Frontier Communications 2014 Annual Report Download - page 51

acquired, the purchase price allocation could be materially impacted by applying a different set of
assumptions and estimates.
The Company allocated $2.0 billion in total consideration to the “fair market value” of the assets
and liabilities acquired in the Connecticut Acquisition. The estimates of the fair values assigned to
property, plant and equipment, customer list and goodwill, are more fully described in Note 3 of the
Notes to Consolidated Financial Statements.
Recent Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements included in Part IV of this report for
additional information related to recent accounting literature.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk in the normal course of our business operations due to ongoing
investing and funding activities, including those associated with our pension plan assets. Market risk
refers to the potential change in fair value of a financial instrument as a result of fluctuations in interest
rates and equity prices. We do not hold or issue derivative instruments, derivative commodity
instruments or other financial instruments for trading purposes. As a result, we do not undertake any
specific actions to cover our exposure to market risks, and we are not party to any market risk
management agreements other than in the normal course of business. Our primary market risk
exposures from interest rate risk and equity price risk are as follows:
Interest Rate Exposure
Our exposure to market risk for changes in interest rates relates primarily to the interest-bearing
portion of our pension investment portfolio and related obligations, as well as our floating rate
indebtedness. As of December 31, 2014, 92% of our long-term debt had fixed interest rates. We had
no interest rate swap agreements related to our fixed rate debt in effect at December 31, 2014 and
2013. The Company believes that its exposure to interest rate changes is minimal.
Our objectives in managing our interest rate risk are to limit the impact of interest rate changes on
earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, only
$753 million of our outstanding borrowings at December 31, 2014 have floating interest rates. In
addition, our undrawn $750 million revolving credit facility has interest rates that float with the LIBO
Rate, as defined. Consequently, we have limited material future earnings or cash flow exposures from
changes in interest rates on our debt. An adverse change in interest rates would increase the amount
that we pay on our variable rate obligations and could result in fluctuations in the fair value of our fixed
rate obligations. Based upon our overall interest rate exposure at December 31, 2014, a near-term
change in interest rates would not materially affect our consolidated financial position, results of
operations or cash flows.
At December 31, 2014, the fair value of our long-term debt was estimated to be approximately
$10 billion, based on our overall weighted average borrowing rate of 7.62% and our overall weighted
average maturity of approximately eight years. As of December 31, 2014, there has been no significant
change in the weighted average maturity applicable to our obligations since December 31, 2013.
Equity Price Exposure
Our exposure to market risks for changes in equity security prices as of December 31, 2014 is
limited to our pension plan assets. We have no other security investments of any significant amount.
The Company’s pension plan assets increased from $1,217 million at December 31, 2013 to
$1,673 million at December 31, 2014, an increase of $456 million, or 38%. This increase is a result of
asset transfers from the AT&T pension plan trusts of $343 million related to the Connecticut
Acquisition, including approximately $35 million that represents a receivable of the Plan as of
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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES