide fees
based on traffic they carry for us subject to minimum monthly fees.
At December 31, 2014, the estimated future payments for obligations under our noncancelable
long distance contracts and service agreements are as follows:
($ in thousands) Amount
Year ending December 31:
2015 . . . . . . . . . . . . . . . . . . . . . . . $28,401
2016 . . . . . . . . . . . . . . . . . . . . . . . 17,011
2017 . . . . . . . . . . . . . . . . . . . . . . . 16,906
2018 . . . . . . . . . . . . . . . . . . . . . . . 30
2019 . . . . . . . . . . . . . . . . . . . . . . . —
Thereafter . . . . . . . . . . . . . . . . . . —
Total . . . . . . . . . . . . . . . . . . . . . . . $62,348
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). U.S.
GAAP rules require that we disclose “the maximum potential amount of future payments
(undiscounted) that 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, 2015 and remained in default for the duration of the contract (another 1 year),
we estimate that our undiscounted purchase obligation through 2015 would be approximately $144
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.
F-46
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements