10-Q 1 form10q1q2013.htm 1Q'13 FORM 10-Q form10q1q2013.htm
 



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, 2013







 
 

 
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, 2013

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 1, 2013 was 997,753,000.
 
 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Index


 
Page No.
Part I.  Financial Information (Unaudited)
 
   
Item 1.  Financial Statements
 
   
     Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012
2
   
     Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012
3
   
     Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012
3
   
     Consolidated Statements of Equity for the three months ended March 31, 2012, the nine months
     ended December 31, 2012 and the three months ended March 31, 2013
 
4
   
     Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012
5
   
     Notes to Consolidated Financial Statements
6
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
   
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
37
   
Item 4.  Controls and Procedures
39
   
Part II.  Other Information
 
   
Item 1.  Legal Proceedings
40
   
Item 1A.  Risk Factors
40
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
40
   
Item 4.  Mine Safety Disclosure
41
   
Item 6.  Exhibits
42
   
Signature
43
   





 
1

 
PART I.  FINANCIAL INFORMATION

Item 1.Financial Statements

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)

             
   
(Unaudited)
March 31, 2013
   
December 31, 2012
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 875,909     $ 1,326,532  
Accounts receivable, less allowances of $96,164 and $93,267, respectively
    480,746       533,704  
Restricted cash
    22,126       15,408  
Prepaid expenses
    65,762       66,972  
Income taxes and other current assets
    103,612       144,587  
Total current assets
    1,548,155       2,087,203  
                 
Restricted cash
    20,545       27,252  
Property, plant and equipment, net
    7,417,746       7,504,896  
Goodwill
    6,337,719       6,337,719  
Other intangibles, net
    1,455,956       1,542,739  
Other assets
    229,441       233,822  
Total assets
  $ 17,009,562     $ 17,733,631  
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Long-term debt due within one year
  $ 57,899     $ 560,550  
Accounts payable
    219,009       338,148  
Advanced billings
    143,768       146,317  
Accrued other taxes
    74,003       66,342  
Accrued interest
    208,114       209,327  
Other current liabilities
    213,144       232,836  
Total current liabilities
    915,937       1,553,520  
                 
Deferred income taxes
    2,335,286       2,357,210  
Pension and other postretirement benefits
    1,054,246       1,055,058  
Other liabilities
    264,982       266,625  
Long-term debt
    8,368,729       8,381,947  
                 
Equity:
               
Shareholders' equity of Frontier:
               
Common stock, $0.25 par value (1,750,000,000 authorized shares,
               
998,131,000 and 998,410,000 outstanding, respectively, and
               
1,027,986,000 issued, at March 31, 2013 and December 31, 2012)
    256,997       256,997  
Additional paid-in capital
    4,536,657       4,639,563  
Retained earnings
    111,345       63,205  
Accumulated other comprehensive loss, net of tax
    (476,830 )     (483,576 )
Treasury stock
    (365,705 )     (368,593 )
Total shareholders' equity of Frontier
    4,062,464       4,107,596  
Noncontrolling interest in a partnership
    7,918       11,675  
Total equity
    4,070,382       4,119,271  
Total liabilities and equity
  $ 17,009,562     $ 17,733,631  
                 

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, 2013 AND 2012
($ in thousands, except for per-share amounts)
(Unaudited)
 
   
2013
   
2012
 
             
Revenue
  $ 1,205,396     $ 1,268,054  
                 
Operating expenses:
               
Network access expenses
    109,398       115,569  
Other operating expenses
    541,499       551,583  
Depreciation and amortization
    303,675       357,300  
Integration costs
    -       35,144  
Total operating expenses
    954,572       1,059,596  
                 
Operating income
    250,824       208,458  
                 
Investment income
    3,062       2,103  
Other income, net
    1,592       3,485  
Interest expense
    171,420       164,862  
                 
Income before income taxes
    84,058       49,184  
Income tax expense
    33,275       18,694  
                 
Net income
    50,783       30,490  
Less: Income attributable to the noncontrolling interest in a partnership
    2,643       3,722  
Net income attributable to common shareholders of Frontier
  $ 48,140     $ 26,768  
                 
Basic and diluted net income per share attributable to common
               
shareholders of Frontier
  $ 0.05     $ 0.03  
                 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012
($ in thousands)
(Unaudited)
   
2013
   
2012
 
             
Net income
  $ 50,783     $ 30,490  
Other comprehensive income, net
               
   of tax (see Note 15)
    6,746       4,267  
Comprehensive income
    57,529       34,757  
                 
Less:  Net income attributable
               
   to the noncontrolling interest
               
   in a partnership
    (2,643 )     (3,722 )
                 
Comprehensive income attributable to
               
   the common shareholders of Frontier
  $ 54,886     $ 31,035  
                 

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, 2012, THE NINE MONTHS ENDED DECEMBER 31, 2012 AND
THE THREE MONTHS ENDED MARCH 31, 2013
($ 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, 2012
    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  
Stock plans
    -       -       9,463       -       -       (102 )     1,423       -       10,886  
Dividends on common stock
    -       -       (99,238 )     (200,301 )     -       -       -       -       (299,539 )
Net income
    -       -       -       109,868       -       -       -       12,956       122,824  
Other comprehensive income, net
                                                                       
  of tax
    -       -       -       -       (100,880 )     -       -       -       (100,880 )
Distributions
    -       -       -       -       -       -       -       (14,000 )     (14,000 )
Balance December 31, 2012
    1,027,986       256,997       4,639,563       63,205       (483,576 )     (29,576 )     (368,593 )     11,675       4,119,271  
Stock plans
    -       -       (3,094 )     -       -       (279 )     2,888       -       (206 )
Dividends on common stock
    -       -       (99,812 )     -       -       -       -       -       (99,812 )
Net income
    -       -       -       48,140       -       -       -       2,643       50,783  
Other comprehensive income, net
                                                                       
  of tax
    -       -       -       -       6,746       -       -       -       6,746  
Distributions
    -       -       -       -       -       -       -       (6,400 )     (6,400 )
Balance March 31, 2013
    1,027,986     $ 256,997     $ 4,536,657     $ 111,345     $ (476,830 )     (29,855 )   $ (365,705 )   $ 7,918     $ 4,070,382  
                                                                         
                                                                         



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, 2013 AND 2012
($ in thousands)
(Unaudited)

   
2013
   
2012
 
             
Cash flows provided by (used in) operating activities:
           
Net income
  $ 50,783     $ 30,490  
Adjustments to reconcile net income to net cash provided by
               
   operating activities:
               
Depreciation and amortization expense
    303,675       357,300  
Stock based compensation expense
    3,885       3,718  
Pension/OPEB costs
    5,018       12,403  
Other non-cash adjustments
    1,710       1,537  
Deferred income taxes
    (10,133 )     15,764  
Change in accounts receivable
    48,951       59,905  
Change in accounts payable and other liabilities
    (84,756 )     (102,042 )
Change in prepaid expenses, income taxes and other current assets
    40,159       3,438  
Net cash provided by operating activities
    359,292       382,513  
                 
Cash flows provided from (used by) investing activities:
               
Capital expenditures - Business operations
    (189,009 )     (208,522 )
Capital expenditures - Integration activities
    -       (15,731 )
Network expansion funded by Connect America Fund
    (1,815 )     -  
Grant funds received for network expansion from Connect America Fund
    5,998       -  
Cash transferred from (to) escrow
    (11 )     5,425  
Other assets purchased and distributions received, net
    528       (5,918 )
Net cash used by investing activities
    (184,309 )     (224,746 )
                 
Cash flows provided from (used by) financing activities:
               
Long-term debt payments
    (517,129 )     (14,502 )
Dividends paid
    (99,812 )     (99,851 )
Repayment of customer advances for construction,
               
   distributions to noncontrolling interests and other
    (7,279 )     (3,694 )
Net cash used by financing activities
    (624,220 )     (118,047 )
                 
                 
Increase/(Decrease) in cash and cash equivalents
    (449,237 )     39,720  
Cash reclassed to assets held for sale
    (1,386 )     -  
Cash and cash equivalents at January 1,
    1,326,532       326,094  
Cash and cash equivalents at March 31,
  $ 875,909     $ 365,814  
                 
Supplemental cash flow information:
               
Cash paid (received) during the period for:
               
Interest
  $ 168,095     $ 118,524  
Income taxes (refunds)
  $ 947     $ (369 )
                 
                 

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, 2012.  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, 2013, 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).

Frontier has a 33% controlling general partner interest in a partnership entity, the Mohave Cellular Limited Partnership (Mohave).  Mohave’s results of operations and balance sheet are included in our consolidated financial statements.  The minority interest of the limited partners is reflected in the consolidated balance sheet as “Noncontrolling interest in a partnership” and in the consolidated statements of operations as “Income attributable to the noncontrolling interest in a partnership.”  See Note 18 – Subsequent Events for additional discussion regarding the sale of Mohave.

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 revenue recognition (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 voice, features, long distance and inside wire 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 within “Revenue” and “Other operating expenses” of $29.8 million and $29.7 million for the three months ended March 31, 2013 and 2012, respectively.

 
6

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




(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.   During the first quarter of 2013, the Company reorganized into four regional operating segments. Our operating segments consist of the following regions: Central, East, National and West.  Our regional operating segments are aggregated into one reportable segment.  In conjunction with the reorganization of our operating segments effective with the first quarter of 2013, we reassigned goodwill to our reporting units using a relative fair value allocation approach.

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:

Presentation of Comprehensive Income
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-02 (ASU 2013-02), “Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” (ASC Topic 220). ASU 2013-02 requires disclosing the effect of reclassifications out of accumulated other comprehensive income on the respective line items in the components of net income in circumstances when U.S. GAAP requires the item to be reclassified in its entirety to net income. This new guidance is to be applied prospectively. The Company adopted ASU 2013-02 during the fourth quarter of 2012 with no impact on our financial position, results of operations or cash flows.

Indefinite-Lived Intangible Assets
In July 2012, the FASB issued Accounting Standards Update No. 2012-02 (ASU 2012-02), “Intangibles—Goodwill and Other – Testing Indefinite-Lived Intangible Assets for Impairment,” (ASC Topic 350). ASU 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. This amendment also gives an entity the option not to calculate annually the fair value of an indefinite-lived intangible asset if the entity can determine that it is not more likely than not that the asset is impaired. If an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action.  ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company adopted ASU 2012-02 during the fourth quarter of 2012 with no material 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 certain states (the Acquired Territories), including Internet access and long distance services and broadband video provided to designated customers in the Acquired Territories (the Acquired Business).  Frontier was considered the acquirer of the Acquired Business for accounting purposes.

We accounted for our acquisition of 4.0 million access lines from Verizon (the Transaction) using the guidance included in Accounting Standards Codification (ASC) Topic 805. We incurred $35.1 million of integration related costs in connection with the Transaction during the three months ended March 31, 2012.  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, 2013
   
December 31, 2012
   
    
                 
    Retail and Wholesale
 
537,644
   
$
581,152
   
    Other
   
39,266
     
45,819
   
    Less: Allowance for doubtful accounts
   
(96,164
)
   
(93,267
)
 
         Accounts receivable, net
 
$
480,746
   
$
533,704
   
                   

We maintain an allowance for 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 $16.2 million and $16.6 million for the three months ended March 31, 2013 and 2012.

(5)   Property, Plant and Equipment:
Property, plant and equipment, net is as follows:

   ($ in thousands)
 
March 31, 2013
   
December 31, 2012
   
    
                 
    Property, plant and equipment
 
14,429,251
   
$
14,353,763
   
    Less:  Accumulated depreciation
   
(7,011,505
)
   
(6,848,867
)
 
         Property, plant and equipment, net
 
$
7,417,746
   
$
7,504,896
   
                   

Depreciation expense is principally based on the composite group method.  Depreciation expense was $216.7 million and $210.3 million for the three months ended March 31, 2013 and 2012, 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, 2012, with an immaterial impact to depreciation expense.

(6)    Goodwill and Other Intangibles:
The components of goodwill by the reporting units in effect as of March 31, 2013 are as follows:

($ in thousands)
     
    
       
Central
$
1,815,498
   
East
 
2,003,574
   
National
 
1,218,113
   
West
 
1,300,534
   
     Total Goodwill
$
6,337,719
   
         


 
8

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The components of other intangibles are as follows:

   ($ in thousands)
 
March 31, 2013
   
December 31, 2012
   
    
                 
Other Intangibles:
                 
    Customer base
 
2,427,648
   
$
2,427,648
   
    Software licenses
   
105,019
     
105,019
   
    Trade name and license
   
124,136
     
124,419
   
          Other intangibles
   
2,656,803
     
2,657,086
   
    Less: Accumulated amortization
   
(1,200,847
)
   
(1,114,347
)
 
         Total other intangibles, net
 
$
1,455,956
   
$
1,542,739
   
                   

Amortization expense was $87.0 million and $147.0 million for the three months ended March 31, 2013 and 2012, respectively. Amortization expense primarily represents the amortization of intangible assets (primarily customer base) that were acquired in the Transaction based on 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 $38.3 million for the three months ended March 31, 2012 for amortization associated with certain software licenses no longer required for operations as a result of the completed systems conversions and $10.5 million for the three months ended March 31, 2012 for amortization associated with certain Frontier legacy properties, each of which were fully amortized in 2012.

(7)    Fair Value of Financial Instruments:
The following table summarizes the carrying amounts and estimated fair values for long-term debt at March 31, 2013 and December 31, 2012.  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.

 
March 31, 2013
 
December 31, 2012
 
Carrying
     
Carrying
   
($ in thousands)
Amount
 
Fair Value
 
Amount
 
Fair Value
               
Long-term debt
$  8,368,729
 
$  8,947,496
 
$  8,381,947
 
$  9,091,416



 
9

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




(8)    Long-Term Debt:
The activity in our long-term debt from December 31, 2012 to March 31, 2013 is summarized as follows:


       
Three months ended
           
       
March 31, 2013
       
Interest
 
                       
Rate at
 
   
December 31,
 
Payments
   
New
 
March 31,
   
March 31,
 
($ in thousands)
 
2012
 
and Retirements
   
Borrowings
 
2013
      2013*  
                             
  Senior Unsecured Debt
  $ 8,919,696   $ (517,033 )   $ -   $ 8,402,663       7.95 %
                                     
  Industrial Development
                                   
     Revenue Bonds
    13,550     -       -     13,550       6.33 %
                                     
  Rural Utilities Service
                                   
    Loan Contracts
    9,322     (96 )     -     9,226       6.15 %
                                     
TOTAL LONG-TERM DEBT
  $ 8,942,568   $ (517,129 )   $ -   $ 8,425,439       7.94 %
                                     
  Less: Debt (Discount)/Premium
    (71 )                 1,189          
  Less: Current Portion
    (560,550 )                 (57,899 )        
                                     
    $ 8,381,947                 $ 8,368,729          
                                     

* Interest rate includes amortization of debt issuance costs and debt premiums or discounts.  The interest rates at March 31, 2013 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:

($ in thousands)
March 31, 2013
 
December 31, 2012
   
Principal
   
Interest
     
Principal
   
Interest
 
   
Outstanding
   
Rate
     
Outstanding
   
Rate
 
                           
Senior Notes and
   Debentures Due:
                         
   1/15/2013
$
-
   
-
   
$
502,658
   
6.250%
 
   5/1/2014
 
200,000
   
8.250%
     
200,000
   
8.250%
 
   3/15/2015 *
 
300,000
   
6.625%
     
300,000
   
6.625%
 
   4/15/2015 *
 
374,803
   
7.875%
     
374,803
   
7.875%
 
   10/14/2016 **
 
503,125
   
3.085% (Variable)
     
517,500
   
3.095% (Variable)
 
   4/15/2017 *
 
1,040,685
   
8.250%
     
1,040,685
   
8.250%
 
   10/1/2018
 
600,000
   
8.125%
     
600,000
   
8.125%
 
   3/15/2019
 
434,000
   
7.125%
     
434,000
   
7.125%
 
   4/15/2020
 
1,100,000
   
8.500%
     
1,100,000
   
8.500%
 
   7/1/2021
 
500,000
   
9.250%
     
500,000
   
9.250%
 
   4/15/2022
 
500,000
   
8.750%
     
500,000
   
8.750%
 
   1/15/2023
 
850,000
   
7.125%
     
850,000
   
7.125%
 
   11/1/2025
 
138,000
   
7.000%
     
138,000
   
7.000%
 
   8/15/2026
 
1,739
   
6.800%
     
1,739
   
6.800%
 
   1/15/2027
 
345,858
   
7.875%
     
345,858
   
7.875%
 
   8/15/2031
 
945,325
   
9.000%
     
945,325
   
9.000%
 
   10/1/2034
 
628
   
7.680%
     
628
   
7.680%
 
   7/1/2035
 
125,000
   
7.450%
     
125,000
   
7.450%
 
   10/1/2046
 
193,500
   
7.050%
     
193,500
   
7.050%
 
   
8,152,663
           
8,669,696
       
                           
Subsidiary Senior Notes
   and Debentures Due:
                         
   2/15/2028
 
200,000
   
6.730%
     
200,000
   
6.730%
 
   10/15/2029
 
50,000
   
8.400%
     
50,000
   
8.400%
 
                           
Total
$
8,402,663
   
7.78% ***
   
$
8,919,696
   
7.69% ***
 
                           


*        See Note 18 – Subsequent Events
**      Represents borrowings under the Credit Agreement with CoBank.
***    Interest rate represents a weighted average of the stated interest rates of multiple issuances.

 
11

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The Company has a 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 with a final maturity of October 14, 2016 (the Credit Agreement).  The entire loan 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 $14.4 million, 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 current pricing on this facility is LIBOR plus 2.875%.  The maximum permitted leverage ratio is 4.5 times.  

We also have a $750.0 million revolving credit facility.  As of March 31, 2013, we had not made any borrowings under this facility.  The terms of the credit facility are set forth in the 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, 2013. 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 is available for general corporate purposes but may not be used to fund dividend payments.  See Note 18 - Subsequent Events for additional discussion regarding renewal of the Revolving Credit Agreement.

 
We also have a $20.0 million unsecured letter of credit facility, as amended.  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 in September 2011, with the Bank exercising its option to extend $100.0 million of the commitments to September 2012.  In September 2012, the Company entered into an amendment to the Letter of Credit Agreement to extend $40 million of the commitments.  Two letters of credit, one for $20 million that expired in March 2013, and the other for $20 million expiring in September 2013, were issued in September 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 amended 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, 2013, we were in compliance with all of our debt and credit facility covenants.


 
12

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Our principal payments for the next five years are as follows as of March 31, 2013:
 
     
   
Principal
($ in thousands)
 
Payments
    
   
2013 (remaining nine months)
$
43,420
2014
$
257,916
2015
$
732,746
2016
$
345,466
2017
$
1,041,186
2018
$
600,534

See Note 18 – Subsequent Events for additional discussion regarding debt refinancing activities.

(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,  
     
2013
     
2012
 
                 
Consolidated tax provision at federal statutory rate
   
35.0%
     
35.0%
 
State income tax provisions, net of federal income
               
    tax benefit
   
        3.6
     
        2.8
 
Noncontrolling interest
   
      (0.4)
     
      (0.9)
 
Tax reserve adjustment
   
        0.4
     
        1.2
 
All other, net
   
        1.0
     
      (0.1)
 
Effective tax rate
   
39.6%
     
38.0%
 
                 
                 
                 

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 $5.2 million as of March 31, 2013.


 
13

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(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,
 
   
2013
   
2012
 
Net income used for basic and diluted earnings
           
   per common share:
           
Net income attributable to common shareholders of Frontier
  $ 48,140     $ 26,768  
Less:  Dividends paid on unvested restricted stock awards
    (521 )     (737 )
Total basic and diluted net income attributable to common
               
   shareholders of Frontier
  $ 47,619     $ 26,031  
                 
Basic earnings per common share:
               
Total weighted average shares and unvested restricted stock awards
               
   outstanding - basic
    998,146       995,897  
Less:  Weighted average unvested restricted stock awards
    (6,273 )     (7,024 )
Total weighted average shares outstanding - basic
    991,873       988,873  
Net income per share attributable to common shareholders of Frontier
  $ 0.05     $ 0.03  
 
               
Diluted earnings per common share:
               
Total weighted average shares outstanding - basic
    991,873       988,873  
Effect of dilutive shares
    675       12  
Effect of dilutive stock units
    -       623  
Total weighted average shares outstanding - diluted
    992,548       989,508  
                 
Net income per share attributable to common shareholders of Frontier
  $ 0.05     $ 0.03  
                 
 
Stock Options
For the three months ended March 31, 2013 and 2012, options to purchase 526,000 shares (at exercise prices ranging from $10.44 to $14.15) and 895,000 shares (at exercise prices ranging from $8.19 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.

Stock Units
At March 31, 2013 and 2012, we had 949,412 and 623,121 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).  These securities have not been included in the diluted income per share of common stock calculation for the three months ended March 31, 2013 because their inclusion would have an antidilutive effect.

(11) Stock Plans:
At March 31, 2013, 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 1996 EIP), the Amended and Restated 2000 Equity Incentive Plan (the 2000 EIP) and the Deferred Fee Plan. At March 31, 2013, there were 12,540,761 shares authorized for grant and 2,002,671 shares available for grant under the 2009 Equity Incentive Plan (the 2009 EIP) and the Directors’ Equity Plan.  
 
 
14

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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 Frontier Long-Term Incentive Plan (the “LTIP”). LTIP awards are 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 Integrated Telecommunications Services Group (GICS Code 50101020) for the three-year Measurement Period.  Operating cash flow performance is 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.  The TSR performance measure is then applied to decrease or increase payouts based on the Company’s three year relative TSR performance. LTIP awards, to the extent earned, will be paid out in the form of common stock shortly following the end of the three-year Measurement Period.
 
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.  On February 27, 2013, the Compensation Committee approved 1,123,966 target performance shares under the LTIP for the 2013-2015 Measurement Period and set the operating cash flow performance goal for 2013, which applies to the first year of the 2013-2015 Measurement Period and the second year of the 2012-2014 Measurement Period.  The performance share awards approved in February 2013 will be granted upon stockholder approval of the Company’s 2013 Equity Incentive Plan at the Annual Meeting of Stockholders to be held on May 8, 2013.  The number of shares of common stock earned at the end of each three-year Measurement Period may be more or less than the number of target performance shares granted as a result of operating cash flow and TSR performance.   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 each three year Measurement Period in February of the year following the end of the Measurement Period.

For the three months ended March 31, 2013, the Company recognized an expense of $0.3 million for the LTIP.

Restricted Stock
The following summary presents information regarding unvested restricted stock as of  March 31, 2013 and changes during the three months then ended with regard to restricted stock under the 2009 EIP:

         
Weighted
   
         
Average
   
   
 Number of
   
 Grant Date
 
Aggregate
   
 Shares
   
 Fair Value
 
Fair Value
Balance at January 1, 2013
7,049,000
 
 
$           8
   6.08
$
 30,169,000
 
 
Restricted stock granted (a)
521,000
 
 $
4.09
$
2,077,000 
 
Restricted stock vested
(1,806,000)
 
$
6.50
$
7,205,000 
 
Restricted stock forfeited
(422,000)
 
$
5.69
   
Balance at March 31, 2013
5,342,000
 
$
5.77
$
21,316,000

(a) Amount excludes 2,845,000 restricted shares approved by the Compensation Committee on February 27, 2013.  These restricted stock awards approved in February 2013 will be granted upon stockholder approval of the Company’s 2013 Equity Incentive Plan at the Annual Meeting of Stockholders to be held on May 8, 2013.
 
 
15

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
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, 2013 was $22.9 million and the weighted average period over which this cost is expected to be recognized is approximately 2 years.

Shares granted during the first three months of  2012 totaled 3,667,000.  The total fair value of shares granted and vested at March 31, 2012 was approximately $15.3 million and $4.7 million, respectively.  The total fair value of unvested restricted stock at March 31, 2012 was $30.7 million. The weighted average grant date fair value of restricted shares granted during the three months ended March 31, 2012 was $4.22.

Stock Options
The following summary presents information regarding outstanding stock options as of March 31, 2013 and changes during the three months then ended with regard to options under the 2000 EIP and the 2009 EIP:

         
Weighted
 
Weighted
     
   
Shares
   
Average
 
Average
   
Aggregate
   
 Subject to
   
 Option Price
 
 Remaining
   
Intrinsic
   
 Option
   
 Per Share
 
 Life in Years
   
 Value
Balance at January 1, 2013
540,000
 
$
10.99
 
0.9
 
$
-
 
Options granted
-
 
$
-
         
 
Options exercised
-
 
$
-
         
 
Options canceled, forfeited or lapsed
(14,000)
 
$
12.30
         
Balance at March 31, 2013
526,000
 
$
10.96
 
0.6
 
$
-
                     
Exercisable at March 31, 2013
526,000
 
$
10.96
 
0.6
 
$
-
                     
 
There were no stock options granted during the first three months of 2012.  There was no intrinsic value for the stock options outstanding and exercisable at March 31, 2012.  

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

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)
 
2013
   
2012
 
             
Interest and dividend income
  $ 1,766     $ 2,623  
Investment gain
    1,296       -  
Equity earnings (loss)
    -       (520 )
     Total investment income
  $ 3,062     $ 2,103  
                 
 
16

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
During the first quarter of 2013, we recognized an investment gain of $1.3 million associated with cash received in connection with our previously written-off investment in Adelphia.

(14)  Other Income, Net:
The components of other income, net are as follows:
 
   
For the three months ended March 31,
 
($ in thousands)
 
2013
   
2012
 
             
Gain on expiration/settlement of customer advances
  $ 1,952     $ 3,463  
All other, net
    (360 )     22  
    Total other income, net
  $ 1,592     $ 3,485  
                 
(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 at March 31, 2013 and 2012 are as follows:
 
($ in thousands)
 
Pension Costs
      Postretirement Costs       Deferred taxes on pension and OPEB costs    
All other
   
Total
 
Balance at January 1, 2013
  $ (697,874 )   $ (74,264 )   $ 288,712     $ (150 )   $ (483,576 )
Other comprehensive income before reclassifications
    (229 )     -       293       -       64  
Amounts reclassified from accumulated other comprehensive loss
    10,074       703       (4,095 )     -       6,682  
Net current-period other comprehensive income (loss)
    9,845       703       (3,802 )     -       6,746  
Balance at March 31, 2013
  $ (688,029 )   $ (73,561 )   $ 284,910     $ (150 )   $ (476,830 )
                                         
                                         
($ in thousands)
 
Pension Costs
       Postretirement Costs       Deferred taxes on pension and OPEB costs    
All other
   
Total
 
Balance at January 1, 2012
  $ (575,163 )   $ (41,811 )   $ 230,161     $ (150 )   $ (386,963 )
Other comprehensive income before reclassifications
    -       -       (162 )      -       (162 )
Amounts reclassified from accumulated other comprehensive loss
    7,736       (592 )     (2,715 )     -       4,429  
Net current-period other comprehensive income (loss)
    7,736       (592 )     (2,877 )     -       4,267  
Balance at March 31, 2012
  $ (567,427 )   $ (42,403 )   $ 227,284     $ (150 )   $ (382,696 )
                                         
                                         


 
17

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The significant items reclassified from each component of accumulated other comprehensive loss for the three months ended March 31, 2013 and 2012 are as follows:
 
 
                 
($ in thousands)
 
Amount Reclassified from
 
 
   
Accumulated Other Comprehensive Loss (a)
 
Affected Line Item in the 
     
For the three months ended March 31,
  Statement Where Net 
Details about Accumulated Other Comprehensive Loss Components
 
2013
   
2012
  Income is Presented
Amortization of Pension Cost Items (b)
             
 
Prior-service costs
  $ (2 )   $ 50    
 
Actuarial gains/(losses)
    (10,072 )     (7,786 )  
        (10,074 )     (7,736 )
Income before income taxes
 
Tax impact
    3,828       2,940  
Income tax (expense) benefit
      $ (6,246 )   $ (4,796 )
Net income
Amortization of Postretirement Cost Items (b)
                 
 
Prior-service costs
  $ 1,525     $ 2,503    
 
Actuarial gains/(losses)
    (2,228 )     (1,911 )  
        (703 )     592  
Income before income taxes
 
Tax impact
    267       (225 )
Income tax (expense) benefit
      $ (436 )   $ 367  
Net income
                     
(a)
Amounts in parentheses indicate losses.
           
                     
(b)
These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 16 - Retirement Plans for additional details).
                     
                     

 
18

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16)  Retirement Plans:
The following tables provide the components of net periodic benefit cost:

 
Pension Benefits
 
    For the three months ended  
    March 31,  
   
2013
   
2012
 
($ in thousands)
           
Components of net periodic pension benefit cost
           
Service cost
  $ 12,834     $ 10,492  
Interest cost on projected benefit obligation
    18,880       19,658  
Expected return on plan assets
    (24,590 )     (24,088 )
Amortization of prior service cost /(credit)
    2       (50 )
Amortization of unrecognized loss
    10,072       7,786  
Net periodic pension benefit cost
  $ 17,198     $ 13,798  
                 
                 
 
Postretirement Benefits
 
 
Other Than Pensions (OPEB)
 
    For the three months ended
 
    March 31,  
      2013        2012   
($ in thousands)
               
Components of net periodic postretirement benefit cost
               
Service cost
  $ 3,179     $ 2,555  
Interest cost on projected benefit obligation
    4,440       4,460  
Expected return on plan assets
    (43 )     (55 )
Amortization of prior service cost/(credit)
    (1,525 )     (2,503 )
Amortization of unrecognized loss
    2,228       1,911  
Net periodic postretirement benefit cost
  $ 8,279     $ 6,368  
                 
During the first three months of 2013 and 2012, we capitalized $4.9 million and $4.2 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 2013 pension and OPEB expenses will be approximately $100 million to $110 million before amounts capitalized into the cost of capital expenditures (they were $81.6 million in 2012 before amounts capitalized into the cost of capital expenditures).   We made total cash contributions to our pension plan during the three months ended March 31, 2013 of $12.1 million.  We expect that we will make contributions to our pension plan of approximately $60 million in 2013.   

The Plan’s assets have decreased from $1,253.6 million at December 31, 2012 to $1,224.3 million at March 31, 2013, a decrease of $29.3 million, or 2%.  This decrease is a result of benefit payments of $89.1 million, offset by positive investment returns and cash contributions for a combined total of $59.8 million during the first three months of 2013.  

(17) Commitments and Contingencies:
We anticipate total capital expenditures for business operations of approximately $625 million to $675 million for 2013. 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.  

19
 

In connection with the Transaction, 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, 2013, we had expanded broadband availability in excess of 1 Mbps to 87% of the households throughout the Acquired Territories, in excess of 3 Mbps to 84% of the households throughout the Acquired Territories, and in excess of 4 Mbps to 80% 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 $23.9 million and an associated liability of $0.2 million as of March 31, 2013) was acquired in connection with the Transaction to be used for service quality initiatives in the state of West Virginia.  As of March 31, 2013, $145.0 million had been released from escrow and the Company had a restricted cash balance in these escrow accounts in the aggregate amount of $42.7 million, including interest earned.  In addition, as of March 31, 2013, the letter of credit had been reduced to $20 million.  The aggregate amount of these escrow accounts and the letter of credit will continue to decrease over time as Frontier makes the required capital expenditures in the respective states.

In our normal course of business, we have obligations under certain non-cancelable arrangements for services.  During 2012, we entered into a “take or pay” arrangement for the purchase of future long distance and carrier services.   Our total commitments under the arrangement are $132.0 million, $141.8 million and $140.8 million for the years ending December 31, 2013, 2014 and 2015, respectively.  As of March 31, 2013, we expect to utilize the services included within the arrangement and no liability for the “take or pay” provision has been recorded.

The Company has entered into an agreement to upgrade a significant portion of its existing vehicle fleet.  As of March 31, 2013, the Company has accepted delivery of 3,047 new vehicles and expects to accept delivery of 632 additional new vehicles by June 30, 2013.  The new vehicles expected to be leased under this program will represent approximately 50% of our vehicle fleet.   The minimum lease commitment for each vehicle is 1 year and the leases are renewable at the Company’s option.  The total annual lease expense for all of the new vehicles is expected to be approximately $30.0 million on an annualized basis.

We are party to various legal proceedings (including individual, class and putative class actions) arising in the normal course of our business covering a wide range of matters and types of claims including, but not limited to, general contracts, billing disputes, rights of access, taxes and surcharges, consumer protection, trademark and patent infringement, employment, regulatory, tort, claims of competitors and disputes with other carriers.  

In accordance with U.S. GAAP, we accrue an expense for pending litigation when we determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated.  Legal defense costs are expensed as incurred.  None of our existing accruals for pending matters is material.  We constantly monitor our pending litigation for the purpose of adjusting our accruals and revising our disclosures accordingly, in accordance with U.S. GAAP, when required.  Litigation is, however, subject to uncertainty, and the outcome of any particular matter is not predictable.  We will vigorously defend our interests for pending litigation, and as of this date, we believe that the ultimate resolution of all such matters, after considering insurance coverage or other indemnities to which we are entitled, will not have a material adverse effect on our consolidated 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 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, 2013 and remained in default for the duration of the contract (another 3 years), we estimate that our undiscounted purchase obligation for 2013 through 2015 would be approximately $431.1 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.
20

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(18)  Subsequent Events:
We repurchased $208.8 million of the 2017 Notes in a privately negotiated transaction for $250.6 million that was settled with cash on hand on April 2, 2013.  This repurchase resulted in a loss on the early extinguishment of debt of approximately $41.1 million ($25.4 million or $0.03 per share after tax), which will be recognized in the second quarter of 2013.

On April 10, 2013, the Company completed a registered debt offering of $750.0 million aggregate principal amount of 7.625% senior unsecured notes due 2024, issued at a price of 100% of their principal amount.  We received net proceeds of $736.9 million from the offering after deducting underwriting fees.  The Company used the net proceeds from the sale of the notes, together with cash on hand, to finance the cash tender offers discussed below.

On April 10, 2013, the Company accepted for purchase $471.3 million aggregate principal amount of its senior notes tendered for total consideration of $532.4 million, consisting of $194.2 million aggregate principal amount of the 6.625% senior notes due 2015 (the March 2015 Notes), tendered for total consideration of $216.0 million, and $277.1 million aggregate principal amount of the 7.875% senior notes due 2015 (the April 2015 Notes), tendered for total consideration of $316.4 million, respectively.  On April 24, 2013, the Company accepted for purchase $0.7 million aggregate principal amount of the March 2015 Notes, tendered for total consideration of $0.8 million, $0.8 million of the April 2015 Notes, tendered for total consideration of $0.9 million, and $225.0 million aggregate principal amount of the 8.250% senior notes due 2017 (the 2017 Notes), tendered for total consideration of $267.7 million, respectively.  The repurchases in the debt tender offers for the senior notes resulted in a loss on the early extinguishment of debt of approximately $102.7 million, ($63.6 million or $0.06 per share after tax), which will be recognized in the second quarter of 2013.  As of April 30, 2013, approximately $105.0 million aggregate principal amount of the March 2015 Notes, $96.9 million aggregate principal amount of the April 2015 Notes and $606.9 million aggregate principal amount of the 2017 Notes remained outstanding.
 
The Company has entered into a new $750.0 million revolving credit facility (the New Credit Facility).  The terms of the New Credit Facility are set forth in the credit agreement, dated as of May 3, 2013, among the Company, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and the joint lead arrangers, joint bookrunners, syndication agent and joint documentation agents named therein (the New Revolving Credit Agreement).  Associated facility fees under the New Credit Facility will vary from time to time depending on the Company’s debt rating (as defined in the New Revolving Credit Agreement).  The New Credit Facility is scheduled to terminate on November 3, 2016.  During the term of the New Credit Facility, the Company may borrow, repay and reborrow funds, and may obtain letters of credit, subject to customary borrowing conditions.  Loans under the New Credit Facility will bear interest based on the alternate base rate or the adjusted LIBO rate (each as determined in the New Revolving Credit Agreement), at the Company’s election, plus a margin specified in the New Revolving Credit Agreement based on the Company’s debt rating.  Letters of credit issued under the New Credit Facility will also be subject to fees that vary depending on the Company’s debt rating.  The New Credit Facility is available for general corporate purposes but may not be used to fund dividend payments.
 
21

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

During 2012, the Company entered into an agreement with Verizon Wireless to sell its 33% partnership interest in the Mohave Cellular Limited Partnership, in which Frontier was the General Partner. We closed on the sale on April 1, 2013, and we will recognize a gain on sale of approximately $15.3 million before taxes in the second quarter of 2013. As of March 31, 2013, Mohave is consolidated within Frontier’s financial statements, with the non-controlling interest portion separately identified and disclosed, and net assets of approximately $12.1 million classified as held-for-sale, consisting of $14.3 million included within “Income taxes and other assets” and $2.2 million included within “Other current liabilities” as of March 31, 2013.
 
 
22

 

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 effects of greater than anticipated competition which could require us to implement 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 voice customers that we cannot offset with 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;

·  
The effects of 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;

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

 
23

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
 
·  
The effects of increased medical, pension and postemployment expenses and related funding requirements;

·  
The effects of changes in income tax rates, tax laws, regulations or rulings, or federal or state tax assessments;

·  
Our ability to successfully renegotiate union contracts in 2013 and thereafter;

·  
Changes in pension plan assumptions and/or the value of our pension plan assets, which could 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;

·  
Our cash flow from operations, amount of capital expenditures, debt service requirements, cash paid for income taxes and liquidity may affect our payment of dividends on our common shares;

·  
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; 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.

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.

The Company is the largest communications company providing services predominantly to rural areas and small and medium-sized towns and cities in the U.S.  The Company operates in 27 states, and is the nation’s fourth largest Incumbent Local Exchange Carrier (ILEC), with 3.1 million customers,  1.8 million broadband connections and 14,400 employees as of March 31, 2013.

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 (the Order). The Order changed how federal subsidies will be calculated and disbursed, with these changes being phased-in beginning in 2012. These changes transition the Federal Universal Service High-Cost Fund, which supports voice services in high-cost areas, to the Connect America Fund (CAF), which supports broadband deployment in high-cost areas. CAF Phase I, implemented in 2012, provides for ongoing USF support for price cap carriers to be capped at the 2011 amount. In addition, the FCC in CAF Phase I made 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 was eligible to receive $71.9 million of the total $300 million CAF Phase I interim support. On July 9, 2012, Frontier announced that it would accept all of the funding for which it is eligible. On July 24, 2012, Frontier formally notified the FCC and appropriate state commissions of its intent to accept those funds and identified the unserved locations to be served using the funds. The $71.9 million in incremental CAF Phase I support is expected to enable an incremental 92,877 households for broadband service and will be accounted for as Contributions in Aid of Construction.  Frontier is required to implement, spend and enable these 92,877 households no later than July 24, 2015.  As of March 31, 2013, Frontier has received the entire $71.9 million of the CAF Phase I support funds and has initially recorded as increases to Cash and Other liabilities in the balance sheet.  The FCC is currently considering the rules for distribution of incremental CAF funding in 2013.
 
 
24

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
 
The Order also makes changes to Intercarrier Compensation. Intercarrier Compensation, which is the payment framework that governs how carriers compensate each other for the exchange of interstate traffic, will transition over a number of years, with the first step being implemented in July 2012, to a near zero rate for terminating traffic by 2017. Frontier will be able to recover a significant portion of those revenues through end user rates and other replacement support mechanisms. We do not expect the implementation to have a material impact on our revenues in 2013.

Effective December 29, 2011, the 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 Order has been challenged by certain parties in court and certain parties have also petitioned the FCC to reconsider various aspects of the Order. With the initial implementation commencing in July 2012, the impact during the second half of 2012 and the first quarter of 2013 was immaterial.

Certain states also have their own open proceedings to address reform to intrastate access charges and other intercarrier compensation and state universal service funds.  Although the FCC has pre-empted state jurisdiction on most access charges, many states could consider moving forward with their proceedings. We cannot predict when or how these matters will be decided or the effect on our subsidy or switched access revenues.

 
25

 

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, 2012.

(a)  Liquidity and Capital Resources

As of March 31, 2013, we had cash and cash equivalents aggregating $875.9 million (excluding total restricted cash of $42.7 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, 2013, we used cash flow from operations and cash on hand to fund principally all of our cash investing and financing activities, primarily capital expenditures, dividends and debt repayments.

We repurchased $208.8 million of the 2017 Notes in a privately negotiated transaction for $250.6 million that was settled with cash on hand on April 2, 2013.  This repurchase resulted in a loss on the early extinguishment of debt of approximately $41.1 million ($25.4 million or $0.03 per share after tax), which will be recognized in the second quarter of 2013.

On April 10, 2013, the Company completed a registered debt offering of $750.0 million aggregate principal amount of 7.625% senior unsecured notes due 2024, issued at a price of 100% of their principal amount.  We received net proceeds of $736.9 million from the offering after deducting underwriting fees.  The Company used the net proceeds from the sale of the notes, together with cash on hand, to finance the cash tender offers discussed below.

On April 10, 2013, the Company accepted for purchase $471.3 million aggregate principal amount of its senior notes tendered for total consideration of $532.4 million, consisting of $194.2 million aggregate principal amount of the 6.625% senior notes due 2015 (the March 2015 Notes), tendered for total consideration of $216.0 million, and $277.1 million aggregate principal amount of the 7.875% senior notes due 2015 (the April 2015 Notes), tendered for total consideration of $316.4 million, respectively.  On April 24, 2013, the Company accepted for purchase $0.7 million aggregate principal amount of the March 2015 Notes, tendered for total consideration of $0.8 million, $0.8 million of the April 2015 Notes, tendered for total consideration of $0.9 million, and $225.0 million aggregate principal amount of the 8.250% senior notes due 2017 (the 2017 Notes), tendered for total consideration of $267.7 million, respectively.  The repurchases in the debt tender offers for the senior notes resulted in a loss on the early extinguishment of debt of approximately $102.7 million ($63.6 million or $0.06 per share after tax), which will be recognized in the second quarter of 2013.  As of April 30, 2013, approximately $105.0 million aggregate principal amount of the March 2015 Notes, $96.9 million aggregate principal amount of the April 2015 Notes and $606.9 million aggregate principal amount of the 2017 Notes remained outstanding.

We have a revolving credit facility with a line of credit of $750.0 million that we believe provides sufficient flexibility to meet our liquidity needs.  As of March 31, 2013, we had not made any borrowings under this facility.  At March 31, 2013, the ratio of our net debt to adjusted operating cash flow (leverage ratio) was 3.22 times.

At March 31, 2013, we had a working capital surplus of $632.2 million.  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, and support our short-term and long-term operating strategies through 2013. However, a number of factors, including but not limited to, losses of voice customers, 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, 2013, we had $43.4 million of debt maturing during the last nine months of 2013 and $257.9 million and $732.7 million of debt maturing in 2014 and 2015, respectively. As of April 30, 2013, and after reflecting the debt refinancing activities discussed above, we had $43.4 million of debt maturing during the last eight months of 2013 and $257.9 million and $259.9 million of debt maturing in 2014 and 2015, 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.

 
26

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
 
As of March 31, 2013 and December 31, 2012, we had expanded our broadband availability to the households throughout the Company’s territories as follows:

 
March 31, 2013
 
December 31, 2012
 
Frontier
 
Acquired
 
Total
 
Total
(In excess of)
Legacy
 
Territories
 
Company
 
Company
               
1 Mbps
93%
 
87%
 
88%
 
88%
3 Mbps
80%
 
84%
 
83%
 
83%
4 Mbps
76%
 
80%
 
79%
 
77%
6 Mbps
66%
 
78%
 
74%
 
74%
12 Mbps
51%
 
55%
 
54%
 
51%
20 Mbps
43%
 
42%
 
42%
 
40%

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 $23.9 million and an associated liability of $0.2 million as of March 31, 2013) was acquired in connection with the Transaction to be used for service quality initiatives in the state of West Virginia.  As of March 31, 2013, $145.0 million had been released from escrow.  As of March 31, 2013, the Company had a restricted cash balance in these escrow accounts of $42.7 million and the letter of credit had been reduced to $20 million.  The aggregate amount of these escrow accounts and the letter of credit 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 $23.2 million, or 6%, for the three months ended March 31, 2013, as compared with the prior year period.  The decrease was primarily the result of lower revenue and net income before depreciation and amortization.

We paid $0.9 million in net cash taxes during the first three months of 2013.  We expect that in 2013 our cash taxes for the full year will be approximately $125 million to $150 million.

Cash Flows used by Investing Activities

Capital Expenditures
For the three months ended March 31, 2013 and 2012, our capital expenditures were $189.0 million and $224.3 million (including $15.7 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 decrease in 2013 to approximately $625 million to $675 million due to the planned completion of geographic broadband expansion requirements established in connection with regulatory approval of the Transaction.

Cash Flows used by Financing Activities

Debt Reduction
During the first three months of 2013 and 2012, we retired an aggregate principal amount of $517.1 million and $14.5 million, respectively, of debt consisting of $517.0 million and $14.4 million, respectively, of senior unsecured debt and $0.1 million, respectively, of rural utilities service loan contracts in each period.

We may from time to time make additional repurchases of 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.

 
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
 
Bank Financing
The Company has a 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 with a final maturity of October 14, 2016 (the Credit Agreement).  The entire loan 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 $14.4 million, 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 current pricing on this facility is LIBOR plus 2.875%.  The maximum permitted leverage ratio is 4.5 times.

Credit Facility
We also have a $750.0 million revolving credit facility. As of March 31, 2013, we had not made any borrowings under this facility.  On May 3, 2013, the Company entered into a new $750.0 million revolving credit facility (the New Credit Facility) and the existing facility was terminated.  The terms of the New Credit Facility are set forth in the credit agreement, dated as of May 3, 2013, among the Company, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and the joint lead arrangers, joint bookrunners, syndication agent and joint documentation agents named therein (the New Revolving Credit Agreement). Associated facility fees under the New Credit Facility will vary from time to time depending on the Company’s debt rating (as defined in the New Revolving Credit Agreement). The New Credit Facility is scheduled to terminate on November 3, 2016. During the term of the New Credit Facility, the Company may borrow, repay and reborrow funds, and may obtain letters of credit, subject to customary borrowing conditions. Loans under the New Credit Facility will bear interest based on the alternate base rate or the adjusted LIBO rate (each as determined in the New Revolving Credit Agreement), at the Company’s election, plus a margin specified in the New Revolving Credit Agreement based on the Company’s debt rating. Letters of credit issued under the New Credit Facility will also be subject to fees that vary depending on the Company’s debt rating. The New Credit Facility is available for general corporate purposes but may not be used to fund dividend payments.
 
Letter of Credit Facility
We also have a $20.0 million unsecured letter of credit facility, as amended. 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 in September 2011, with the Bank exercising its option to extend $100.0 million of the commitments to September 2012.  In September 2012, the Company entered into an amendment to the Letter of Credit Agreement to extend $40 million of the commitments.  Two letters of credit, one for $20 million that expired in March 2013, and the other for $20 million expiring in September 2013, were issued in September 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 amended 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.

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

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, 2013, we were in compliance with all of our debt and credit facility covenants.

Dividends
We intend to pay regular quarterly dividends.  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.

Future Commitments
In our normal course of business we have obligations under certain non-cancelable arrangements for services.  During 2012, we entered into a “take or pay” arrangement for the purchase of future long distance and carrier services.  Our total commitments under the arrangement are $132.0 million, $141.8 million and $140.8 million for the years ending December 31, 2013, 2014 and 2015, respectively.  As of March 31, 2013, we expect to utilize the services included within the arrangement and no liability for the “take or pay” provision has been recorded.

The Company has entered into an agreement to upgrade a significant portion of its existing vehicle fleet.  As of March 31, 2013, the Company has accepted delivery of 3,047 new vehicles and expects to accept delivery of 632 additional new vehicles by June 30, 2013.  The new vehicles expected to be leased under this program will represent approximately 50% of our vehicle fleet.   The minimum lease commitment for each vehicle is 1 year and the leases are renewable at the Company’s option.  The total annual lease expense for all of the new vehicles is expected to be approximately $30.0 million on an annualized basis.

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 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 revenue recognition (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.

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 impact that changes in such circumstances might have on the valuation of the Company’s goodwill or other intangible assets.  If our goodwill or other 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.

 
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
 
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, 2012.

New Accounting Pronouncements
There were no new accounting standards issued and adopted by the Company during the first three months of 2013, or that have been issued but are not required to be adopted until future periods, with any material financial statement impact.

Presentation of Comprehensive Income
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-02 (ASU 2013-02), “Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” (ASC Topic 220). ASU 2013-02 requires disclosing the effect of reclassifications out of accumulated other comprehensive income on the respective line items in the components of net income in circumstances when U.S. GAAP requires the item to be reclassified in its entirety to net income. This new guidance is to be applied prospectively. The Company adopted ASU 2013-02 during the fourth quarter of 2012 with no impact on our financial position, results of operations or cash flows.

Indefinite-Lived Intangible Assets
In July 2012, the FASB issued Accounting Standards Update No. 2012-02 (ASU 2012-02), “Intangibles–Goodwill and Other – Testing Indefinite-Lived Intangible Assets for Impairment,” (ASC Topic 350). ASU 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. This amendment also gives an entity the option not to calculate annually the fair value of an indefinite-lived intangible asset if the entity can determine that it is not more likely than not that the asset is impaired. If an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company adopted ASU 2012-02 during the fourth quarter of 2012 with no material 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 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, 2013 decreased $62.7 million, or 5%, to $1,205.4 million as compared with the three months ended March 31, 2012.  The decline during the first three months of 2013 is primarily the result of decreases in voice revenues, and lower switched and nonswitched access revenue, partially offset by an $18.3 million, or 9%, increase in data services revenue, each as described in more detail below.

Switched access and subsidy revenue of $142.3 million represented 12% of our revenues for the three months ended March 31, 2013. Switched access revenue was $62.3 million for the three months ended March 31, 2013, or 5% of our revenues, down from $76.9 million, or 6% of our revenues, for the three months ended March 31, 2012.   Subsidy revenue was $80.0 million for the three months ended March 31, 2013, or 7% of our revenues, down slightly from $80.2 million, or 6% of our revenues, for the three months ended March 31, 2012.  We expect declining revenue trends in switched access and subsidy revenue during the remainder of 2013.

During the quarter ended March 31, 2013, we lost 32,900 customers, as compared to a loss of 72,600 customers during the quarter ended March 31, 2012. We believe the improved customer retention in 2013 as compared to 2012 is principally due to our investments in our network, our local engagement strategy, improved customer service and simplified products and packages.  We lost 27,800 residential customers and 5,100 business customers during the quarter ended March 31, 2013, or 6% on an annual basis, as compared to 64,800 residential customers and 7,800 business customers lost during the quarter ended March 31, 2012, or 9% on an annual basis. Average monthly residential revenue per customer increased $0.99 to $58.82 during the quarter ended March 31, 2013 as compared to the quarter ended March 31, 2012. This increase is due to the additional monthly subscriber line charges to our residential customers that were implemented in the third quarter of 2012, as permitted by the Order, increased penetration of products and rationalized product pricing. 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 could adversely affect our revenue, profitability and cash flows.

During the three months ended March 31, 2013, the Company added approximately 28,200 net broadband subscribers.  During the first quarter of 2012, the Company added approximately 11,700 net broadband subscribers.  The Company plans to expand broadband availability and speed over the next several years.  We expect to continue to increase broadband subscribers during the remainder of 2013.

Management believes that customer counts and revenue per customer are the most important factors in evaluating our business trends.  Among the key services we provide to residential customers are voice service, data service, video service, and, in some markets, wireless service.  We continue to explore the potential to provide additional services to our customer base, with the objective of meeting all of our customers' communications needs, as well as increasing revenue per customer.  For commercial customers we provide voice and data services, as well as a broad range of value-added services.

For the above reasons, presented in the table titled “Other Financial and Operating Data” below is an analysis that presents customer counts, average monthly revenue and churn.  It also categorizes revenue into customer revenue (business and residential) and regulatory revenue (switched access and subsidy revenue).  Despite the 7% decline in business customers and