XNAS:FTR Frontier Communications Corp Class B Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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FRONTIER COMMUNICATIONS CORPORATION


FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012







 
 

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q
(Mark One)
x  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

or

¨  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________to__________

Commission file number:  001-11001

FRONTIER COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
 
06-0619596
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
   
     
3 High Ridge Park
   
Stamford, Connecticut   
 
06905
(Address of principal executive offices)
 
(Zip Code)
     
(203) 614-5600
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   X        No ___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
  
Yes   X         No ___
                                                                              
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

         Large accelerated filer [X]                  Accelerated filer [  ]                     Non-accelerated filer [  ]                     Smaller reporting company  [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes             No  X    

The number of shares outstanding of the registrant’s Common Stock as of May 2, 2012 was 998,448,000.

 
 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Index


 
Page No.
Part I.  Financial Information (Unaudited)
 
   
Item 1.  Financial Statements
 
   
     Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011
2
   
     Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011
3
   
     Consolidated Statements of Comprehensive Income for the three months ended
March 31, 2012 and 2011
 
3
   
     Consolidated Statements of Equity for the three months ended March 31, 2011, the nine months
     ended December 31, 2011 and the three months ended March 31, 2012
 
4
   
     Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011
5
   
     Notes to Consolidated Financial Statements
6
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
   
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
34
   
Item 4.  Controls and Procedures
35
   
Part II.  Other Information
 
   
Item 1.  Legal Proceedings
36
   
Item 1A.  Risk Factors
36
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
36
   
Item 4.  Mine Safety Disclosure
37
   
Item 6.  Exhibits
38
   
Signature
39
   





 
1

 

PART I.  FINANCIAL INFORMATION

Item 1.Financial Statements

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
 
   
(Unaudited)
       
   
March 31, 2012
   
December 31, 2011
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 365,814     $ 326,094  
Accounts receivable, less allowances of $104,125 and $107,048, respectively
    525,252       585,157  
Prepaid expenses
    61,949       63,422  
Income taxes and other current assets
    264,161       264,357  
Total current assets
    1,217,176       1,239,030  
                 
Restricted cash
    139,255       144,680  
Property, plant and equipment, net
    7,501,149       7,547,523  
Goodwill
    6,337,719       6,337,719  
Other intangibles, net
    1,817,901       1,964,505  
Other assets
    205,050       196,311  
Total assets
  $ 17,218,250     $ 17,429,768  
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Long-term debt due within one year
  $ 674,746     $ 94,016  
Accounts payable
    327,584       519,548  
Advanced billings
    150,174       152,784  
Accrued other taxes
    72,907       64,392  
Accrued interest
    212,107       169,340  
Other current liabilities
    138,699       152,136  
Total current liabilities
    1,576,217       1,152,216  
                 
Deferred income taxes
    2,478,924       2,458,018  
Pension and other postretirement benefits
    929,210       918,701  
Other liabilities
    219,527       225,858  
Long-term debt
    7,614,392       8,205,841  
                 
Equity:
               
Shareholders' equity of Frontier:
               
Common stock, $0.25 par value (1,750,000,000 authorized shares,
               
998,512,000 and 995,128,000 outstanding, respectively, and
               
1,027,986,000 issued, at March 31, 2012 and December 31, 2011)
    256,997       256,997  
Additional paid-in capital
    4,729,338       4,773,383  
Retained earnings
    153,638       226,721  
Accumulated other comprehensive loss, net of tax
    (382,696 )     (386,963 )
Treasury stock
    (370,016 )     (415,001 )
Total shareholders' equity of Frontier
    4,387,261       4,455,137  
Noncontrolling interest in a partnership
    12,719       13,997  
Total equity
    4,399,980       4,469,134  
Total liabilities and equity
  $ 17,218,250     $ 17,429,768  
                 
The accompanying Notes are an integral part of these Consolidated Financial Statements.
 
2
 
PART I.  FINANCIAL INFORMATION (Continued)


FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
($ in thousands, except for per-share amounts)
(Unaudited)
 
   
2012
   
2011
 
             
Revenue
  $ 1,268,054     $ 1,346,697  
                 
Operating expenses:
               
Network access expenses
    115,569       151,284  
Other operating expenses
    551,583       580,340  
Depreciation and amortization
    357,300       351,257  
Integration costs
    35,144       13,223  
Total operating expenses
    1,059,596       1,096,104  
                 
Operating income
    208,458       250,593  
                 
Investment income
    2,103       3,115  
Other income, net
    3,485       6,470  
Interest expense
    164,862       167,415  
                 
Income before income taxes
    49,184       92,763  
Income tax expense
    18,694       36,567  
                 
Net income
    30,490       56,196  
Less: Income attributable to the noncontrolling interest in a partnership
    3,722       1,485  
Net income attributable to common shareholders of Frontier
  $ 26,768     $ 54,711  
                 
Basic and diluted net income per common share attributable to common
               
shareholders of Frontier
  $ 0.03     $ 0.05  
                 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
($ in thousands)
(Unaudited)

   
2012
   
2011
 
             
Net income
  $ 30,490     $ 56,196  
Other comprehensive income, net
               
   of tax (see Note 15)
    4,267       1,655  
Comprehensive income
    34,757       57,851  
                 
Less:  Comprehensive income
               
   attributable to the noncontrolling
               
   interest in a partnership
    (3,722 )     (1,485 )
                 
Comprehensive income attributable to
               
   the common shareholders of Frontier
  $ 31,035     $ 56,366  
                 
The accompanying Notes are an integral part of these Consolidated Financial Statements.
 
3

 


 PART I.  FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2011, THE NINE MONTHS ENDED DECEMBER 31, 2011 AND THE THREE MONTHS ENDED MARCH 31, 2012
($ and shares in thousands)
(Unaudited)


   
Frontier Shareholders
             
                           
    Accumulated
                   
               
Additional
         
Other
                         
   
Common Stock
   
Paid-In
   
Retained
   
Comprehensive
   
Treasury Stock
   
Noncontrolling
   
Total
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Loss
   
Shares
   
Amount
   
Interest
   
Equity
 
                                                       
Balance January 1, 2011
    1,027,986     $ 256,997     $ 5,525,471     $ 77,107     $ (229,549 )     (34,131 )   $ (433,286 )   $ 13,003     $ 5,209,743  
Stock plans
    -       -       (17,070 )     -       -       1,370       18,591       -       1,521  
Dividends on common stock
    -       -       (186,605 )     -       -       -       -       -       (186,605 )
Net income
    -       -       -       54,711       -       -       -       1,485       56,196  
Other comprehensive income, net
                                                                       
  of tax
    -       -       -       -       1,655       -       -       -       1,655  
Distributions
    -       -       -       -       -       -       -       (1,500 )     (1,500 )
Balance March 31, 2011
    1,027,986       256,997       5,321,796       131,818       (227,894 )     (32,761 )     (414,695 )     12,988       5,081,010  
Stock plans
    -       -       11,369       -       -       (97 )     (306 )     -       11,063  
Dividends on common stock
    -       -       (559,782 )     -       -       -       -       -       (559,782 )
Net income
    -       -       -       94,903       -       -       -       6,509       101,412  
Other comprehensive income, net
                                                                       
  of tax
    -       -       -       -       (159,069 )     -       -       -       (159,069 )
Distributions
    -       -       -       -       -       -       -       (5,500 )     (5,500 )
Balance December 31, 2011
    1,027,986       256,997       4,773,383       226,721       (386,963 )     (32,858 )     (415,001 )     13,997       4,469,134  
Stock plans
    -       -       (44,045 )     -       -       3,384       44,985       -       940  
Dividends on common stock
    -       -       -       (99,851 )     -       -       -       -       (99,851 )
Net income
    -       -       -       26,768       -       -       -       3,722       30,490  
Other comprehensive income, net
                                                                       
  of tax
    -       -       -       -       4,267       -       -       -       4,267  
Distributions
    -       -       -       -       -       -       -       (5,000 )     (5,000 )
Balance March 31, 2012
    1,027,986     $ 256,997     $ 4,729,338     $ 153,638     $ (382,696 )     (29,474 )   $ (370,016 )   $ 12,719     $ 4,399,980  
                                                                         
                                                                         


The accompanying Notes are an integral part of these Consolidated Financial Statements.

 
4

 



PART I.  FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
($ in thousands)
(Unaudited)
 
   
2012
   
2011
 
             
Cash flows provided by (used in) operating activities:
           
Net income
  $ 30,490     $ 56,196  
Adjustments to reconcile net income to net cash provided by
               
   operating activities:
               
Depreciation and amortization expense
    357,300       351,257  
Stock based compensation expense
    3,718       3,584  
Pension/OPEB costs
    12,403       11,279  
Other non-cash adjustments
    1,537       (2,999 )
Deferred income taxes
    15,764       27,744  
Change in accounts receivable
    59,905       30,996  
Change in accounts payable and other liabilities
    (102,042 )     29,469  
Change in prepaid expenses, income taxes and other current assets
    3,438       6,588  
Net cash provided by operating activities
    382,513       514,114  
                 
Cash flows provided from (used by) investing activities:
               
Capital expenditures - Business operations
    (208,522 )     (203,534 )
Capital expenditures - Integration activities
    (15,731 )     (5,578 )
Cash transferred from escrow
    5,425       3,349  
Other assets purchased and distributions received, net
    (5,918 )     (6,556 )
Net cash used by investing activities
    (224,746 )     (212,319 )
                 
Cash flows provided from (used by) financing activities:
               
Long-term debt payments
    (14,502 )     (969 )
Dividends paid
    (99,851 )     (186,605 )
Repayment of customer advances for construction,
               
   distributions to noncontrolling interests and other
    (3,694 )     (6,102 )
Net cash used by financing activities
    (118,047 )     (193,676 )
                 
                 
Increase in cash and cash equivalents
    39,720       108,119  
Cash and cash equivalents at January 1,
    326,094       251,263  
                 
Cash and cash equivalents at March 31,
  $ 365,814     $ 359,382  
                 
Supplemental cash flow information:
               
Cash paid (received) during the period for:
               
Interest
  $ 118,524     $ 119,067  
Income taxes (refunds)
  $ (369 )   $ 8,946  
                 
                 
 
The accompanying Notes are an integral part of these Consolidated Financial Statements.

 
5

 

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(1)  
Summary of Significant Accounting Policies:
(a)  
Basis of Presentation and Use of Estimates:
Frontier Communications Corporation and its subsidiaries are referred to as “we,” “us,” “our,” “Frontier,” or the “Company” in this report. Our interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2011. Certain reclassifications of balances previously reported have been made to conform to the current presentation. All significant intercompany balances and transactions have been eliminated in consolidation. These interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring accruals) considered necessary, in the opinion of Frontier’s management, to present fairly the results for the interim periods shown.  Revenues, net income and cash flows for any interim periods are not necessarily indicative of results that may be expected for the full year. For our interim financial statements as of and for the period ended March 31, 2012, we evaluated subsequent events and transactions for potential recognition or disclosure through the date that we filed this quarterly report on Form 10-Q with the Securities and Exchange Commission (SEC).

The preparation of our interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities at the date of the financial statements, (ii) the disclosure of contingent assets and liabilities, and (iii) the reported amounts of revenue and expenses during the reporting period.  Actual results may differ from those estimates.  Estimates and judgments are used when accounting for allowance for doubtful accounts, impairment of long-lived assets, intangible assets, depreciation and amortization, income taxes, purchase price allocations, contingencies, and pension and other postretirement benefits, among others. Certain information and footnote disclosures have been excluded and/or condensed pursuant to SEC rules and regulations.

(b)  
Revenue Recognition:
Revenue is recognized when services are provided or when products are delivered to customers.  Revenue that is billed in advance includes: monthly recurring network access services, special access services and monthly recurring local line and unlimited fixed long distance bundle charges.  The unearned portion of these fees is initially deferred as a component of other liabilities on our consolidated balance sheet and recognized as revenue over the period that the services are provided.  Revenue that is billed in arrears includes: non-recurring network access services, switched access services, non-recurring local services and long-distance services.  The earned but unbilled portion of these fees is recognized as revenue in our consolidated statements of operations and accrued in accounts receivable in the period that the services are provided.  Excise taxes are recognized as a liability when billed.  Installation fees and their related direct and incremental costs are initially deferred and recognized as revenue and expense over the average term of a customer relationship.  We recognize as current period expense the portion of installation costs that exceeds installation fee revenue.

As required by law, the Company collects various taxes from its customers and subsequently remits these taxes to governmental authorities. Substantially all of these taxes are recorded through the consolidated balance sheet and presented on a net basis in our consolidated statements of operations.  We also collect Universal Service Fund (USF) surcharges from customers (primarily federal USF) that we have recorded on a gross basis in our consolidated statements of operations and included in revenue and other operating expenses at $29.7 million and $28.1 million, for the three months ended March 31, 2012 and 2011, respectively.

(c)  
Goodwill and Other Intangibles:
Intangibles represent the excess of purchase price over the fair value of identifiable tangible net assets acquired. We undertake studies to determine the fair values of assets and liabilities acquired and allocate purchase prices to assets and liabilities, including property, plant and equipment, goodwill and other identifiable intangibles.  We annually (during the fourth quarter) or more frequently, if appropriate, examine the carrying value of our goodwill and trade name to determine whether there are any impairment losses.  We test for goodwill impairment at the “operating segment” level, as that term is defined in U.S. GAAP.  Our operating segments consist of the following regions: Central, Midwest, National, Northeast, Southeast and West.  Our operating segments are aggregated into one reportable segment.

 
6

 
The Company amortizes finite lived intangible assets over their estimated useful lives and reviews such intangible assets at least annually to assess whether any potential impairment exists and whether factors exist that would necessitate a change in useful life and a different amortization period.

(2)   Recent Accounting Literature:

Fair Value Measurements
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-04 (ASU 2011-04), “Fair Value Measurements: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASC Topic 820).  ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively, and is effective for interim and annual periods beginning after December 15, 2011.  The Company adopted ASU 2011-04 in the first quarter of 2012 with no impact on our financial position, results of operations or cash flows.

Presentation of Comprehensive Income
In June 2011, the FASB issued Accounting Standards Update No. 2011-05 (ASU 2011-05), “Comprehensive Income: Presentation of Comprehensive Income,” (ASC Topic 220).  ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively, and is effective for interim and annual periods beginning after December 15, 2011.  In December 2011, the FASB issued ASU No. 2011-12 that defers the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income in ASU 2011-05.  The Company adopted ASU 2011-05 in the first quarter of 2012 with no impact on our financial position, results of operations or cash flows.

(3)   The Transaction:
On July 1, 2010, we acquired the defined assets and liabilities of the local exchange business and related landline activities of Verizon Communications Inc. (Verizon) in Arizona, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia and Wisconsin and in portions of California bordering Arizona, Nevada and Oregon (collectively, the Territories), including Internet access and long distance services and broadband video provided to designated customers in the Territories (the Acquired Business).  Frontier was considered the acquirer of the Acquired Business for accounting purposes.

We have accounted for our acquisition of approximately 4.0 million access lines from Verizon (the Transaction) using the guidance included in Accounting Standards Codification (ASC) Topic 805. We incurred approximately $35.1 million and $13.2 million of integration related costs in connection with the Transaction during the three months ended March 31, 2012 and 2011, respectively.  Such costs are required to be expensed as incurred and are reflected in “Integration costs” in our consolidated statements of operations.


 
7

 

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




(4)   Accounts Receivable:
The components of accounts receivable, net are as follows:

   ($ in thousands)
 
March 31, 2012
   
December 31, 2011
   
    
                 
    Retail and Wholesale
 
575,474
   
$
639,842
   
    Other
   
53,903
     
52,363
   
    Less: Allowance for doubtful accounts
   
(104,125
)
   
(107,048
)
 
         Accounts receivable, net
 
$
525,252
   
$
585,157
   
                   
Retail and wholesale accounts receivable and the allowance for doubtful accounts are presented net of a fair value adjustment of $9.8 million at December 31, 2011.  As of March 31, 2012, no further fair value adjustment is required. We maintain an allowance for estimated bad debts based on our estimate of our ability to collect accounts receivable. Bad debt expense, which is recorded as a reduction to revenue, was $16.6 million and $28.3 million for the three months ended March 31, 2012 and 2011, respectively.

Amounts for retail and wholesale accounts receivable as of December 31, 2011 have been revised to conform to the current presentation, reflecting a reduction of $31.0 million for customer volume discounts with a right of offset to the customer’s accounts receivable.  There was a similar reduction to other current liabilities in the balance sheet.
 
(5)   Property, Plant and Equipment:
        Property, plant and equipment is as follows:

   ($ in thousands)
 
March 31, 2012
   
December 31, 2011
   
    
                 
    Property, plant and equipment
 
13,779,230
   
$
13,638,136
   
    Less:  Accumulated depreciation
   
(6,278,081
)
   
(6,090,613
)
 
         Property, plant and equipment, net
 
$
7,501,149
   
$
7,547,523
   
                   

Depreciation expense is principally based on the composite group method.  Depreciation expense was $210.3 million and $219.1 million for the three months ended March 31, 2012 and 2011, respectively.  As a result of an independent study of the estimated remaining useful lives of our plant assets, we adopted new estimated remaining useful lives for certain plant assets as of October 1, 2011.

 
8

 

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




(6)   Goodwill and Other Intangibles:
The components of goodwill and other intangibles are as follows:

   ($ in thousands)
 
March 31, 2012
   
December 31, 2011
   
    
                 
Goodwill:
 
$
6,337,719
   
$
6,337,719
   
                   
Other Intangibles:
                 
    Customer base
 
2,697,763
   
$
2,697,413
   
    Software licenses
   
105,019
     
105,019
   
    Trade name and license
   
135,285
     
135,285
   
          Other intangibles
   
2,938,067
     
2,937,717
   
    Less: Accumulated amortization
   
(1,120,166
)
   
(973,212
)
 
         Total other intangibles, net
 
$
1,817,901
   
$
1,964,505
   
                   

Amortization expense was $147.0 million and $132.2 million for the three months ended March 31, 2012 and 2011, respectively. Amortization expense for the three months ended March 31, 2012 and 2011 included $136.5 million and $118.1 million, respectively, for intangible assets (primarily customer base) that were acquired in the Transaction based on a fair value of $2.5 billion and a useful life of nine years for the residential customer base and 12 years for the business customer base, amortized on an accelerated method.  Amortization expense included $10.5 million and $14.1 million for the three months ended March 31, 2012 and 2011, respectively, for intangible assets (customer base and trade name) that were acquired in the acquisitions of Commonwealth Telephone Enterprises, Inc., Global Valley Networks, Inc. and GVN Services.

(7)    Fair Value of Financial Instruments:
The following table summarizes the carrying amounts and estimated fair values for long-term debt at March 31, 2012 and December 31, 2011.  For the other financial instruments, representing cash, accounts receivable, long-term debt due within one year, accounts payable and other current liabilities, the carrying amounts approximate fair value due to the relatively short maturities of those instruments.  Other equity method investments, for which market values are not readily available, are carried at cost, which approximates fair value.

The fair value of our long-term debt is estimated based upon quoted market prices at the reporting date for those financial instruments.

($ in thousands)
March 31, 2012
 
December 31, 2011
 
Carrying
     
Carrying
   
 
Amount
 
Fair Value
 
Amount
 
Fair Value
               
Long-term debt
$  7,614,392
 
$  7,720,171
 
$  8,205,841
 
$   7,958,873



 
9

 
 
(8)Long-Term Debt:
 The activity in our long-term debt from December 31, 2011 to March 31, 2012 is summarized as follows:

 
         
Three months ended
           
         
March 31, 2012
     
Interest
 
                           
Rate* at
 
   
December 31,
         
New
   
March 31,
   
March 31,
 
($ in thousands)
 
2011
   
Payments
   
Borrowings
   
2012
   
2012
 
                               
  Rural Utilities Service
                             
    Loan Contracts
  $ 10,197     $ (127 )   $ -     $ 10,070       6.15%  
                                         
  Senior Unsecured Debt
    8,325,774       (14,375 )     -       8,311,399       7.92%  
 
                                       
  Industrial Development
                                       
     Revenue Bonds
    13,550       -       -       13,550       6.33%  
                                         
TOTAL LONG-TERM DEBT
  $ 8,349,521     $ (14,502 )   $ -     $ 8,335,019       7.92%  
                                         
  Less: Debt Discount
    (49,664 )                     (45,881 )        
  Less: Current Portion
    (94,016 )                     (674,746 )        
                                         
    $ 8,205,841                     $ 7,614,392          
                                         


* Interest rate includes amortization of debt issuance costs and debt premiums or discounts.  The interest rates at March 31, 2012 represent a weighted average of multiple issuances.

 
10

 

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Additional information regarding our Senior Unsecured Debt is as follows:

 
March 31, 2012
 
December 31, 2011
   
Principal
   
Interest
     
Principal
   
Interest
 
($ in thousands)
 
Outstanding
   
Rate
     
Outstanding
   
Rate
 
                           
Senior Notes:
                         
  Due 1/15/2013
$
580,724
   
6.250%
   
$
580,724
   
6.250%
 
  Due 5/1/2014
 
600,000
   
8.250%
     
600,000
   
8.250%
 
  Due 3/15/2015
 
300,000
   
6.625%
     
300,000
   
6.625%
 
  Due 4/15/2015
 
500,000
   
7.875%
     
500,000
   
7.875%
 
  Due 10/14/2016 *
 
560,625
   
3.125% (Variable)
     
575,000
   
3.175% (Variable)
 
  Due 4/15/2017
 
1,100,000
   
8.250%
     
1,100,000
   
8.250%
 
  Due 10/1/2018
 
600,000
   
8.125%
     
600,000
   
8.125%
 
  Due 3/15/2019
 
434,000
   
7.125%
     
434,000
   
7.125%
 
  Due 4/15/2020
 
1,100,000
   
8.500%
     
1,100,000
   
8.500%
 
  Due 4/15/2022
 
500,000
   
8.750%
     
500,000
   
8.750%
 
  Due 1/15/2027
 
345,858
   
7.875%
     
345,858
   
7.875%
 
  Due 2/15/2028
 
200,000
   
6.730%
     
200,000
   
6.730%
 
  Due 10/15/2029
 
50,000
   
8.400%
     
50,000
   
8.400%
 
  Due 8/15/2031
 
945,325
   
9.000%
     
945,325
   
9.000%
 
   
7,816,532
           
7,830,907
       
                           
                           
Debentures:
                         
  Due 11/1/2025
 
138,000
   
7.000%
     
138,000
   
7.000%
 
  Due 8/15/2026
 
1,739
   
6.800%
     
1,739
   
6.800%
 
  Due 10/1/2034
 
628
   
7.680%
     
628
   
7.680%
 
  Due 7/1/2035
 
125,000
   
7.450%
     
125,000
   
7.450%
 
  Due 10/1/2046
 
193,500
   
7.050%
     
193,500
   
7.050%
 
   
458,867
           
458,867
       
Subsidiary Senior
                         
   Notes due 12/1/2012
 
36,000
   
8.050%
     
36,000
   
8.050%
 
Total
$
8,311,399
   
7.92%
   
$
8,325,774
   
7.93%
 
                           
* Represents borrowings under the Credit Agreement with CoBank, as discussed below.

 
11

 

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The Company has a credit agreement (the “Credit Agreement”) with CoBank, ACB, as administrative agent, lead arranger and a lender, and the other lenders party thereto for a $575.0 million senior unsecured term loan facility with a final maturity of October 14, 2016.  The entire facility was drawn upon execution of the Credit Agreement in October 2011.  Repayment of the outstanding principal balance is made in quarterly installments in the amount of $14,375,000, which commenced on March 31, 2012, with the remaining outstanding principal balance to be repaid on the final maturity date.  Borrowings under the Credit Agreement bear interest based on the margins over the Base Rate (as defined in the Credit Agreement) or LIBOR, at the election of the Company.  Interest rate margins under the facility (ranging from 0.875% to 2.875% for Base Rate borrowings and 1.875% to 3.875% for LIBOR borrowings) are subject to adjustments based on the Total Leverage Ratio of the Company, as such term is defined in the Credit Agreement.  The initial pricing on this facility is LIBOR plus 2.875% through September 30, 2012.  The maximum permitted leverage ratio is 4.5 times.
 
We have a $750.0 million revolving credit facility.  As of March 31, 2012, we had not made any borrowings utilizing this facility.  The terms of the credit facility are set forth in the Revolving Credit Agreement, dated as of March 23, 2010, among the Company, the Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent (the Revolving Credit Agreement). Associated facility fees under the credit facility will vary from time to time depending on the Company’s credit rating (as defined in the Revolving Credit Agreement) and were 0.625% per annum as of March 31, 2012. The credit facility is scheduled to terminate on January 1, 2014. During the term of the credit facility, the Company may borrow, repay and reborrow funds, and may obtain letters of credit, subject to customary borrowing conditions. Loans under the credit facility will bear interest based on the alternate base rate or the adjusted LIBOR rate (each as determined in the Revolving Credit Agreement), at the Company’s election, plus a margin specified in the Revolving Credit Agreement based on the Company’s credit rating. Letters of credit issued under the credit facility will also be subject to fees that vary depending on the Company’s credit rating. The credit facility will be available for general corporate purposes but may not be used to fund dividend payments.

We also have a $100.0 million unsecured letter of credit facility.  The terms of the letter of credit facility are set forth in a Credit Agreement, dated as of September 8, 2010, among the Company, the Lenders party thereto, and Deutsche Bank AG, New York Branch (the Bank), as Administrative Agent and Issuing Bank (the Letter of Credit Agreement). An initial letter of credit for $190.0 million was issued to the West Virginia Public Service Commission to guarantee certain of our capital investment commitments in West Virginia in connection with the Transaction.  The initial commitments under the Letter of Credit Agreement expired on September 20, 2011, with the Bank exercising its option to extend $100.0 million of the commitments to September 20, 2012.  The Company is required to pay an annual facility fee on the available commitment, regardless of usage.  The covenants binding on the Company under the terms of the Letter of Credit Agreement are substantially similar to those in the Company’s other credit facilities, including limitations on liens, substantial asset sales and mergers, subject to customary exceptions and thresholds.

As of March 31, 2012, we were in compliance with all of our debt and credit facility financial covenants.

Our principal payments for the next five years are as follows as of March 31, 2012:
   
Principal
($ in thousands)
 
Payments
    
   
2012 (remaining nine months)
$
79,514
2013
$
638,767
2014
$
658,017
2015
$
858,049
2016
$
345,466
2017
$
1,100,501

 
12


PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(9)   Income Taxes:
The following is a reconciliation of the provision for income taxes computed at federal statutory rates to the effective rates:
 
     
For the three months ended
      March 31,
     
2012
 
2011
           
Consolidated tax provision at federal statutory rate
   
35.0%
 
35.0%
State income tax provisions, net of federal income
         
    tax benefit
   
3.6
 
                  3.8
All other, net
   
(0.6)
 
                  0.6
Effective tax rate
   
38.0%
 
39.4%
           
Income taxes for the three months ended March 31, 2011 includes the impact of a $1.1 million charge resulting from increases in certain state income tax rates.

The amount of our uncertain tax positions whose statute of limitations are expected to expire during the next twelve months and which would affect our effective tax rate is $8.4 million as of March 31, 2012.
 
(10)  Net Income Per Common Share:
 The reconciliation of the net income per common share calculation is as follows:
 
   
For the three months ended
($ and shares in thousands, except per share amounts)
 
March 31,
   
2012
   
2011
 
Net income used for basic and diluted earnings
           
   per common share:
           
Net income attributable to common shareholders of Frontier
  $ 26,768     $ 54,711  
                 
Less:  Dividends paid on unvested restricted stock awards
    (737 )     (966 )
Total basic and diluted net income attributable to common
               
   shareholders of Frontier
  $ 26,031     $ 53,745  
                 
Basic earnings per common share:
               
Total weighted average shares and unvested restricted stock awards
               
   outstanding - basic
    995,897       994,547  
Less:  Weighted average unvested restricted stock awards
    (7,024 )     (4,798 )
Total weighted average shares outstanding - basic
    988,873       989,749  
                 
Net income per share attributable to common shareholders of Frontier
  $ 0.03     $ 0.05  
 
               
Diluted earnings per common share:
               
Total weighted average shares outstanding - basic
    988,873       989,749  
Effect of dilutive shares
    12       1,213  
Effect of dilutive stock units
    623       474  
Total weighted average shares outstanding - diluted
    989,508       991,436  
                 
Net income per share attributable to common shareholders of Frontier
  $ 0.03     $ 0.05  
                 
 
13
 
 
Stock Options
For the three months ended March 31, 2012 and 2011, options to purchase 895,000 shares (at exercise prices ranging from $8.19 to $14.15) and 1,115,000 shares (at exercise prices ranging from $10.44 to $14.15), respectively, issuable under employee compensation plans were excluded from the computation of diluted earnings per share (EPS) for those periods because the exercise prices were greater than the average market price of our common stock and, therefore, the effect would be antidilutive.  In calculating diluted EPS, we apply the treasury stock method and include future unearned compensation as part of the assumed proceeds.
 
In addition, for the three months ended March 31, 2012 and 2011, we have deducted the impact of dividends paid on unvested restricted stock awards from net income attributable to common shareholders of Frontier.

Stock Units
At March 31, 2012 and 2011, we had 623,121 and 473,940 stock units, respectively, issued under our Non-Employee Directors’ Deferred Fee Equity Plan (Deferred Fee Plan) and the Non-Employee Directors’ Equity Incentive Plan (Directors’ Equity Plan).

(11) Stock Plans:
At March 31, 2012, we had five stock-based compensation plans under which grants were made and awards remained outstanding.  No further awards may be granted under three of the plans: the 1996 Equity Incentive Plan, the Amended and Restated 2000 Equity Incentive Plan (collectively, together with the 2009 Equity Incentive Plan, the EIP) and the Deferred Fee Plan. At March 31, 2012, there were 12,540,761 shares authorized for grant under these plans and 3,274,997 shares available for grant under two of the plans.  

Performance Shares
On February 15, 2012, the Company’s Compensation Committee, in consultation with the other non-management directors of the Company’s Board of Directors and the Committee’s independent executive compensation consultant, adopted the new Frontier Long-Term Incentive Plan (the “LTIP”). LTIP awards will be granted in the form of performance shares.  The LTIP is offered under the Company’s 2009 Equity Incentive Plan and participants consist of senior vice presidents and above. The LTIP awards have performance, market and time-vesting conditions.
 
Beginning in 2012, during the first 90 days of a three-year performance period (a “Measurement Period”), a target number of performance shares are awarded to each LTIP participant with respect to the Measurement Period.  The performance metrics under the LTIP are (1) annual targets for operating cash flow based on a goal set during the first 90 days of each year in the three-year Measurement Period and (2) an overall performance “modifier” set during the first 90 days of the Measurement Period, based on the Company’s total return to stockholders (i.e., Total Shareholder Return or “TSR”) relative to the Diversified Telecommunications Services Group (GICS Code 501010) for the three-year Measurement Period.  LTIP awards will be paid out in the form of common stock shortly following the end of the three-year Measurement Period.  Operating cash flow performance will be determined at the end of each year and the annual results will be averaged at the end of the three-year Measurement Period to determine the preliminary number of shares earned under the LTIP award.
 
On February 15, 2012, the Compensation Committee granted 930,020 performance shares under the LTIP for the 2012-2014 Measurement Period and set the operating cash flow performance goal for the first year in that Measurement Period and the TSR modifier for the three-year Measurement Period.  Actual amounts earned will be subject to increase or decrease (including forfeiture of the entire award).  An executive must maintain a satisfactory performance rating during the Measurement Period and must be employed by the Company at the end of the three-year Measurement Period in order for the award to vest.  The Compensation Committee will determine the number of shares earned for the 2012-2014 Measurement Period in February 2015.


 
14

 
 
Restricted Stock
The following summary presents information regarding unvested restricted stock as of March 31, 2012 and changes during the three months then ended with regard to restricted stock under the EIP:

         
Weighted
     
         
Average
     
   
 Number of
   
 Grant Date
   
Aggregate
   
 Shares
   
 Fair Value
   
Fair Value
Balance at January 1, 2012
4,847,000
 
$
8.40
 
$
24,962,000
 
Restricted stock granted
3,667,000
 
$
4.22
 
$
15,291,000
 
Restricted stock vested
(1,131,000)
 
$
9.04
 
$
4,716,000
 
Restricted stock forfeited
(13,000)
 
$
7.64
     
Balance at March 31, 2012
7,370,000
 
$
6.23
 
$
30,732,000

For purposes of determining compensation expense, the fair value of each restricted stock grant is estimated based on the average of the high and low market price of a share of our common stock on the date of grant.  Total remaining unrecognized compensation cost associated with unvested restricted stock awards at March 31, 2012 was $37.3 million and the weighted average period over which this cost is expected to be recognized is approximately two years.

Shares granted during the first three months of 2011 totaled 1,679,000.  The total fair value of shares granted and vested during the three months ended March 31, 2011 was approximately $13.8 million and $7.5 million, respectively.  The total fair value of unvested restricted stock at March 31, 2011 was $42.4 million. The weighted average grant date fair value of restricted shares granted during the three months ended March 31, 2011 was $9.40.

Stock Options
The following summary presents information regarding outstanding stock options as of March 31, 2012 and changes during the three months then ended with regard to options under the EIP:

         
Weighted
 
Weighted
     
   
Shares
   
Average
 
Average
   
Aggregate
   
 Subject to
   
 Option Price
 
 Remaining
   
Intrinsic
   
 Option
   
 Per Share
 
 Life in Years
   
 Value
Balance at January 1, 2012
895,000
 
$
9.94
 
1.3
 
$
-
 
Options granted
-
 
$
-
 
-
     
 
Options exercised
-
 
$
-
 
-
 
$
-
 
Options canceled, forfeited or lapsed
-
 
$
-
 
-
     
Balance at March 31, 2012
895,000
 
$
9.94
 
1.1
 
$
-
                     
Exercisable at March 31, 2012
895,000
 
$
9.94
 
1.1
 
$
-
                     
 
There were no options granted during the first three months of 2011.  Cash received upon the exercise of options during the first three months of 2011 was $0.1 million.  The intrinsic value of the stock options outstanding and exercisable at March 31, 2011 was $11,000.  

(12)  Segment Information:
We operate in one reportable segment.  Frontier provides both regulated and unregulated voice, data and video services to residential, business and wholesale customers and is typically the incumbent provider in its service areas.

 
15

 
As permitted by U.S. GAAP, we have utilized the aggregation criteria to combine our operating segments because all of our Frontier properties share similar economic characteristics, in that they provide the same products and services to similar customers using comparable technologies in all of the states in which we operate.  The regulatory structure is generally similar.  Differences in the regulatory regime of a particular state do not materially impact the economic characteristics or operating results of a particular property.  

(13)  Investment Income:
The components of investment income are as follows:
 
   
For the three months ended March 31,
 
($ in thousands)
 
2012
   
2011
 
             
Interest and dividend income
  $ 2,623     $ 2,731  
Investment gain
    -       552  
Equity earnings (loss)
    (520 )     (168 )
     Total investment income
  $ 2,103     $ 3,115  
                 
 
 
(14)  Other Income, Net:
The components of other income, net are as follows:
 
   
For the three months ended March 31,
 
($ in thousands)
 
2012
   
2011
 
             
Gain on expiration/settlement of customer advances
  $ 3,463     $ 6,337  
All other, net
    22       133  
    Total other income, net
  $ 3,485     $ 6,470  
                 
(15)  Comprehensive Income:
Comprehensive income consists of net income and other gains and losses affecting shareholders’ investment and pension/OPEB liabilities that, under U.S. GAAP, are excluded from net income.

The components of accumulated other comprehensive loss, net of tax are as follows:

   
 
   
 
 
($ in thousands)
 
March 31, 2012
   
December 31, 2011
 
             
Pension costs
  $ 567,427     $ 575,163  
Postretirement costs
    42,403       41,811  
Deferred taxes on pension and OPEB costs
    (227,283 )     (230,161 )
All other
    149       150  
    $ 382,696     $ 386,963  
                 

 
16

 

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Our other comprehensive income for the three months ended March 31, 2012 and 2011 is as follows:

      2012  
   
Before-Tax
   
Tax Expense/
 
Net-of-Tax
 
($ in thousands)
 
Amount
   
(Benefit)
   
Amount
 
                   
Amortization of pension and postretirement costs
  $ 7,145     $ 2,878     $ 4,267  
All other
    -       -       -  
Other comprehensive income
  $ 7,145     $ 2,878     $ 4,267  
                         
     2011  
   
Before-Tax
   
Tax Expense/
 
Net-of-Tax
 
   
Amount
   
(Benefit)
   
Amount
 
                         
Amortization of pension and postretirement costs
  $ 3,334     $ 1,199     $ 2,135  
All other
    (750 )     (270 )     (480 )
Other comprehensive income
  $ 2,584     $ 929     $ 1,655  
                         
 
(16) Retirement Plans:
The following tables provide the components of net periodic benefit cost:
 
             
 
Pension Benefits
   
For the three months ended
      March 31,  
   
2012
   
2011
 
($ in thousands)
           
Components of net periodic pension benefit cost
           
Service cost
  $ 10,492     $ 9,615  
Interest cost on projected benefit obligation
    19,658       21,172  
Expected return on plan assets
    (24,089 )     (25,589 )
Amortization of prior service cost /(credit)
    (50 )     (50 )
Amortization of unrecognized loss
    7,787       4,435  
Net periodic pension benefit cost
  $ 13,798     $ 9,583  
                 
                 
 
Postretirement Benefits
 
Other Than Pensions (OPEB)
   
For the three months ended
 
   
March 31,
      2012       2011  
($ in thousands)
               
Components of net periodic postretirement benefit cost
               
Service cost
  $ 2,555     $ 4,228  
Interest cost on projected benefit obligation
    4,460       6,328  
Expected return on plan assets
    (55 )     (82 )
Amortization of prior service cost/(credit)
    (2,503 )     (2,550 )
Amortization of unrecognized loss
    1,911       1,499  
Net periodic postretirement benefit cost
  $ 6,368     $ 9,423  
                 
 
17
 
During the first three months of 2012 and 2011, we capitalized $4.2 million and $3.1 million, respectively, of pension and OPEB expense into the cost of our capital expenditures, as the costs relate to our engineering and plant construction activities.  Based on current assumptions and plan asset values, we estimate that our 2012 pension and OPEB expenses will be between $75 million and $85 million before amounts capitalized into the cost of capital expenditures (they were $58.3 million in 2011 before amounts capitalized into the cost of capital expenditures).  We expect to make net contributions to our pension plan of approximately $60 million in 2012. No contributions were made to our pension plan during the first three months of 2012.

In connection with the completion of the Transaction on July 1, 2010, certain employees were transferred from various Verizon pension plans into 12 pension plans that were then merged with the Frontier Communications Pension Plan (the Plan) effective August 31, 2010.  Assets of $438.8 million were transferred into the Plan during the second half of 2010 and assets of $106.9 million were transferred into the Plan in August 2011.  Additionally, $18.7 million of assets were transferred into the Plan during the first quarter of 2012.  The Plan has a receivable of $47.5 million as of March 31, 2012 that will be settled by the transfer of assets in 2012.

The Plan’s assets have increased from $1,258.0 million at December 31, 2011 to $1,315.5 million at March 31, 2012, an increase of $57.5 million, or 5%.  This increase is a result of $83.5 million of positive investment returns less benefit payments of $26.0 million during the first three months of 2012.  

(17) Commitments and Contingencies:
We anticipate total capital expenditures for business operations of approximately $725 million to $775 million for 2012. Although we from time to time make short-term purchasing commitments to vendors with respect to these expenditures, we generally do not enter into firm, written contracts for such activities.  

In connection with the Transaction, the Company has undertaken activities to plan and implement network and systems conversions as well as other initiatives to integrate the operations and reduce costs.  In the fourth quarter of 2011, the Company converted all of the remaining 13 states of the Acquired Business onto the Company’s legacy financial and human resources systems, and converted the operating systems in four states of the Acquired Business to our legacy systems.  In the first quarter of 2012, the Company successfully converted the operating systems in the remaining nine states of the Acquired Business to our legacy systems.  Therefore, as of March 31, 2012, the Company has completed its network and systems integration into one platform.  While these conversions are complete, the Company continues to simplify its processes, eliminate redundancies and further reduce its cost structure while improving its customer service capabilities.  The Company incurred $35.1 million of operating expenses for integration costs and $15.7 million in capital expenditures related to integration activities during the first three months of 2012.  For the full year of 2012, the Company currently expects to incur operating expenses and capital expenditures of approximately $80 million and $40 million, respectively, related to completing its integration and cost savings initiatives.

In addition, the Federal Communications Commission (FCC) and certain state regulatory commissions, in connection with granting their approvals of the Transaction, specified certain capital expenditure and operating requirements for the acquired Territories for specified periods of time post-closing.  These requirements focus primarily on certain capital investment commitments to expand broadband availability to at least 85% of the households throughout the acquired Territories with minimum download speeds of 3 megabits per second (Mbps) by the end of 2013 and 4 Mbps by the end of 2015.  As of March 31, 2012, we had expanded broadband availability in excess of 1 Mbps to 81% of the households throughout the acquired Territories, in excess of 3 Mbps to 77% of the households throughout the acquired Territories, and in excess of 4 Mbps to 67% of the households throughout the acquired Territories.

To satisfy all or part of certain capital investment commitments to three state regulatory commissions, we placed an aggregate amount of $115.0 million in cash into escrow accounts and obtained a letter of credit for $190 million in 2010. Another $72.4 million of cash in an escrow account (with a cash balance of $62.9 million and an associated liability of $6.4 million as of March 31, 2012 that is reflected in Other liabilities) was acquired in connection with the Transaction to be used for service quality initiatives in the state of West Virginia.  As of March 31, 2012, the Company had a restricted cash balance in these escrow accounts in the aggregate amount of $139.3 million. As of March 31, 2012, $48.4 million had been released from escrow.  In addition, as of March 31, 2012, the letter of credit had been reduced to $100.0 million.   The aggregate amount of these escrow accounts and the letter of credit has decreased and will continue to decrease over time as Frontier makes the required capital expenditures in the respective states.

 
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We are party to various legal proceedings arising in the normal course of our business covering a wide range of matters or types of claims including, but not limited to, general contract, rights of access, tax, consumer protection, trademark and patent infringement, employment, regulatory and tort.  Litigation is subject to uncertainty and the outcome of individual matters is not predictable.  However, we believe that the ultimate resolution of all such matters, after considering insurance coverage or other indemnities to which Frontier is entitled, will not have a material adverse effect on our financial position, results of operations, or our cash flows.

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 that 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) 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, 2012 and remained in default for the duration of the contract (another 4 years), we estimate that our undiscounted purchase obligation for 2012 through 2015 would be approximately $316.1 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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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES



Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements.  Statements that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of The Private Securities Litigation Reform Act of 1995.  Words such as “believe,” “anticipate,” “expect” and similar expressions are intended to identify forward-looking statements. Forward-looking statements (including oral representations) are only predictions or statements of current plans, which we review continuously.  Forward-looking statements may differ from actual future results due to, but not limited to, and our future results may be materially affected by, potential risks or uncertainties.  You should understand that it is not possible to predict or identify all potential risks or uncertainties.  We note the following as a partial list:

·  
The risk that the growth opportunities from the Transaction may not be fully realized or may take longer to realize than expected;

·  
The effects of greater than anticipated competition requiring new pricing, marketing strategies or new product or service offerings and the risk that we will not respond on a timely or profitable basis;

·  
Reductions in the number of our access lines that cannot be offset by increases in broadband subscribers and sales of other products and services;

·  
The effects of competition from cable, wireless and other wireline carriers;

·  
Our ability to maintain relationships with customers, employees or suppliers;

·  
The effects of ongoing changes in the regulation of the communications industry as a result of federal and state legislation and regulation, or changes in the enforcement or interpretation of such legislation and regulation;

·  
The effects of any unfavorable outcome with respect to any current or future legal, governmental or regulatory proceedings, audits or disputes;

·  
The effects of changes in the availability of federal and state universal funding to us and our competitors;

·  
Our ability to adjust successfully to changes in the communications industry and to implement strategies for growth;

·  
Continued reductions in switched access revenues as a result of regulation, competition or technology substitutions;

·  
Our ability to effectively manage service quality in our territories and meet mandated service quality metrics;

·  
Our ability to successfully introduce new product offerings, including our ability to offer bundled service packages on terms that are both profitable to us and attractive to customers;

·  
Changes in accounting policies or practices adopted voluntarily or as required by generally accepted accounting principles or regulations;
 
·  
Our ability to effectively manage our operations, operating expenses and capital expenditures, and to repay, reduce or refinance our debt;

·  
The effects of changes in both general and local economic conditions on the markets that we serve, which can affect demand for our products and services, customer purchasing decisions, collectability of revenues and required levels of capital expenditures related to new construction of residences and businesses;
 
 
20

 
 
·  
The effects of technological changes and competition on our capital expenditures and product and service offerings, including the lack of assurance that our network improvements will be sufficient to meet or exceed the capabilities and quality of competing networks;

·  
The effects of increased medical and pension expenses and related funding requirements;

·  
Changes in income tax rates, tax laws, regulations or rulings, or federal or state tax assessments;

·  
The effects of state regulatory cash management practices that could limit our ability to transfer cash among our subsidiaries or dividend funds up to the parent company;

·  
Our ability to successfully renegotiate union contracts in 2012 and thereafter;

·  
Changes in pension plan assumptions and/or the value of our pension plan assets, which would require us to make increased contributions to the pension plan in 2013 and beyond;

·  
The effects of customer bankruptcies and home foreclosures, which could result in difficulty in collection of revenues and loss of customers;

·  
Adverse changes in the credit markets or in the ratings given to our debt securities by nationally accredited ratings organizations, which could limit or restrict the availability, or increase the cost, of financing;

·  
Limitations on the amount of capital stock that we can issue to make acquisitions or to raise additional capital until July 2012;

·  
Our indemnity obligation to Verizon for taxes which may be imposed upon them as a result of changes in ownership of our stock may discourage, delay or prevent a third party from acquiring control of us during the two-year period ending July 2012 in a transaction that stockholders might consider favorable;

·  
Our ability to pay dividends on our common shares, which may be affected by our cash flow from operations, amount of capital expenditures, debt service requirements, cash paid for income taxes and liquidity; and

·  
The effects of severe weather events such as hurricanes, tornadoes, ice storms or other natural or man-made disasters.

Any of the foregoing events, or other events, could cause financial information to vary from management’s forward-looking statements included in this report.  You should consider these important factors, in evaluating any statement in this report on Form 10-Q or otherwise made by us or on our behalf.  The following information is unaudited and should be read in conjunction with the consolidated financial statements and related notes included in this report.  We have no obligation to update or revise these forward-looking statements and do not undertake to do so.

Investors should also be aware that while we do, at various times, communicate with securities analysts, it is against our policy to disclose to them selectively any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by an analyst irrespective of the content of the statement or report. To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

 
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES



Overview
See Note 3 of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this report for a discussion of the Transaction.

As a result of the Transaction, the Company is the nation’s largest communications services provider focused on rural areas and small and medium-sized towns and cities, operating in 27 states, and the nation’s fourth largest Incumbent Local Exchange Carrier (ILEC), with approximately 5.2 million access lines, 1.8 million broadband connections and 15,500 employees as of March 31, 2012.

Expected Cost Savings Resulting from the Transaction
Based on current estimates and assumptions, we expect to achieve cost savings as a result of the Transaction, principally (1) by leveraging the scalability of our existing corporate administrative functions, information technology and network systems to cover certain former Acquired Business functions and systems, (2) by in-sourcing certain functions formerly provided by third-party service providers to the Acquired Business and (3) by achieving improved efficiencies and more favorable rates with third-party vendors.

We estimate that our annualized cost savings will reach approximately $650 million by the end of 2012.  Our first quarter 2012 savings from our targeted initiatives list (which includes, but is not limited to, network cost savings, contractor reductions, cancellation or reduction of vendor services, benefit changes and real estate savings) was approximately $13 million and combined with the savings achieved in 2011 of $156 million, or $248 million on an annualized basis, and the savings achieved in 2010 of approximately $152 million, or $304 million on an annualized basis, equates to an annualized cost savings run rate of approximately $604 million as of the end of the first quarter of 2012. 

The foregoing future cost savings are based on our estimates and assumptions that, although we consider them reasonable, are inherently uncertain.  Significant business, economic, competitive and regulatory uncertainties and contingencies, all of which are difficult to predict and many of which are beyond our control, may affect these expected cost savings.  See “Forward Looking Statements” above. As a result, there can be no assurance that these or any other future cost savings or synergies will actually be realized.

Regulatory Developments
On November 18, 2011, the FCC released a Report and Order and Further Notice of Proposed Rulemaking on the subject of Universal Service Fund and intercarrier compensation reform (USF/ICC Report & Order). The FCC’s USF/ICC Report & Order changes how federal subsidies will be calculated and disbursed, with this change being phased in beginning in 2012. These changes will transition the federal Universal Service High-Cost Fund, which supports voice services in high-cost areas, to the Connect America Fund (CAF), which will support broadband deployment in high-cost areas. CAF Phase I, implemented in 2012, provides for ongoing support for price cap carriers to be capped at the 2011 amount. In addition, the FCC in CAF Phase I is making available for price cap ILECs an additional $300 million in incremental high cost broadband support to be used for broadband deployment to unserved areas. Frontier is eligible to receive approximately $72 million of the total $300 million CAF Phase I interim support. The USF/ICC Report and Order requires carriers receiving the CAF Phase I interim support to deploy broadband to locations that are currently unserved, within 3 years of receipt of the funds, based on an FCC formula that utilizes the National Broadband Map and includes carrier certification requirements. By July 24, 2012, Frontier will need to notify the FCC and appropriate state commissions of its intent to accept those funds and identify the unserved locations to be served by the funds. The $72 million in incremental CAF Phase I support is expected to be accounted for as Contributions in Aid of Construction.

The FCC’s USF/ICC Report & Order also make changes to Intercarrier Compensation. Intercarrier Compensation, which is the payment framework that governs how carriers compensate each other for the exchange of traffic, will transition over a number of years beginning in mid-2012 to a near zero rate for terminating traffic by 2017. Carriers will be able to recover a portion of those revenues through end user rates and other replacement support mechanisms. Effective December 29, 2011, the USF/ICC Report & Order required providers to pay interstate access rates for the termination of VoIP toll traffic. On April 25, 2012, the FCC, in an Order on Reconsideration, specified that changes to originating access rates for VoIP traffic will not be implemented until July 2014. The USF/ICC Report & Order has been challenged by certain parties in court and certain parties have also petitioned the FCC to reconsider various aspects of the USF/ICC Report & Order. Accordingly, Frontier cannot fully predict the long-term impact at this time but believes that the USF/ICC Report & Order will provide a more stable regulatory framework.

 
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES



The following should be read in conjunction with Item 7.  “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2011.

(a)  Liquidity and Capital Resources

As of March 31, 2012, we had cash and cash equivalents aggregating $365.8 million (excluding restricted cash of $139.3 million, representing funds escrowed for future broadband expansion and service quality initiatives).  Our primary source of funds continued to be cash generated from operations.  For the three months ended March 31, 2012, we used cash flow from operations and cash on hand to fund all of our cash investing and financing activities, primarily capital expenditures, dividends and debt repayments.

We have a revolving credit facility with a line of credit of $750.0 million that provides sufficient flexibility to meet our liquidity needs.  As of March 31, 2012, we had not made any borrowings utilizing this facility.

At March 31, 2012, we had a working capital deficiency of $359.0 million, which includes the classification of debt maturing in the first quarter of 2013 of $580.7 million as a current liability.  We had a working capital surplus of $221.7 million at March 31, 2012, after excluding this debt classification as a current liability in the balance sheet.  We believe our operating cash flows, existing cash balances, and existing revolving credit facility will be adequate to finance our working capital requirements, fund capital expenditures, make required debt payments, pay taxes, pay dividends to our stockholders, pay our integration costs and capital expenditures, and support our short-term and long-term operating strategies through 2012.  Effective February 16, 2012, our Board of Directors set the annual cash dividend at $0.40 per share.  The Board reduced the dividend in order to strengthen our balance sheet and improve operational and financial flexibility.  However, a number of factors, including but not limited to, losses of access lines, pricing pressure from increased competition, lower subsidy and switched access revenues, and the impact of the current economic environment are expected to reduce our cash generated from operations.  In addition, although we believe, based on information available to us, that the financial institutions syndicated under our revolving credit facility would be able to fulfill their commitments to us, this could change in the future.   As of March 31, 2012, we had approximately $79.5 million of debt maturing during the last nine months of 2012 and approximately $638.8 million and $658.0 million of debt maturing in 2013 and 2014, respectively.

In addition, the FCC and certain state regulatory commissions, in connection with granting their approvals of the Transaction, specified certain capital expenditure and operating requirements for the acquired Territories for specified periods of time post-closing.  These requirements focus primarily on certain capital investment commitments to expand broadband availability to at least 85% of the households throughout the acquired Territories with minimum download speeds of 3 Mbps by the end of 2013 and 4 Mbps by the end of 2015.   As of March 31, 2012, we had expanded broadband availability in excess of 1 Mbps to 81% of the households throughout the acquired Territories, in excess of 3 Mbps to 77% of the households throughout the acquired Territories, and in excess of 4 Mbps to 67% of the households throughout the acquired Territories.

To satisfy all or part of certain capital investment commitments to three state regulatory commissions, we placed an aggregate amount of $115.0 million in cash into escrow accounts and obtained a letter of credit for $190.0 million in 2010.  Another $72.4 million of cash in an escrow account (with a cash balance of $62.9 million and an associated liability of $6.4 million as of March 31, 2012) was acquired in connection with the Transaction to be used for service quality initiatives in the state of West Virginia.  As of March 31, 2012, $48.4 million had been released from escrow.  In addition, as of March 31, 2012, the letter of credit had been reduced to $100.0 million.  The aggregate amount of these escrow accounts and the letter of credit has decreased and will continue to decrease over time as Frontier makes the required capital expenditures in the respective states.

Cash Flows provided by Operating Activities

Cash flows provided by operating activities declined $131.6 million, or 26%, for the three months ended March 31, 2012, as compared with the prior year period.  The decrease was primarily the result of large cash settlements of accounts payable due to the timing of vendor payments during the first quarter of 2012.  In addition, our accounts payable balances at December 31, 2011, were unusually high due to our systems conversion and broadband build activities in the second half of 2011.

We received tax refunds of $0.4 million during the first three months of 2012.  We expect that in 2012 our cash taxes for the full year will be approximately $25 million.

 
23

 
In connection with the Transaction, the Company continues to undertake a variety of activities to integrate systems and implement other initiatives.   As a result of the Transaction, the Company incurred $35.1 million of costs related to integration activities during the first three months of 2012, as compared to $13.2 million of integration costs during the first three months of 2011.     The Company estimates operating expenses related to its final integration activities in 2012 to be approximately $80 million.    

Cash Flows used by Investing Activities

Capital Expenditures
For the three months ended March 31, 2012 and 2011, our capital expenditures were $224.3 million (including $15.7 million of integration–related capital expenditures) and $209.1 million (including $5.6 million of integration-related capital expenditures), respectively.  We continue to closely scrutinize all of our capital projects, emphasize return on investment and focus our capital expenditures on areas and services that have the greatest opportunities with respect to revenue growth and cost reduction.  We anticipate capital expenditures for business operations to be approximately $725 million to $775 million for 2012.  We anticipate capital expenditures for our final integration activities in 2012 to be approximately $40 million.

Cash Flows used by Financing Activities

Debt Reduction
During the first three months of 2012 and 2011, we retired an aggregate principal amount of $14.5 million and $1.0 million, respectively, of debt consisting of $14.4 million and $0.7 million, respectively, of senior unsecured debt and $0.1 million and $0.3 million, respectively, of rural utilities service loan contracts.

We may from time to time repurchase our debt in the open market, through tender offers, exchanges of debt securities, by exercising rights to call or in privately negotiated transactions.  We may also refinance existing debt or exchange existing debt for newly issued debt obligations.

Bank Financing
The Company has a credit agreement (the Credit Agreement) with CoBank, ACB, as administrative agent, lead arranger and a lender, and the other lenders party thereto for a $575.0 million senior unsecured term loan facility with a final maturity of October 14, 2016.  The entire facility was drawn upon execution of the Credit Agreement in October 2011.  Repayment of the outstanding principal balance is made in quarterly installments in the amount of $14,375,000, which commenced on March 31, 2012, with the remaining outstanding principal balance to be repaid on the final maturity date.  Borrowings under the Credit Agreement bear interest based on the margins over the Base Rate (as defined in the Credit Agreement) or LIBOR, at the election of the Company.  Interest rate margins under the facility (ranging from 0.875% to 2.875% for Base Rate borrowings and 1.875% to 3.875% for LIBOR borrowings) are subject to adjustments based on the Total Leverage Ratio of the Company, as such term is defined in the Credit Agreement.  The initial pricing on this facility is LIBOR plus 2.875% through September 30, 2012.  The maximum permitted leverage ratio is 4.5 times.

Credit Facility
We have a $750.0 million revolving credit facility. As of March 31, 2012, we had not made any borrowings utilizing this facility. The terms of the credit facility are set forth in the Revolving Credit Agreement, dated as of March 23, 2010, among the Company, the Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent (the Revolving Credit Agreement). Associated facility fees under the credit facility will vary from time to time depending on the Company’s credit rating (as defined in the Revolving Credit Agreement) and were 0.625% per annum as of March 31, 2012. The credit facility is scheduled to terminate on January 1, 2014. During the term of the credit facility, the Company may borrow, repay and reborrow funds, and may obtain letters of credit, subject to customary borrowing conditions. Loans under the credit facility will bear interest based on the alternate base rate or the adjusted LIBOR rate (each as determined in the Revolving Credit Agreement), at the Company’s election, plus a margin specified in the Revolving Credit Agreement based on the Company’s credit rating. Letters of credit issued under the credit facility will also be subject to fees that vary depending on the Company’s credit rating. The credit facility will be available for general corporate purposes but may not be used to fund dividend payments.

 
24

 
Letter of Credit Facility
We also have a $100.0 million unsecured letter of credit facility. The terms of the letter of credit facility are set forth in a Credit Agreement, dated as of September 8, 2010, among the Company, the Lenders party thereto, and Deutsche Bank AG, New York Branch (the Bank), as Administrative Agent and Issuing Bank (the Letter of Credit Agreement). An initial letter of credit for $190.0 million was issued to the West Virginia Public Service Commission to guarantee certain of our capital investment commitments in West Virginia in connection with the Transaction.  The initial commitments under the Letter of Credit Agreement expired on September 20, 2011, with the Bank exercising its option to extend $100.0 million of the commitments to September 20, 2012. The Company is required to pay an annual facility fee on the available commitment, regardless of usage. The covenants binding on the Company under the terms of the Letter of Credit Agreement are substantially similar to those in the Company’s other credit facilities, including limitations on liens, substantial asset sales and mergers, subject to customary exceptions and thresholds.

Covenants
The terms and conditions contained in our indentures, the Credit Agreement, the Revolving Credit Agreement and the Letter of Credit Agreement include the timely payment of principal and interest when due, the maintenance of our corporate existence, keeping proper books and records in accordance with U.S. GAAP, restrictions on the incurrence of liens on our assets, and restrictions on asset sales and transfers, mergers and other changes in corporate control. We are not subject to restrictions on the payment of dividends either by contract, rule or regulation, other than that imposed by the General Corporation Law of the State of Delaware. However, we would be restricted under the Credit Agreement, the Revolving Credit Agreement and the Letter of Credit Agreement from declaring dividends if an event of default occurred and was continuing at the time or would result from the dividend declaration.

The Credit Agreement and the Revolving Credit Agreement each contain a maximum leverage ratio covenant. Under those covenants, we are required to maintain a ratio of (i) total indebtedness minus cash and cash equivalents (including restricted cash) in excess of $50.0 million to (ii) consolidated adjusted EBITDA (as defined in the agreements) over the last four quarters no greater than 4.50 to 1.  At March 31, 2012, the ratio of our net debt to adjusted operating cash flow (leverage ratio) was 3.17 times.

The Credit Agreement, the Revolving Credit Agreement, the Letter of Credit Agreement and certain indentures for our senior unsecured debt obligations limit our ability to create liens or merge or consolidate with other companies and our subsidiaries’ ability to borrow funds, subject to important exceptions and qualifications.

As of March 31, 2012, we were in compliance with all of our debt and credit facility covenants.

Dividends
We intend to pay regular quarterly dividends.  Effective February 16, 2012, our Board of Directors has set the annual cash dividend rate at $0.40 per share.  Our ability to fund a regular quarterly dividend will be impacted by our ability to generate cash from operations. The declarations and payment of future dividends will be at the discretion of our Board of Directors, and will depend upon many factors, including our financial condition, results of operations, growth prospects, funding requirements, applicable law, restrictions in agreements governing our indebtedness and other factors our Board of Directors deem relevant.

Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial statements.

Critical Accounting Policies and Estimates
We review all significant estimates affecting our consolidated financial statements on a recurring basis and record the effect of any necessary adjustment prior to their publication.  Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, it is possible that actual results could differ from those estimates and changes to estimates could occur in the near term.  The preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses during the reporting period.  Estimates and judgments are used when accounting for allowance for doubtful accounts, impairment of long-lived assets, impairment of intangible assets, depreciation and amortization, pension and other postretirement benefits, income taxes, contingencies and purchase price allocations, among others.

 
25

 
The Company monitors relevant circumstances, including general economic conditions, enterprise value EBITDA multiples for rural ILEC properties, the Company’s overall financial performance and the market prices for the Company’s common stock, and the potential that changes in such circumstances might have on the valuation of the Company’s intangible assets.  If our intangible assets are determined to be impaired in the future, we may be required to record a non-cash charge to earnings during the period in which the impairment is determined.
 
Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and our Audit Committee has reviewed our disclosures relating to such estimates.

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2011.

New Accounting Pronouncements
There were no new accounting standards issued and adopted by the Company during the first three months of 2012, or that have been issued but are not required to be adopted until future periods, with any material financial statement impact.

Fair Value Measurements
In May 2011, the FASB issued Accounting Standards Update No. 2011-04 (ASU 2011-04), “Fair Value Measurements: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASC Topic 820).  ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively, and is effective for interim and annual periods beginning after December 15, 2011.  The Company adopted ASU 2011-04 in the first quarter of 2012 with no impact on our financial position, results of operations or cash flows.

Presentation of Comprehensive Income
In June 2011, the FASB issued Accounting Standards Update No. 2011-05 (ASU 2011-05), “Comprehensive Income: Presentation of Comprehensive Income,” (ASC Topic 220).  ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively, and is effective for interim and annual periods beginning after December 15, 2011.  In December 2011, the FASB issued ASU No. 2011-12 that defers the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income in ASU 2011-05.  The Company adopted ASU 2011-05 in the first quarter of 2012 with no impact on our financial position, results of operations or cash flows.




 
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES



(b)  Results of Operations

REVENUE

Revenue is generated primarily through the provision of local, network access, long distance, data, video and internet services.  Such revenues are generated through either a monthly recurring fee or a fee based on usage at a tariffed rate and revenue recognition is not dependent upon significant judgments by management, with the exception of a determination of a provision for uncollectible amounts.

Revenue for the three months ended March 31, 2012 decreased $78.6 million, or 6%, to $1,268.1 million as compared with the three months ended March 31, 2011.  This decline during the first three months of 2012 is a result of decreases in the number of residential and business customers, switched access, data services and video revenue, each as described in more detail below.

Switched access and subsidy revenue of $148.3 million represented 12% of our revenues for the first quarter ended March 31, 2012.  Switched access revenue was $70.3 million for the first quarter ended March 31, 2012, or 6% of our revenues, down from $86.9 million, or 6% of our revenues, for the first quarter ended March 31, 2011.   Subsidy revenue was $78.0 million for the first quarter ended March 31, 2012, or 6% of our revenues, down slightly from $79.3 million, or 6% of our revenues, for the first quarter ended March 31, 2011.  We expect declining revenue trends in switched access and subsidy revenue during the remainder of 2012.

Change in the number of our access lines is one metric that is important to our revenue and profitability.  We lost access lines primarily because of competition (due to changing technology and consumer behavior such as wireless substitution), economic conditions, and by the loss of second lines upon the addition of broadband service.  We lost approximately 102,100 access lines (net) during the three months ended March 31, 2012, or 8% on an annual basis, comparable to the 136,800 access lines (net) lost during the three months ended March 31, 2011, or 9% on an annual basis.  In addition, in our normal course of business, we proactively remove access lines when we upgrade business customers and when we convert our dial up customers to digital phone.  As a result, some of these access line losses are not indicative of a loss of revenue or customers.  Economic conditions and/or increasing competition could make it more difficult to sell our bundled service offerings, and cause us to increase our promotions and/or lower our prices for our products and services, which would adversely affect our revenue, profitability and cash flows.

During the three months ended March 31, 2012, the Company added approximately 11,700 broadband subscribers (net).  In connection with the Transaction, the Company agreed to focus primarily on certain capital investment commitments to expand broadband availability and speeds.  The Company plans to significantly expand broadband availability and speed over the next several years.  We expect to continue to increase broadband subscribers during the remainder of 2012.

While the number of access lines is an important metric to gauge certain revenue trends, it is not necessarily the best or only measure to evaluate our business.  Management believes that customer counts and understanding different components of revenue is most important.  For this reason, presented in the table titled “Other Financial and Operating Data” below is an analysis that  presents customer counts, average monthly revenue, products per customer and churn.  It also categorizes revenue into customer revenue (residential and business) and regulatory revenue (switched access and subsidy revenue).  Despite the 9% decline in residential customers and the 8% decline in total access lines, customer revenue (all revenue except switched access and subsidy revenue) declined in the first quarter of 2012 by only 5% as compared to the prior year period.   The decline in customers and access lines was partially offset by increased penetration of additional products sold to both residential and business customers.  A substantial further loss of customers and access lines, combined with increased competition and the other factors discussed herein may cause our revenue, profitability and cash flows to decrease in the remainder of 2012.


 
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
OTHER FINANCIAL AND OPERATING DATA
                               
   
As of
   
As of
   
% Increase
   
As of
   
% Increase
 
   
March 31, 2012
   
December 31, 2011
   
(Decrease)
   
March 31, 2011
   
(Decrease)
 
Access lines:
                             
   Residential
    3,196,951       3,267,487       (2 %)     3,521,710       (9 %)
   Business
    1,967,877       1,999,429       (2 %)     2,087,254       (6 %)
Total access lines
    5,164,828       5,266,916       (2 %)     5,608,964       (8 %)
                                         
Broadband subscribers
    1,775,853       1,764,160       1 %     1,730,336       3 %
Video subscribers
    561,878       557,527       1 %     546,404       3 %
                                         

     
For the three months ended March 31,
             
                 
$ Increase
   
% Increase
 
     
2012
   
2011
   
(Decrease)
   
(Decrease)
 
 
Revenue (in 000's):
                       
 
   Residential
  $ 534,836     $ 589,166     $ (54,330 )     (9 %)
 
   Business
    584,873       591,310       (6,437 )     (1 %)
 
Customer revenue
    1,119,709       1,180,476       (60,767 )     (5 %)
                                   
 
   Switched access and subsidy
    148,345       166,221       (17,876 )     (11 %)
 
Total revenue
  $ 1,268,054     $ 1,346,697     $ (78,643 )     (6 %)
                                   
 
Switched access minutes of use
                               
 
   (in millions)
    4,517       5,000               (10 %)
 
Average monthly total revenue per