Attached files

file filename
EX-31.2 - DON'S CERTIFICATION - FRONTIER COMMUNICATIONS CORPdoncert.htm
EX-32.2 - DON'S 906 CERTIFICATION - FRONTIER COMMUNICATIONS CORPdon906cert.htm
EX-31.1 - MAGGIE'S CERTIFICATION - FRONTIER COMMUNICATIONS CORPmaggiecert.htm
EX-32.1 - MAGGIE'S 906 CERTIFICATION - FRONTIER COMMUNICATIONS CORPmaggie906cert.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, 2010







 
 

 
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, 2010

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       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 3, 2010 was 313,391,000.
 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Index


 
Page No.
Part I.  Financial Information (Unaudited)
 
   
Item 1.  Financial Statements
 
   
     Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009
2
   
     Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009
3
   
     Consolidated Statements of Equity for the three months ended March 31, 2009, the nine months ended
     December 31, 2009 and the three months ended March 31, 2010
 
4
   
     Consolidated Statements of Comprehensive Income for the three months ended March 31, 2010 and 2009
4
   
     Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009
5
   
     Notes to Consolidated Financial Statements
6
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
   
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
31
   
Item 4.  Controls and Procedures
32
   
Part II.  Other Information
 
   
Item 1.  Legal Proceedings
33
   
Item 1A.  Risk Factors
33
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
46
   
Item 6.  Exhibits
48
   
Signature
49
   

 
 
 

 
PART I.  FINANCIAL INFORMATION
Item 1.Financial Statements
 
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
   
(Unaudited)
   
December 31,
 
   
March 31, 2010
   
2009
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 331,095     $ 358,693  
Accounts receivable, less allowances of $31,629 and $30,171, respectively
    189,503       190,745  
Prepaid expenses
    26,493       28,081  
Income taxes and other current assets
    79,837       102,561  
Total current assets
    626,928       680,080  
                 
Property, plant and equipment, net
    3,115,991       3,133,521  
                 
Goodwill, net
    2,642,323       2,642,323  
Other intangibles, net
    233,474       247,527  
Other assets
    174,907       174,804  
Total assets
  $ 6,793,623     $ 6,878,255  
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Long-term debt due within one year
  $ 7,228     $ 7,236  
Accounts payable
    110,077       139,556  
Other current liabilities
    208,742       245,885  
Total current liabilities
    326,047       392,677  
                 
Deferred income taxes
    730,371       722,192  
Other liabilities
    633,102       630,187  
Long-term debt
    4,796,474       4,794,129  
                 
Equity:
               
   Shareholders' equity of Frontier:
               
  Common stock, $0.25 par value (600,000,000 authorized shares; 313,410,000 and
  312,328,000 outstanding, respectively, and 349,456,000  issued at March 31, 2010
    and December 31, 2009)
  87,364       87,364  
Additional paid-in capital
    863,988       956,401  
Retained earnings
    45,321       2,756  
Accumulated other comprehensive loss, net of tax
    (241,542 )     (245,519 )
Treasury stock
    (458,368 )     (473,391 )
   Total shareholders' equity of Frontier
    296,763       327,611  
   Noncontrolling interest in a partnership
    10,866       11,459  
Total equity
    307,629       339,070  
    Total liabilities and equity
  $ 6,793,623     $ 6,878,255  
                 
The accompanying Notes are an integral part of these Consolidated Financial Statements.
 

 

PART I.  FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
($ in thousands, except for per-share amounts)
(Unaudited)


 
   
2010
   
2009
 
             
Revenue
  $ 519,849     $ 537,956  
                 
Operating expenses:
               
Network access expenses
    53,543       60,684  
Other operating expenses
    193,025       200,204  
Depreciation and amortization
    101,049       137,558  
Acquisition and integration costs
    10,370       -  
Total operating expenses
    357,987       398,446  
                 
Operating income
    161,862       139,510  
                 
Investment income
    2,497       3,562  
Other income, net
    4,956       4,685  
Interest expense
    93,787       88,749  
Income before income taxes
    75,528       59,008  
                 
Income tax expense
    32,056       22,053  
                 
Net income
    43,472       36,955  
Less: Income attributable to the noncontrolling
               
interest in a partnership
    907       652  
Net income attributable to common shareholders
               
of Frontier
  $ 42,565     $ 36,303  
                 
Basic and diluted net income per common share
               
  attributable to common shareholders of Frontier
  $ 0.14     $ 0.12  
                 


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

 
 

 

 PART I.  FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2009, THE NINE MONTHS ENDED DECEMBER 31, 2009 AND THE THREE MONTHS ENDED MARCH 31, 2010
($ and shares in thousands, except for per-share amounts)
(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, 2009
  349,456
 
 $ 87,364
 
 $  1,117,936
 
 $             38,163
 
 $       (237,152)
 
    (38,142)
 
 $ (487,266)
 
 $           10,561
 
 $        529,606
Stock plans
            -
 
            -
 
         (13,433)
 
                       -
 
                      -
 
        1,050
 
        14,111
 
                      -
 
                  678
Dividends on common stock of
                                 
    $0.25 per share
            -
 
            -
 
         (78,085)
 
                       -
 
                      -
 
              -
 
               -
 
                      -
 
           (78,085)
Net income
            -
 
            -
 
                  -
 
                36,303
 
                      -
 
              -
 
               -
 
                   652
 
             36,955
Other comprehensive income, net of tax
                                 
   and reclassification adjustments
            -
 
            -
 
                  -
 
                       -
 
                4,031
 
              -
 
               -
 
                      -
 
               4,031
Balance March 31, 2009
  349,456
 
    87,364
 
     1,026,418
 
                74,466
 
          (233,121)
 
    (37,092)
 
    (473,155)
 
              11,213
 
           493,185
Stock plans
            -
 
            -
 
            8,074
 
                       -
 
                      -
 
           (36)
 
           (236)
 
                      -
 
               7,838
Dividends on common stock of
                                 
    $0.75 per share
            -
 
            -
 
         (78,091)
 
            (156,190)
 
                      -
 
              -
 
               -
 
                      -
 
         (234,281)
Net income
            -
 
            -
 
                  -
 
                84,480
 
                      -
 
              -
 
               -
 
                1,746
 
             86,226
Other comprehensive loss, net of tax
                                 
   and reclassification adjustments
            -
 
            -
 
                  -
 
                       -
 
            (12,398)
 
              -
 
               -
 
                      -
 
           (12,398)
Distributions
            -
 
            -
 
                  -
 
                       -
 
                      -
 
              -
 
               -
 
              (1,500)
 
             (1,500)
Balance December 31, 2009
  349,456
 
    87,364
 
        956,401
 
                  2,756
 
          (245,519)
 
    (37,128)
 
    (473,391)
 
              11,459
 
           339,070
Stock plans
            -
 
            -
 
         (14,058)
 
                       -
 
                      -
 
        1,082
 
        15,023
 
                      -
 
                  965
Dividends on common stock of
                                 
    $0.25 per share
            -
 
            -
 
         (78,355)
 
                       -
 
                      -
 
              -
 
               -
 
                      -
 
           (78,355)
Net income
            -
 
            -
 
                  -
 
                42,565
 
                      -
 
              -
 
               -
 
                   907
 
             43,472
Other comprehensive income, net of tax
                                 
   and reclassification adjustments
            -
 
            -
 
                  -
 
                       -
 
                3,977
 
              -
 
               -
 
                      -
 
               3,977
Distributions
            -
 
            -
 
                  -
 
                       -
 
                      -
 
              -
 
               -
 
              (1,500)
 
             (1,500)
Balance March 31, 2010
  349,456
 
 $ 87,364
 
 $     863,988
 
 $             45,321
 
 $       (241,542)
 
    (36,046)
 
 $ (458,368)
 
 $           10,866
 
 $        307,629
                                   
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
($ in thousands)
(Unaudited)
 
   
2010
   
2009
 
             
Net income
  $ 43,472     $ 36,955  
Other comprehensive income, net of tax
               
  and reclassification adjustments
    3,977       4,031  
  Comprehensive income
    47,449       40,986  
Less: Comprehensive income attributable to
               
  the noncontrolling interest in a partnership
    (907 )     (652 )
Comprehensive income attributable to the common
               
   shareholders of Frontier
  $ 46,542     $ 40,334  
                 

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

 
PART I.  FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
($ in thousands)
(Unaudited)
             
   
2010
   
2009
 
Cash flows provided by (used in) operating activities:
           
Net income
  $ 43,472     $ 36,955  
                 
Adjustments to reconcile net income to net cash provided by
               
   operating activities:
               
Depreciation and amortization expense
    101,049       137,558  
Stock based compensation expense
    2,743       2,122  
Pension expense
    7,323       8,246  
Other non-cash adjustments
    (2,159 )     (3,759 )
Deferred income taxes
    8,084       4,125  
Change in accounts receivable
    1,242       9,211  
Change in accounts payable and other liabilities
    (62,914 )     (47,409 )
Change in prepaid expenses, income taxes and other current assets
    24,312       26  
Net cash provided by operating activities
    123,152       147,075  
                 
Cash flows provided from (used by) investing activities:
               
Capital expenditures - Business operations
    (39,927 )     (54,572 )
Capital expenditures - Integration activities
    (29,679 )     -  
Other assets purchased and distributions received, net
    142       158  
Net cash used by investing activities
    (69,464 )     (54,414 )
                 
Cash flows provided from (used by) financing activities:
               
Financing costs paid
    (82 )     -  
Long-term debt payments
    (977 )     (962 )
Issuance of common stock
    -       680  
Dividends paid
    (78,355 )     (78,085 )
Repayment of customer advances for construction
               
  and distributions to noncontrolling interests
    (1,872 )     (490 )
Net cash used by financing activities
    (81,286 )     (78,857 )
                 
Increase (decrease) in cash and cash equivalents
    (27,598 )     13,804  
Cash and cash equivalents at January 1,
    358,693       163,627  
                 
Cash and cash equivalents at March 31,
  $ 331,095     $ 177,431  
                 
Cash paid during the period for:
               
Interest
  $ 109,528     $ 116,408  
Income taxes
  $ -     $ 1,255  
                 
The accompanying Notes are an integral part of these Consolidated Financial Statements.
 

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,” or the “Company” in this report.  Our 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, 2009. Certain reclassifications of balances previously reported have been made to conform to the current presentation.  All significant intercompany balances and transactions have been eliminated in consolidation. These unaudited consolidated financial statements include all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the results for the interim periods shown.

The preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses during the reporting period.  Actual results may differ from those estimates.  Estimates and judgments are used when accounting for allowance for doubtful accounts, impairment of long-lived assets, intangible assets, depreciation and amortization, income taxes, purchase price allocations, contingencies, and pension and other postretirement benefits, among others. Certain information and footnote disclosures have been excluded and/or condensed pursuant to Securities and Exchange Commission rules and regulations.  The results of the interim periods are not necessarily indicative of the results for the full year.

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

The Company collects various taxes from its customers and subsequently remits such funds 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) which we have recorded on a gross basis in our consolidated statements of operations and included in revenue and other operating expenses at $10.4 million and $7.5 million for the three months ended March 31, 2010 and 2009, respectively.

(c)   Goodwill and Other Intangibles:
Intangibles represent the excess of purchase price over the fair value of identifiable tangible net assets acquired.  We undertake studies to determine the fair values of assets and liabilities acquired and allocate purchase prices to assets and liabilities, including property, plant and equipment, goodwill and other identifiable intangibles.  We annually (during the fourth quarter) or more frequently, if appropriate, examine the carrying value of our goodwill and trade name to determine whether there are any impairment losses.  We test for goodwill impairment at the “operating segment” level, as that term is defined in Accounting Standards Codification (ASC) Topic 350 (formerly Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”).  The Company has three “operating segments.”  Our “operating segments” are aggregated into one reportable segment.

ASC Topic 350 requires that intangible assets with estimated useful lives be amortized over those lives and be reviewed for impairment in accordance with ASC Topic 360 (formerly SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”) to determine whether any changes to these lives are required.  We periodically reassess the useful lives of our intangible assets to determine whether any changes are required.

(2)   Recent Accounting Literature and Changes in Accounting Principles:

Business Combinations
In December 2007, the FASB revised SFAS No. 141, “Business Combinations” (currently ASC Topic 805).  The revised statement, SFAS No. 141R (ASC Topic 805), as amended by FSP SFAS No. 141(R)-1 (ASC Topic 805), requires an acquiring entity to recognize all of the assets acquired and liabilities assumed in a transaction at the acquisition date at fair value, to recognize and measure preacquisition contingencies, including contingent consideration, at fair value (if possible), to remeasure liabilities related to contingent consideration at fair value in each subsequent reporting period and to expense all acquisition related costs.  The effective date of SFAS No. 141R (ASC Topic 805) was for business combinations for which the acquisition date was on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  We will account for our pending acquisition of approximately 4.1 million access lines (as of March 31, 2010) from Verizon Communications Inc. (Verizon)  (the Verizon Transaction) using the guidance included in SFAS No. 141R (ASC Topic 805).  During the three months ended March 31, 2010, we incurred approximately $10.4 million of acquisition and integration costs in connection with the Verizon Transaction.  In accordance with SFAS No. 141R (ASC Topic 805), such costs are required to be expensed as incurred and are reflected in “Acquisition and integration costs” in our consolidated statements of operations.

(3)    Pending Acquisition:
On May 13, 2009, we entered into a definitive agreement with Verizon under which Frontier will acquire defined assets and liabilities of the local exchange business and related landline activities of Verizon, including Internet access and long distance services and broadband video provided to designated customers. As part of the Verizon Transaction, the business to be acquired will be spun-off to Verizon stockholders (the spin-off).  New Communications Holdings Inc. (Spinco), a wholly-owned subsidiary of Verizon, which will hold the business to be acquired, will then merge with and into Frontier, and Frontier will survive as the combined company conducting the combined business operations of Frontier and Spinco (the merger).  Assuming that the merger occurred on March 31, 2010, the merger would have resulted in Frontier acquiring approximately 4.1 million access lines and certain business related assets from Verizon. The Verizon Transaction will be financed with approximately $5.3 billion of common stock plus the assumption of approximately $3.5 billion in debt.  Certain of the conditions to the closing of the Verizon Transaction have already been satisfied: (1) Frontier’s stockholders approved the Verizon Transaction at a special meeting of stockholders held on October 27, 2009; (2) the Federal Trade Commission has granted early termination of the waiting period under the Hart-Scott-Rodino Act; (3) approvals of all necessary local video franchise authorities, subject to certain conditions; (4) receipt by Verizon of a favorable ruling from the IRS regarding the tax consequences of the Verizon Transaction; (5) the completion of a $3.2 billion debt financing by Spinco which is sufficient to fund the special cash payment to Verizon, as contemplated by the Verizon Transaction; and (6) eight of the nine required state regulatory approvals.  Completion of the Verizon Transaction remains subject to a number of other conditions, including the receipt of the remaining state regulatory approval and approval from the Federal Communications Commission (FCC), as well as other customary closing conditions.  Subject to satisfaction of these conditions, we anticipate closing this transaction at the end of the second quarter of 2010.  Please see Note 16 for a description of the debt offering by Spinco completed subsequent to March 31, 2010.

On March 24, 2010, we entered into a new $750.0 million revolving credit facility (the New Credit Facility) that will become effective upon, and subject to (1) the closing of the merger, (2) the termination of the Company’s existing revolving credit facility and (3) other customary conditions. The terms of the New 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 Credit Agreement). Associated facility fees under the New Credit Facility will vary from time to time depending on the Company’s credit rating (as defined in the Credit Agreement). The New Credit Facility is scheduled to terminate on the date that is three years and six months after the effective date of the New Credit Facility. 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 LIBOR rate (each as determined in the Credit Agreement), at the Company’s election, plus a margin specified in the Credit Agreement based on the Company’s credit rating. Letters of credit issued under the New Credit Facility will also be subject to fees that vary depending on the Company’s credit rating. The New Credit Facility will be available for general corporate purposes but may not be used to fund dividend payments.
 
(4)   Accounts Receivable:
The components of accounts receivable, net at March 31, 2010 and December 31, 2009 are as follows:

   ($ in thousands)
 
March 31, 2010
   
December 31, 2009
   
    
                 
    End user
 
204,511
   
$
205,384
   
    Other
   
16,621
     
15,532
   
    Less: Allowance for doubtful accounts
   
(31,629
)
   
(30,171
)
 
         Accounts receivable, net
 
$
189,503
   
$
190,745
   
                   

We maintain an allowance for estimated bad debts based on our estimate of our ability to collect our accounts receivable. Bad debt expense, which is recorded as a reduction to revenue, was $6.1 million and $6.7 million for the three months ended March 31, 2010 and 2009, respectively.

(5)   Property, Plant and Equipment:
Property, plant and equipment at March 31, 2010 and December 31, 2009 is as follows:

   ($ in thousands)
 
March 31, 2010
   
December 31, 2009
   
    
                 
    Property, plant and equipment
 
7,864,523
   
$
7,803,062
   
    Less:  Accumulated depreciation
   
(4,748,532
)
   
(4,669,541
)
 
         Property, plant and equipment, net
 
$
3,115,991
   
$
3,133,521
   
                   

Depreciation expense is principally based on the composite group method.  Depreciation expense was $87.0 million and $92.9 million for the three months ended March 31, 2010 and 2009, respectively.  Effective with the completion of an independent study of the estimated useful lives of our plant assets we adopted new lives beginning October 1, 2009.

(6)   Other Intangibles:
    The components of other intangibles at March 31, 2010 and December 31, 2009 are as follows:

   ($ in thousands)
 
March 31, 2010
   
December 31, 2009
   
    
                 
    Customer base
 
270,309
   
$
270,309
   
    Trade name and license
   
134,680
     
134,680
   
          Other intangibles
   
404,989
     
404,989
   
    Less: Accumulated amortization
   
(171,515
)
   
(157,462
)
 
         Total other intangibles, net
 
$
233,474
   
$
247,527
   
                   

 
 

Amortization expense was $14.1 million and $44.7 million for the three months ended March 31, 2010 and 2009, respectively.  Amortization expense for the three months ended March 31, 2010 and 2009 included $14.1 million for intangible assets (customer base and trade name) that were acquired in the acquisitions of Commonwealth Telephone Enterprises, Inc., Global Valley Networks, Inc. and GVN Services.  Amortization expense for the three months ended

March 31, 2009 included $30.6 million for amortization associated with our “legacy” Frontier properties, which were fully amortized in June 2009.

(7)   Fair Value of Financial Instruments:
The following table summarizes the carrying amounts and estimated fair values for certain of our financial instruments at March 31, 2010 and December 31, 2009.  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 on quoted market prices at the reporting date for those financial instruments.
 
($ in thousands)
 
March 31, 2010
   
December 31, 2009
 
   
Carrying
         
Carrying
       
   
Amount
   
Fair Value
   
Amount
   
Fair Value
 
Long-term debt
  $ 4,796,474     $ 4,642,563     $ 4,794,129     $ 4,628,132  
 
(8)   Long-Term Debt:
The activity in our long-term debt from December 31, 2009 to March 31, 2010 is summarized as follows:
 
         
Three months ended
             
         
March 31, 2010
         
Interest
 
                           
Rate* at
 
   
December 31,
         
New
   
March 31,
   
March 31,
 
($ in thousands)
 
2009
   
Payments
   
Borrowings
   
2010
   
2010
 
                             
  Rural Utilities Service
                           
    Loan Contracts
  $ 15,600     $ (264 )   $ -     $ 15,336       6.07 %
                                         
  Senior Unsecured Debt
    4,855,001       (713 )     -       4,854,288       7.87 %
                                         
  Industrial Development
                                       
     Revenue Bonds
    13,550       -       -       13,550       6.33 %
                                         
TOTAL LONG-TERM DEBT
  $ 4,884,151     $ (977 )   $ -     $ 4,883,174       7.86 %
                                         
  Less: Debt Discount
    (82,786 )                     (79,472 )        
  Less: Current Portion
    (7,236 )                     (7,228 )        
                                         
  $ 4,794,129     $ 4,796,474  
                                         
* Interest rate includes amortization of debt issuance costs, debt premiums or discounts, and deferred gain on interest rate swap terminations.  The interest rates at March 31, 2010 represent a weighted average of multiple issuances.
 

 
Additional information regarding our Senior Unsecured Debt as of March 31, 2010 and December 31, 2009 is as follows:

 
March 31, 2010
   
December 31, 2009
 
 
Principal
   
Interest
   
Principal
   
Interest
 
($ in thousands)
Outstanding
   
Rate
   
Outstanding
   
Rate
 
                       
Senior Notes:
                     
   Due 5/15/2011
$ 76,089       9.250%     $ 76,089       9.250%  
   Due 10/24/2011
  200,000       6.270%       200,000       6.270%  
   Due 12/31/2012
  145,125    
1.875% (Variable)
      145,500    
1.625% (Variable)
 
   Due 1/15/2013
  580,724       6.250%       580,724       6.250%  
   Due 12/31/2013
  132,300    
2.250% (Variable)
      132,638    
2.000% (Variable)
 
   Due 5/1/2014
  600,000       8.250%       600,000       8.250%  
   Due 3/15/2015
  300,000       6.625%       300,000       6.625%  
   Due 10/1/2018
  600,000       8.125%       600,000       8.125%  
   Due 3/15/2019
  434,000       7.125%       434,000       7.125%  
   Due 1/15/2027
  345,858       7.875%       345,858       7.875%  
   Due 8/15/2031
  945,325       9.000%       945,325       9.000%  
                               
    4,359,421               4,360,134          
                               
Debentures:
                             
  Due 11/1/2025
  138,000       7.000%       138,000       7.000%  
  Due 8/15/2026
  1,739       6.800%       1,739       6.800%  
  Due 10/1/2034
  628       7.680%       628       7.680%  
  Due 7/1/2035
  125,000       7.450%       125,000       7.450%  
  Due 10/1/2046
  193,500       7.050%       193,500       7.050%  
    458,867               458,867          
Subsidiary Senior
                             
   Notes due 12/1/2012
  36,000       8.050%       36,000       8.050%  
                               
Total
$ 4,854,288       7.87%     $ 4,855,001       7.86%  
                               
                               

During the first three months of 2010, we retired an aggregate principal amount of $1.0 million of debt, consisting of $0.7 million of senior unsecured debt and $0.3 million of rural utilities service loan contracts.

As of March 31, 2010, we had an available line of credit with seven financial institutions in the aggregate amount of $250.0 million.  Associated facility fees vary, depending on our debt leverage ratio, and were 0.275% per annum as of March 31, 2010. The contractual expiration date for this $250.0 million five year revolving credit agreement is May 18, 2012.  However, we expect that the new revolving credit facility will replace the existing revolving credit facility upon completion of the Verizon Transaction (see Note 3).  During the term of the credit facility we may borrow, repay and reborrow funds, subject to customary borrowing conditions.  The credit facility is available for general corporate purposes but may not be used to fund dividend payments.

As of March 31, 2010, we were in compliance with all of our debt and credit facility financial covenants.

 
 

 
Our principal payments for the next five years are as follows as of March 31, 2010:

   
Principal
 
($ in thousands)
 
Payments
 
    
       
2010 (remaining nine months)
 
6,259
 
2011
 
$
279,956
 
2012
 
$
180,366
 
2013
 
$
709,855
 
2014
 
$
600,517
 
2015
 
$
300,549
 

(9)   Net Income Per Common Share:
The reconciliation of the net income per common share calculation for the three months ended March 31, 2010 and 2009, respectively, is as follows:
 
($ in thousands, except per-share amounts)
 
For the three months ended March 31,
 
   
2010
   
2009
 
Net income used for basic and diluted
           
   earnings per common share:
           
Net income attributable to common shareholders of Frontier
  $ 42,565     $ 36,303  
Less: Dividends allocated to unvested restricted stock awards
    (641 )     (576 )
Total basic and diluted net income attributable to common shareholders
               
   of Frontier
  $ 41,924     $ 35,727  
                 
Basic earnings per common share:
               
Total weighted-average shares and unvested restricted stock awards
         
   outstanding - basic
    312,868       311,820  
Less: Weighted-average unvested restricted stock awards
    (2,472 )     (1,994 )
Total weighted-average shares outstanding - basic
    310,396       309,826  
Net income per share attributable to common shareholders
               
  of Frontier
  $ 0.14     $ 0.12  
                 
Diluted earnings per common share:
               
Total weighted-average shares outstanding - basic
    310,396       309,826  
Effect of dilutive shares
    -       388  
Total weighted-average shares outstanding - diluted
    310,396       310,214  
Net income per share attributable to common shareholders
               
   of Frontier
  $ 0.14     $ 0.12  
                 
Stock Options
For the three months ended March 31, 2010 and 2009, options to purchase 3,551,000 shares and 3,580,000 shares, respectively, (at exercise prices ranging from $8.19 to $18.46) issuable under employee compensation plans were excluded from the computation of diluted earnings per share (EPS) for those periods because the exercise prices were greater than the average market price of our common stock and, therefore, the effect would be antidilutive.  In calculating diluted EPS we apply the treasury stock method and include future unearned compensation as part of the assumed proceeds.
 

 
In addition, for the three months ended March 31, 2010 and 2009, the impact of dividends paid on unvested restricted stock awards have been deducted from net income attributable to common shareholders of Frontier in accordance with FSP EITF No. 03-6-1, (ASC Topic 260) which we adopted in the first quarter of 2009 on a retrospective basis.

Stock Units
At March 31, 2010 and 2009, we had 449,284 and 387,818 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 because their inclusion would have an antidilutive effect.

(10)  Stock Plans:
At March 31, 2010, we had five stock-based compensation plans under which grants have been made and awards remained outstanding.  At March 31, 2010, there were 12,540,761 shares authorized for grant under these plans and 10,706,918 shares available for grant under two of the plans.  No further awards may be granted under three of the plans: the 1996 Equity Incentive Plan, the Amended and Restated 2000 Equity Incentive Plan (collectively, together with the 2009 Equity Incentive Plan that was adopted on May 14, 2009, the EIP) and the Deferred Fee Plan.  

The following summary presents information regarding outstanding stock options as of March 31, 2010 and changes during the three months then ended with regard to options under the EIP:
 
         
Weighted
   
Weighted
       
   
Shares
   
Average
   
Average
   
Aggregate
 
   
Subject to
   
Option Price
   
Remaining
   
Intrinsic
 
   
Option
   
Per Share
   
Life in Years
   
Value
 
Balance at January 1, 2010
    3,551,000     $ 13.74       1.5     $ -  
Options granted
    -     $ -                  
Options exercised
    -     $ -             $ -  
Options canceled, forfeited or lapsed
    -     $ -                  
Balance at March 31, 2010
    3,551,000     $ 13.74       1.3     $ -  
                                 
Exercisable at March 31, 2010
    3,550,000     $ 13.74       1.3     $ -  
                                 
 
There were no options granted during the first three months of 2010.  No cash was received upon the exercise of options during the first three months of 2010.

The total intrinsic value of stock options exercised during the first three months of 2009 was $0.7 million.  The total intrinsic value of stock options outstanding and exercisable at March 31, 2009 was zero.  There were no options granted during the first three months of 2009.  Cash received upon the exercise of options during the first three months of 2009 totaled $0.7 million.  

The following summary presents information regarding unvested restricted stock as of March 31, 2010 and changes during the three months then ended with regard to restricted stock under the EIP:
 
 

 
         
Weighted
       
         
Average
       
   
Number of
   
Grant Date
   
Aggregate
 
   
Shares
   
Fair Value
   
Fair Value
 
Balance at January 1, 2010
    2,193,000     $ 10.41     $ 17,126,000  
Restricted stock granted
    1,300,000     $ 7.69     $ 9,671,000  
Restricted stock vested
    (732,000 )   $ 11.18     $ 5,445,000  
Restricted stock forfeited
    (8,000 )   $ 7.60          
Balance at March 31, 2010
    2,753,000     $ 8.93     $ 20,484,000  
                         
For purposes of determining compensation expense, the fair value of each restricted stock grant is estimated based on the average of the high and low market price of a share of our common stock on the date of grant.  Total remaining unrecognized compensation cost associated with unvested restricted stock awards at March 31, 2010 was $22.7 million and the weighted average period over which this cost is expected to be recognized is approximately two years.

The total fair value of shares granted and vested during the three months ended March 31, 2009 was approximately $7.8 million and $3.6 million, respectively.  The total fair value of unvested restricted stock at March 31, 2009 was $16.3 million. The weighted average grant date fair value of restricted shares granted during the three months ended March 31, 2009 was $8.45.  Shares granted during the first three months of 2009 totaled 1,092,000.

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

As permitted by ASC Topic 280 (formerly SFAS No. 131), we have utilized the aggregation criteria in combining 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.

(12) Investment Income:
The components of investment income for the three months ended March 31, 2010 and 2009 are as follows:
 
   
For the three months ended March 31,
 
   ($ in thousands)
 
2010
   
2009
 
             
    Interest and dividend income
 
$
2,416
   
$
3,288
 
    Equity earnings
   
81
     
274
 
    Total investment income
 
$
2,497
   
$
3,562
 
                 
(13) Other Income, Net:
       The components of other income, net for the three months ended March 31, 2010 and 2009 are as follows:
 
   
For the three months ended March 31,
 
   ($ in thousands)
 
2010
   
2009
   
    
                 
    Gain on expiration/settlement of customer advances
 
4,743
   
$
2,513
   
    Litigation settlement proceeds
   
262
     
2,203
   
    Other, net
   
(49
)
   
(31
)
 
         Total other income, net
 
$
4,956
   
$
4,685
   
                   
 

 
(14) Retirement Plans:
The following tables provide the components of net periodic benefit cost:
   
Pension Benefits
 
   
For the three months ended
 
   
March 31,
 
   
2010
   
2009
 
($ in thousands)
           
Components of net periodic pension benefit cost
           
Service cost
  $ 1,609     $ 1,435  
Interest cost on projected benefit obligation
    12,381       12,964  
Expected return on plan assets
    (11,649 )     (11,096 )
Amortization of prior service cost /(credit)
    (50 )     (64 )
Amortization of unrecognized loss
    6,748       6,920  
Net periodic pension benefit cost
  $ 9,039     $ 10,159  
                 
   
Postretirement Benefits
 
   
Other Than Pensions
 
   
For the three months ended
 
   
March 31,
 
      2010       2009  
($ in thousands)
               
Components of net periodic postretirement benefit cost
               
Service cost
  $ 99     $ 113  
Interest cost on projected benefit obligation
    2,629       2,857  
Expected return on plan assets
    (108 )     (109 )
Amortization of prior service cost/(credit)
    (1,929 )     (1,938 )
Amortization of unrecognized loss
    1,581       1,481  
Net periodic postretirement benefit cost
  $ 2,272     $ 2,404  
                 
During the first three months of 2010 and 2009, we capitalized $1.7 million and $2.0 million, respectively, of pension expense into the cost of our capital expenditures, as the costs that relate to our engineering and plant construction activities.  We expect that our 2010 pension and other postretirement benefit expenses will be between $40.0 million and $50.0 million, as compared to $48.6 million in 2009.  We expect that we will make a $10.0 million cash contribution to our pension plan in 2010, including a payment of $2.6 million which was made in April 2010.

The Company’s pension plan assets have increased from $608.6 million at December 31, 2009 to $613.6 million at March 31, 2010, an increase of $5.0 million, or 1%.  This increase is a result of positive investment returns of $20.6 million, offset by ongoing benefit payments of $15.6 million during the first three months of 2010.  

(15) Commitments and Contingencies:
We anticipate capital expenditures of approximately $220.0 million to $240.0 million for 2010 related to our currently owned properties. Although we from time to time make short-term purchasing commitments to vendors with respect to these expenditures, we generally do not enter into firm, written contracts for such activities.  

In connection with the Verizon Transaction, the Company has commenced activities to obtain the necessary regulatory approvals, plan and implement systems conversions and other initiatives necessary to effectuate the closing, which is expected to occur at the end of the second quarter of 2010, and enable the Company to implement its “go to market” strategy at closing. While the Company continues to evaluate certain expenses, the Company currently expects to incur operating expenses, including deal costs, and capital expenditures of approximately $100.0 million and $180.0 million, respectively, in 2010 related to these integration initiatives.  The Company incurred $10.4 million of acquisition and integration costs and $29.7 million in capital expenditures related to the integration of Verizon activities during the first three months of 2010.

We are party to various legal proceedings arising in the normal course of our business.  The outcome of individual matters is not predictable.  However, we believe that the ultimate resolution of all such matters, after considering insurance coverage, will not have a material adverse effect on our financial position, results of operations, or our cash flows.
 
We sold all of our utility businesses as of April 1, 2004.  However, we have retained a potential payment obligation associated with our previous electric utility activities in the State of Vermont.  The Vermont Joint Owners (VJO), a consortium of 14 Vermont utilities, including us, entered into a purchase power agreement with Hydro-Quebec in 1987.  The agreement contains “step-up” provisions that state that if any VJO member defaults on its purchase obligation under the contract to purchase power from Hydro-Quebec, then the other VJO participants will assume responsibility for the defaulting party’s share on a pro-rata basis.  Our pro-rata share of the purchase power obligation is 10%.  If any member of the VJO defaults on its obligations under the Hydro-Quebec agreement, then the remaining members of the VJO, including us, may be required to pay for a substantially larger share of the VJO’s total purchase power obligation for the remainder of the agreement (which runs through 2015).  U.S. GAAP rules require that we disclose “the maximum potential amount of future payments (undiscounted) the guarantor could be required to make under the guarantee.”  U.S. GAAP rules also state that we must make such disclosure “… even if the likelihood of the guarantor’s having to make any payments under the guarantee is remote…”  As noted above, our obligation only arises as a result of default by another VJO member, such as upon bankruptcy.  Therefore, to satisfy the “maximum potential amount” disclosure requirement we must assume that all members of the VJO simultaneously default, a highly unlikely scenario given that the two members of the VJO that have the largest potential payment obligations are publicly traded with credit ratings equal to or superior to ours, and 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, 2010 and remained in default for the duration of the contract (another 6 years), we estimate that our undiscounted purchase obligation for 2010 through 2015 would be approximately $0.6 billion.  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.

(16)  Subsequent Events:
On April 12, 2010, New Communications Holdings Inc. (Spinco), a subsidiary of Verizon Communications Inc. (Verizon) formed for the purposes of holding defined assets and liabilities of the local exchange business and related landline activities of Verizon in 14 states, completed a private offering for $3.2 billion aggregate principal amount of Senior Notes. The gross proceeds of the offering, plus $125.5 million (equal to the amount of interest that will accrue on the notes from April 12, 2010 to October 1, 2010) contributed by Frontier, were deposited into an escrow account.  Immediately prior to the spin-off and the completion of the merger, the gross proceeds of the notes offering (less the initial purchasers’ discount) will be released from the escrow account and used to make the special cash payment by Spinco to Verizon, with any such amount in excess of the special cash payment and the initial purchaser’s discount to be retained by the Company.  If, however, the merger agreement is terminated or the spin-off and the merger are not completed on or before October 1, 2010, the funds in the escrow account will be released and used to redeem each series of the notes, in each case at a price equal to 100% of the issue price, plus accrued and unpaid interest on the principal amount, of such series of notes.

The Senior Notes consist of $500.0 million aggregate principal amount of Senior Notes due 2015 (the 2015 Notes), $1.1 billion aggregate principal amount of Senior Notes due 2017 (the 2017 Notes), $1.1 billion aggregate principal amount of Senior Notes due 2020 (the 2020 Notes) and $500.0 million aggregate principal amount of Senior Notes due 2022 (the 2022 Notes, and together with the 2015 Notes, the 2017 Notes and the 2020 Notes, the Notes).

The 2015 Notes have an interest rate of 7.875% per annum, the 2017 Notes have an interest rate of 8.25% per annum, the 2020 Notes have an interest rate of 8.50% per annum and the 2022 Notes have an interest rate of 8.75% per annum. The Notes were issued at a price equal to 100% of their face value. The Notes were sold in a private placement that was exempt from the registration requirements of the Securities Act of 1933, as amended (the Securities Act).

The Notes will become the obligations of the Company upon completion of the merger.
 
 


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, any of the following possibilities:

 
·
Our ability to complete the Verizon Transaction;

 
·
The failure to obtain, delays in obtaining or adverse conditions contained in any required regulatory approvals for the Verizon Transaction;

 
·
For two years after the merger, Frontier may be limited in the amount of capital stock that it can issue to make acquisitions or to raise additional capital. Also, Frontier’s indemnity obligation to Verizon may discourage, delay or prevent a third party from acquiring control of Frontier during this two-year period in a transaction that stockholders of Frontier might consider favorable;

 
·
The ability to successfully integrate the Verizon operations into our existing operations;

 
·
The effects of increased expenses incurred due to activities related to the Verizon Transaction;

 
·
The ability to successfully migrate Verizon’s West Virginia operations from Verizon owned and operated systems and processes to our owned and operated systems and processes;

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

 
·
The sufficiency of the assets contributed by Verizon to enable the combined company to operate the acquired business;

 
·
Disruption from the Verizon Transaction making it more difficult to maintain relationships with customers, employees or suppliers;

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

 
·
Reductions in the number of our access lines or, if the Verizon Transaction is completed, the combined company’s access lines that cannot be offset by increases in High-Speed Internet (HSI) subscribers and sales of other products;

 
·
Our ability to sell enhanced and data services in order to offset ongoing declines in revenues from local services, switched access services and subsidies;

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

 
 
·
The effects of ongoing changes in the regulation of the communications industry as a result of federal and state legislation and regulation;
 
 
·
The effects of competition from cable, wireless and other wireline carriers (through voice over internet protocol (VOIP), DOCSIS 3.0, 4G or otherwise);
 
 
·
Our ability to adjust successfully to changes in the communications industry and to implement strategies for growth;

 
·
Adverse changes in the credit markets or in the ratings given to our debt securities or, if the Verizon Transaction is completed, the combined company’s debt securities, by nationally accredited ratings organizations, which could limit or restrict the availability, or increase the cost, of financing;

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

 
·
The effects of changes in both general and local economic conditions on the markets that we serve or that, if the Verizon Transaction is completed, the combined company will serve, which can affect demand for our or its products and services, customer purchasing decisions, collectability of revenues and required levels of capital expenditures related to new construction of residences and businesses;

 
·
Our ability to effectively manage service quality in our existing territories, and if the Verizon Transaction is completed, in our new territories;

 
·
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 our customers;

 
·
Changes in accounting policies or practices adopted voluntarily or as required by generally accepted accounting principles or regulations;

 
·
Our ability to effectively manage our or, if the Verizon Transaction is completed, the combined company’s operations, operating expenses and capital expenditures, and to repay, reduce or refinance our or the combined company’s debt;

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

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

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

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

 
·
The effects of state regulatory cash management policies on our ability or, if the Verizon Transaction is completed, the combined company’s ability to transfer cash among our or the combined company’s subsidiaries and to the parent company;

 
·
Our ability to successfully renegotiate union contracts expiring in 2010 and thereafter;

 
·
Declines in the value of our pension plan assets or, if the Verizon Transaction is completed, the combined company’s pension plan assets, which could require us or the combined company to make contributions to the pension plan in 2011 and beyond;

 
 
·
Our ability to pay dividends in respect of our common shares or, if the Verizon Transaction is completed, the combined company’s common shares, which may be affected by our or the combined company’s cash flow from operations, amount of capital expenditures, debt service requirements, cash paid for income taxes and our or the combined company’s liquidity;
 
 
·
The effects of any unfavorable outcome with respect to any current or future legal, governmental or regulatory proceedings, audits or disputes with respect to us or, if the Verizon Transaction is completed, the combined company;

 
·
The possible impact of adverse changes in political or other external factors over which we or, if the Verizon Transaction is completed, the combined company, would have no control; and

 
·
The effects of hurricanes, ice storms or other natural 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, as well as the risks set forth under Item 1A. “Risk Factors,” in this report 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.

Overview
We are a full–service communications provider and one of the largest exchange telephone carriers in the country.   As of March 31, 2010, we operated in 24 states with approximately 5,400 employees.
 
On May 13, 2009, we entered into a definitive agreement with Verizon under which Frontier will acquire defined assets and liabilities of the local exchange business and related landline activities of Verizon, including Internet access and long distance services and broadband video provided to designated customers.  As part of the Verizon Transaction, the business to be acquired will be spun-off to Verizon stockholders (the spin-off).  New Communications Holdings Inc. (Spinco), a wholly-owned subsidiary of Verizon that will hold the business to be acquired, will then merge with and into Frontier, and Frontier will survive as the combined company conducting the combined business operations of Frontier and Spinco (the merger).  Assuming that the merger occurred on March 31, 2010, the merger would have resulted in Frontier acquiring approximately 4.1 million access lines and certain business related assets from Verizon. The Verizon Transaction will be financed with approximately $5.3 billion of common stock plus the assumption of approximately $3.5 billion in debt.  Certain of the conditions to the closing of the Verizon Transaction have already been satisfied: (1) Frontier’s stockholders approved the Verizon Transaction at a special meeting of stockholders held on October 27, 2009; (2) the Federal Trade Commission has granted early termination of the waiting period under the Hart-Scott-Rodino Act; (3) approvals of all necessary local video franchise authorities, subject to certain conditions; (4) receipt by Verizon of a favorable ruling from the IRS regarding the tax consequences of the Verizon Transaction; (5) the completion of a $3.2 billion debt financing by Spinco which is sufficient to fund the special cash payment to Verizon, as contemplated by the Verizon Transaction; and (6) eight of the nine required state regulatory approvals.  Completion of the Verizon Transaction remains subject to a number of other conditions, including the receipt of the remaining state regulatory approval and approval from the FCC, as well as other customary closing conditions.  Subject to satisfaction of these conditions, we anticipate closing this transaction at the end of the second quarter of 2010.

Competition in the communications industry is intense and increasing.  We experience competition from many communications service providers.  These providers include cable operators offering video, data and VOIP products, wireless carriers, long distance providers, competitive local exchange carriers, Internet providers and other wireline carriers.  We believe that as of March 31, 2010, approximately 76% of the households in our territories had VOIP as an available service option.  We also believe that competition will continue in 2010 and may result in reduced revenues.
 
 
 

The lingering impact of the severe contraction in the global financial markets that occurred in 2008 and 2009 and the subsequent recession has impacted residential and business customer behavior to reduce expenditures by not purchasing our services or by discontinuing some or all of our services.  These trends may continue and may result in a continued challenging revenue environment. These factors could also result in increased delinquencies and bankruptcies and, therefore, affect our ability to collect money owed to us by residential and business customers.  

We employ a number of strategies to combat the competitive pressures and changes to consumer behavior noted above.  Our strategies are focused on preserving and generating new revenues through customer retention, upgrading and up-selling services to our existing customer base, new customer growth, win backs of former customers, new product deployment, and upon managing our profitability and cash flow through targeted reductions in operating expenses and capital expenditures.

We seek to achieve our customer retention goals by offering attractive packages of value-added services to our access line customers and providing exemplary customer service.  Bundled services include HSI, unlimited long distance calling, enhanced telephone features and video offerings.  We tailor these services to the needs of our residential and business customers and continually evaluate the introduction of new and complementary products and services, many of which can also be purchased separately.   Customer retention is also enhanced by offering one-, two-and three-year price protection plans where customers commit to a term in exchange for predictable pricing and/or promotional offers.  Additionally, we are focused on enhancing the customer experience as we believe exceptional customer service will differentiate us from our competition. Our commitment to providing exemplary customer service is demonstrated by our expanded customer service hours, shorter scheduling windows for in-home appointments as well as call reminders and follow-up calls for service appointments.  In addition, our 70 local area markets are operated by local managers with responsibility for the customer experience, as well as the financial results, in those markets.  Customers in our markets have direct access to those local managers to help them manage their communications needs.

We utilize targeted and innovative promotions like “aspirational gifts” (e.g., personal computers) or promotional credits to attract new customers, including those moving into our territory, to win back former customers and to upgrade and up-sell existing customers a variety of service offerings including HSI, video, and enhanced long distance and feature packages in order to maximize the average revenue per customer (wallet share) paid to us.  Depending upon market and economic conditions, we may offer such promotions to drive sales in the future. 

We have restructured and augmented our sales distribution channels to improve coverage of all segments of the business customer base.  This includes adding new sales teams dedicated to small business customers and enhancing the business selling and support skills in our customer sales and service centers.  We have also increased our focus on customer premise equipment (CPE) sales for customers requiring an equipment solution, and have extended our CPE sales reach beyond a handful of markets. In addition, we are introducing new products utilizing wireless and Internet technologies.  We believe the combination of new products and distribution channel improvements will help us improve business customer acquisition and retention.

We are also focused on increasing sales of newer products, including unlimited long distance minutes, bundles of long distance minutes, wireless data, Internet portal advertising, and the Frontier Peace of Mind product suite.  This last category is a suite of products that is aimed at managing the total communications and personal computing experience for our customers and designed to provide value and simplicity to meet our customers’ ever-changing needs. The Frontier Peace of Mind products and services suite includes services such as an in-home, full installation of our HSI product, two hour appointment windows for the installation, hard drive back-up services, 24-7 help desk PC support and inside wire maintenance (when bundled).  Most recently, we introduced our myfitv.com website which provides easy online access to video content, entertainment and news available on the worldwide web.  Our hard drive back-up services, 24-7 help desk PC support and myfitv.com services are also available outside of our service territories.  Although we are optimistic about the opportunities provided by each of these initiatives to increase revenue and reduce churn, we can provide no assurance about their long-term profitability or impact on revenue.

 
 

 
We believe that the combination of offering multiple products and services to our customers pursuant to price protection programs, introducing new products and services to meet customer needs, billing them on a single bill, providing superior customer service, and being active in our local communities will make our customers more loyal, and will help us generate new, and retain existing, customer revenue.

Our revenues declined in the first quarter of 2010 as compared to 2009.  Revenues from data and internet services such as HSI grew and increased as a percentage of our total revenues and revenues from local and long distance services and from switched access and subsidy (including federal and state subsidies) declined and decreased as a percentage of our total revenues.   Switched access and subsidy revenue represented 17% of our revenues for the three months ended March 31, 2010.  Switched access revenue was $58.8 million for the three months ended March 31, 2010, or 11% of our revenues, down from $62.6 million for the three months ended March 31, 2009, or 12% of our revenues.  Federal and state subsidy revenue, including surcharges of $10.4 million billed to customers which are remitted to the FCC, was $29.9 million for the three months ended March 31, 2010, or 6% of our revenues, up from $27.4 million for the three months ended March 31, 2009, or 5% of our revenues.  We expect declining revenue trends in switched access and subsidy revenue during the remainder of 2010.

 
a)  Liquidity and Capital Resources

As of March 31, 2010, we had cash and cash equivalents aggregating $331.1 million.  Our primary source of funds continued to be cash generated from operations.  For the three months ended March 31, 2010, we used cash flow from operations and cash on hand to fund all of our investing and financing activities, including debt repayments.

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 in accordance with our dividend policy, pay our acquisition and integration costs and capital expenditures, and support our short-term and long-term operating strategies through 2010.  However, a number of factors, including but not limited to, losses of access lines, pricing pressure from increased competition, lower subsidy and switched access revenues and the impact of the current economic environment are expected to reduce our cash generated by operations.  In addition, although we believe, based on information available to us, that the financial institutions syndicated under our existing revolving credit facility (as well as the new revolving credit facility that will replace the existing revolving credit facility upon closing of the Verizon Transaction) would be able to fulfill their commitments to us, given the current economic environment and the recent severe contraction in the global financial markets, this could change in the future.  Further, our below-investment grade credit ratings may also make it more difficult and expensive to refinance our maturing debt.  As of March 31, 2010, we have approximately $6.3 million of debt maturing during the last nine months of 2010 and approximately $280.0 million of debt maturing in 2011.

The consummation of the Verizon Transaction would result in a combined company with significantly larger business operations and, consequently, greater working capital, capital expenditure and other liquidity needs.  Upon consummation of the Verizon Transaction, we will be assuming approximately $3.5 billion of Spinco debt.  As a result of the greater liquidity requirements of the combined company, we have entered into a new revolving credit facility which will, effective upon consummation of the Verizon Transaction, increase our line of credit to $750.0 million in order to provide the combined company sufficient flexibility to meet its liquidity needs.  In addition, the Company may need or elect to raise capital in order to finance or pre-fund commitments which may be required in connection with government agencies approvals of the Verizon Transaction, including commitments with regard to capital expenditures.

In addition, Spinco has raised $3.2 billion which is sufficient to make the special cash payment to Verizon, as contemplated by the Verizon Transaction.  If the Verizon Transaction is ultimately not consummated or is delayed for a significant period of time, we will have paid significant interest expense and other costs in connection with the financing without having achieved the expected benefits of the Verizon Transaction, which may impact our liquidity.

 
 

 
Assuming the Verizon Transaction closes, based on the lower level of Spinco debt we will be assuming from Spinco relative to Spinco’s projected operating cash flows, the combined company’s overall debt will increase but its capacity to service the debt will be significantly enhanced as compared to Frontier’s capacity today.  At March 31, 2010, the ratio for Frontier’s net debt to operating cash flow (“leverage ratio”) was 3.9 times.  It is expected that the combined company’s leverage ratio will be significantly lower at closing.

Cash Flow provided by Operating Activities

Cash flow provided by operating activities declined $23.9 million, or 16%, for the three months ended March 31, 2010 as compared with the prior year period, as our operating income before depreciation and amortization decreased during the first three months of 2010 as compared to 2009.
 
We did not pay any cash taxes during the first three months of 2010.   We expect that for the full year of 2010 our cash taxes will be less than $10.0 million.  Our 2010 cash tax requirements will be reduced as a result of 2009 loss carryforwards.   In addition, our 2010 cash taxes will be impacted by approximately $60.0 million of tax benefits arising from 2009 and 2010 financing and integration costs.  Absent the tax benefits generated by integration and refinancing expenses and 2009 loss carryforwards, we estimate that cash taxes would be approximately $60.0 million to $70.0 million in 2010.

In connection with the pending Verizon Transaction, the Company commenced activities during 2009 to obtain the necessary regulatory approvals, plan and implement systems conversions and begin other initiatives necessary to effectuate the closing, which is expected to occur at the end of the second quarter of 2010, and enable the combined company to implement it’s “go to market” strategy at closing.  As a result, the Company incurred $10.4 million of acquisition and integration costs and $29.7 million in capital expenditures related to Verizon integration activities during the first three months of 2010.  While the Company continues to evaluate certain expenses, we currently expect to incur operating expenses, including deal costs, and capital expenditures of approximately $100.0 million and $180.0 million, respectively, in 2010 related to these integration activities.

Cash Flow used by Investing Activities

Capital Expenditures
For the three months ended March 31, 2010 and 2009, our capital expenditures were $69.6 million (including $29.7 million of Verizon integration–related capital expenditures) and $54.6 million, 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 of approximately $220.0 million to $240.0 million for 2010 related to our currently owned properties.
  
In connection with the pending acquisition of approximately 4.1 million access lines (as of March 31, 2010) from Verizon, the Company has commenced activities to obtain the necessary regulatory approvals, plan and implement systems conversions and other initiatives necessary to effectuate the closing, which is expected to occur at the end of the second quarter of 2010, and enable the combined company to implement its “go to market” strategy at closing.  As a result, the Company expects to incur operating expenses, including deal costs, and capital expenditures of approximately $100.0 million and $180.0 million, respectively, in 2010 related to the pending Verizon Transaction.  

In February 2009, the President signed into law an economic stimulus package, the 2009 American Recovery and Reinvestment Act (ARRA), that includes $7.2 billion in funding, through grants and loans, for new broadband investment and adoption in unserved and underserved communities.   We filed applications for the first round of stimulus funding in West Virginia, but were notified in February 2010 that we were not selected.  The State of West Virginia was selected to receive $130.0 million in stimulus funding and Frontier will seek to work with the state in these projects.  The federal agencies responsible for administering the programs released rules and evaluation criteria for the second round of funding, with applications due by March 15, 2010.  Frontier filed a single application for $5.0 million in the second round for a middle mile project in Idaho.

 
 

 
Cash Flow used by and provided from Financing Activities

Debt Reduction
During the first three months of 2010, we retired an aggregate principal amount of $1.0 million of debt, consisting of $0.7 million of senior unsecured debt and $0.3 million of rural utilities service loan contracts.

We may from time to time repurchase our debt in the open market, through tender offers, exchanges of debt securities, by exercising rights to call or in privately negotiated transactions.  We may also refinance existing debt or exchange existing debt for newly issued debt obligations.
 
Interest Rate Management
On January 15, 2008, we terminated all of our interest rate swap agreements representing $400.0 million notional amount of indebtedness associated with our Senior Notes due in 2011 and 2013.  We no longer maintain any interest rate swap arrangements.

Credit Facilities
As of March 31, 2010, we had an available line of credit under our revolving credit facility with seven financial institutions in the aggregate amount of $250.0 million.  Associated facility fees vary, depending on our debt leverage ratio, and were 0.275% per annum as of March 31, 2010.  The contractual expiration date for this $250.0 million five year revolving credit agreement is May 18, 2012.  However, we expect that the new revolving credit facility will replace the existing revolving credit facility upon completion of the Verizon Transaction, as discussed below.  During the term of the credit facility we may borrow, repay and reborrow funds, subject to customary borrowing conditions.  The credit facility is available for general corporate purposes but may not be used to fund dividend payments.

On March 24, 2010, we entered into a new $750.0 million revolving credit facility (the New Credit Facility) that will become effective upon, and subject to (1) the closing of the merger, (2) the termination of the Company’s existing revolving credit facility and (3) other customary conditions. The terms of the New 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 Credit Agreement). Associated facility fees under the New Credit Facility will vary from time to time depending on the Company’s credit rating (as defined in the Credit Agreement). The New Credit Facility is scheduled to terminate on the date that is three years and six months after the effective date of the New Credit Facility. 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 LIBOR rate (each as determined in the Credit Agreement), at the Company’s election, plus a margin specified in the Credit Agreement based on the Company’s credit rating. Letters of credit issued under the New Credit Facility will also be subject to fees that vary depending on the Company’s credit rating. The New Credit Facility will be available for general corporate purposes but may not be used to fund dividend payments.
 
Covenants
The terms and conditions contained in our indentures and credit facility agreements 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 allowance of liens on our assets, and restrictions on asset sales and transfers, mergers and other changes in corporate control.  Except in connection with the Verizon Transaction, as described below, we currently have no restrictions on the payment of dividends either by contract, rule or regulation, other than those imposed by the General Corporation Law of the State of Delaware.  However, we would be restricted under our credit facilities from declaring dividends if an event of default has occurred and is continuing at the time or will result from the dividend declaration.

 
 

 
Our $200.0 million term loan facility with the Rural Telephone Finance Cooperative (RTFC), which matures in 2011, our $250.0 million credit facility, and our $150.0 million and $135.0 million senior unsecured term loans, 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 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.

Our credit facilities 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, 2010, 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 deems relevant.  We have announced that after the closing of the Verizon Transaction we intend to reduce our annual cash dividend from $1.00 per share to $0.75 per share, subject to applicable law and within the discretion of our Board of Directors, as discussed above.  Until consummation of the Verizon Transaction or termination of the merger agreement, we are also restricted from increasing the amount of our dividends by the terms of our merger agreement with Verizon.

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

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

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, 2009.
 
 
 

 

(b)  Results of Operations
REVENUE

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

Revenue for the three months ended March 31, 2010 decreased $18.1 million, or 3%, to $519.8 million as compared with the prior year period.  This decline during the first three months of 2010 is a result of decreases in the number of residential and business customers, switched access revenue and directory revenue, partially offset by a $6.6 million, or 4%, increase in data and internet services revenue, each as described in more detail below.

Change in the number of our access lines is one factor that is important to our revenue and profitability.  We have lost access lines primarily because of changing consumer behavior (including wireless substitution), economic conditions, changing technology, competition, and by some customers disconnecting second lines when they add HSI or cable modem service.  We lost approximately 34,700 access lines (net), or 6% on an annual basis, during the three months ended March 31, 2010.  This represents an improvement in our rate of access line loss over 2009, during which we lost approximately 37,500 access lines (net) during the three months ended March 31, 2009, or 7% on an annual basis.  We believe this improvement is attributable to the customer recognition of the value of our product bundles, fewer residential moves out of territory, fewer moves by businesses to competitors and our ability to compete with cable telephony in a maturing marketplace.  Economic conditions and/or increasing competition could make it more difficult to sell our bundles, and cause us to increase our promotions and/or lower our prices for our products and services, which would adversely affect our revenue profitability and cash flow.

During the three months ended March 31, 2010, we added approximately 8,100 HSI subscribers.  We expect to continue to increase HSI subscribers during the remainder of 2010 (although not enough to offset the expected continued loss in access lines).

While the number of access lines is an important metric to gauge certain revenue trends, it is not necessarily the best or only measure to evaluate our business.  Management believes that customer counts and understanding different components of revenue is most important.  For this reason, presented in the table titled “Other Financial and Operating Data” below is a breakdown that  presents residential customer counts, average monthly revenue, percentage of customers on price protection plans and churn.  It also categorizes revenue into customer revenue (residential and business) and regulatory revenue (switched access and subsidy revenue).  Despite the 7% decline in residential customers and the 6% decline in total access lines, our customer revenue, which is all revenue except switched access and subsidy revenue, declined in the first three months of 2010 by less than 4 percent as compared to the prior year period.   The decline in customers and access lines is partially offset by increased penetration of additional products sold to both residential and business customers, which has increased our average monthly revenue per customer.   A substantial further loss of customers and access lines, combined with increased competition and the other factors discussed herein may cause our revenue, profitability and cash flows to decrease in 2010.

The financial tables below include a comparative analysis of our results of operations on a historical basis as of and for the three months ended March 31, 2010 and 2009.

 
 

 
 
OTHER FINANCIAL AND OPERATING DATA
                         
   
As of
   
As of
   
% Increase
       
   
March 31, 2010
   
March 31, 2009
   
(Decrease)
       
Access lines:
                       
   Residential
    1,322,665       1,427,149       (7%)        
   Business
    760,147       789,654       (4%)        
Total access lines
    2,082,812       2,216,803       (6%)        
                               
High-Speed Internet (HSI) subscribers
    644,060       600,047       7%        
Video subscribers
    175,775       146,010       20%        
                               
   
For the three months ended March 31,
                   
$ Increase
   
% Increase
 
      2010       2009    
(Decrease)
   
(Decrease)
 
Revenue (in 000's):
                             
   Residential
  $ 220,396     $ 230,466     $ (10,070 )     (4%)  
   Business
    210,669       217,425       (6,756 )     (3%)  
Total customer revenue
    431,065       447,891       (16,826 )     (4%)  
                                 
   Regulatory (Access Services)
    88,784       90,065       (1,281 )     (1%)  
Total revenue
  $ 519,849     $ 537,956     $ (18,107 )     (3%)  
                                 
Switched access minutes of use
                               
   (in millions)
    2,077       2,377               (13%)  
Average monthly total revenue per
                               
   access line
  $ 82.51     $ 80.21               3%  
Average monthly customer revenue
                               
   per access line
  $ 68.42     $ 66.78               2%  
                                 
   
As of or for the three months ended March 31,
                           
% Increase
 
      2010       2009            
(Decrease)
 
Residential customer metrics:
                               
   Customers
    1,230,426       1,323,369               (7%)  
   Revenue (in 000's)
  $ 220,396     $ 230,466               (4%)  
   Average monthly residential
                               
     revenue per customer
  $ 59.13     $ 57.53               3%  
Percent of customers on price protection
                         
     plans
    55.3 %     48.2 %             15%  
   Customer monthly churn
    1.37 %     1.49 %             (8%)  
   Products per residential customer (1)
    2.54       2.42               5%  
                                 
Business customer metrics:
                               
   Customers
    138,223       149,901               (8%)  
   Revenue (in 000's)
  $ 210,669     $ 217,425               (3%)  
   Average monthly business
                               
     revenue per customer
  $ 503.41     $ 478.56               5%  
                                 
(1) Products per residential customer: primary residential voice line, HSI and video products have a value of 1. Frontier long distance, Frontier Peace of Mind, second lines, feature packages and dial-up have a value of 0.5.
 

 
 
REVENUE
 
                         
   
For the three months ended March 31,
 
               
$ Increase
   
% Increase
 
($ in thousands)
 
2010
   
2009
   
(Decrease)
   
(Decrease)
 
                         
Local and long distance services
  $ 223,581     $ 242,308     $ (18,727 )     (8 %)
Data and internet services
    163,368       156,730       6,638       4 %
Switched access and subsidy
    88,784       90,065       (1,281 )     (1 %)
Directory services
    24,617       27,705       (3,088 )     (11 %)
Other
    19,499       21,148       (1,649 )     (8 %)
    $ 519,849     $ 537,956     $ (18,107 )     (3 %)
                                 
Local and Long Distance Services
Local and long distance services revenue for the three months ended March 31, 2010 decreased $18.7 million, or 8%, to $223.6 million, as compared with the three months ended March 31, 2009.  Local and enhanced services revenue declined $18.4 million, primarily due to the continued loss of access lines and, to a lesser extent, decreases in private line services and feature packages.

Long distance services revenue for the three months ended March 31, 2010 decreased $0.3 million, as compared with the three months ended March 31, 2009, primarily due to lower minutes of use and average revenue per minute of use, offset by an increase in the number of long distance customers using our bundled service offerings.  We expect our long distance services revenue to continue to trend downward.  We have actively marketed a package of unlimited long distance minutes with our digital phone and state unlimited bundled service offerings.  These offerings have resulted in an increase in long distance customers, and an increase in the minutes used by these customers.  This has lowered our overall average rate per minute billed.  While these package offerings have grown our long distance customer base, those customers who still pay on a per minute of use basis have reduced their calling volumes.

Economic conditions and/or increasing competition could make it more difficult to sell our packages and bundles, and cause us to increase our promotions and/or lower our prices for those products and services, which would adversely affect our revenue, profitability and cash flow.

Data and Internet Services
Data and internet services revenue for the three months ended March 31, 2010 increased $6.6 million, or 4%, to $163.4 million, as compared with the three months ended March 31, 2009, primarily due to the overall growth in the number of HSI subscribers and high-capacity Internet and ethernet circuits purchased by customers.  Data services revenue increased $3.0 million to $90.7 million for the three months ended March 31, 2010.  As of March 31, 2010, the number of the Company’s HSI subscribers had increased by approximately 44,000, or 7%, since March 31, 2009.  We have used “aspirational gifts” or promotional credits to drive growth in HSI subscribers.  Data and internet services also includes revenue from data transmission services to other carriers and high-volume commercial customers with dedicated high-capacity Internet and ethernet circuits.  Nonswitched access revenue increased $3.6 million to $72.7 million in 2010, as compared with 2009, primarily due to growth in the number of those circuits.

On March 16, 2010, the FCC released, as required under the ARRA, its National Broadband Plan.  The National Broadband Plan proposes a series of actions that could result in additional regulatory requirements for broadband services as well as a series of other regulatory reforms.  The FCC has initiated the first of multiple proceedings on a broad number of topics.  Frontier cannot predict, however, what outcomes or impacts these proposals may have on our business.

 
 

 
Switched Access and Subsidy
Switched access and subsidy revenue for the three months ended March 31, 2010 decreased $1.3 million, or 1%, to $88.8 million, as compared with the three months ended March 31, 2009.  Switched access revenue for the first quarter of 2010 of $58.8 million decreased $3.8 million, or 6%, as compared with the first quarter of 2009, primarily due to the impact of a decline in minutes of use related to access line losses and the displacement of minutes of use by wireless, email and other communications services.  Switched access and subsidy revenue includes subsidy payments we receive from federal and state agencies, including surcharges billed to customers which are remitted to the FCC.  Subsidy revenue, including surcharges billed to customers of $10.4 million, for the three months ended March 31, 2010 of $29.9 million increased $2.5 million, or 9%, as compared with the three months ended March 31, 2009, primarily due to higher receipts under the end user and long distance USF program related to an increase in the contribution factor in 2010.
 
Federal subsidies are driven by many factors, including the National Average Cost per Local Loop (NACPL).  Many factors may lead to further increases in the NACPL, thereby resulting in decreases in our federal subsidy revenue in the future.  The FCC and state regulatory agencies are currently considering a number of proposals for changing the manner in which eligibility for federal subsidies is determined as well as the amounts of such subsidies.  On May 1, 2008, the FCC issued an order to cap Competitive Eligible Telecommunications Companies (CETC) receipts from the high cost Federal Universal Service Fund.  In 2009, the federal court upheld the FCC’s order and the cap remains in place pending any future reform.

The FCC is considering proposals that may significantly change interstate, intrastate and local intercarrier compensation and would revise the Federal Universal Service funding and disbursement mechanisms.  When and how these proposed changes will be addressed are unknown and, accordingly, we are unable to predict the impact of future changes on our results of operations. However, future reductions in our subsidy and access revenues will directly affect our profitability and cash flows as those regulatory revenues do not have associated variable expenses.

Certain states have open proceedings to address reform to intrastate access charges and other intercarrier compensation.  We cannot predict when or how these matters will be decided or the effect on our subsidy or access revenues.  In addition, we have been approached by, and/or are involved in formal state proceedings with, various carriers seeking reductions in intrastate access rates in certain states.

Directory Services
Directory services revenue for the three months ended March 31, 2010 decreased $3.1 million, or 11%, to $24.6 million, as compared with the three months ended March 31, 2009, due to a decline in yellow pages advertising.   

Other
Other revenue for the three months ended March 31, 2010 decreased $1.6 million, or 8%, to $19.5 million, as compared with the three months ended March 31, 2009, primarily due to a decrease in equipment sales and lower service fee activation revenue, partially offset by reduced DISH video credits and lower bad debt expenses that are charged against revenue.
 
OPERATING EXPENSES
   
    NETWORK ACCESS EXPENSES  
                         
   
For the three months ended March 31,
 
               
$ Increase
   
% Increase
 
($ in thousands)
 
2010
   
2009
   
(Decrease)
   
(Decrease)
 
                         
Network access
  $ 53,543     $ 60,684     $ (7,141 )     (12 %)
                                 
 
 
 

Network access expenses for the three months ended March 31, 2010 decreased $7.1 million, or 12%, to $53.5 million, as compared with the three months ended March 31, 2009, primarily due to lower “aspirational gift” and long distance carriage costs in 2010.  In the first quarter of 2009, we expensed $6.7 million for the cost of new personal computers provided to customers in connection with our “Rolling Thunder” promotion which resulted in additional DISH video and HSI subscribers.

As we continue to offer “aspirational gifts” as part of our promotions, increase our sales of data products such as HSI and increase the penetration of our unlimited long distance calling plans, our network access expense may increase in the future.
 
OTHER OPERATING EXPENSES
 
                         
   
For the three months ended March 31,
 
               
$ Increase
   
% Increase
 
($ in thousands)
 
2010
   
2009
   
(Decrease)
   
(Decrease)
 
                         
Wage and benefit expenses
  $ 104,987     $ 105,791     $ (804 )     (1 %)
All other operating expenses
    88,038       94,413       (6,375 )     (7 %)
    $ 193,025     $ 200,204     $ (7,179 )     (4 %)
                                 
Wage and benefit expenses
Wage and benefit expenses for the three months ended March 31, 2010 decreased $0.8 million, or 1%, to $105.0 million, as compared to the three months ended March 31, 2009, as decreases in compensation costs due to significant headcount reductions were partially offset by higher benefit costs.
 
Pension costs are included in our wage and benefit expenses.  The decline in the value of our pension plan assets during 2008 resulted in an increase in our pension expense in 2009 and 2010.  Pension costs for the three months ended March 31, 2010 and 2009 were approximately $7.3 million and $8.2 million, respectively.  Pension costs include pension expense of $9.0 million and $10.2 million, less amounts capitalized into the cost of capital expenditures of $1.7 million and $2.0 million for the three months ended March 31, 2010 and 2009, respectively.

The Company’s pension plan assets have increased from $608.6 million at December 31, 2009 to $613.6 million at March 31, 2010, an increase of $5.0 million, or 1%.  This increase is a result of positive investment returns of $20.6 million, partially offset by ongoing benefit payments of $15.6 million during the first three months of 2010.

Based on current assumptions and plan asset values, we estimate that our 2010 pension and other postretirement benefit expenses (which were $48.6 million in 2009) will be approximately $40.0 million to $50.0 million.   We expect that we will make a $10.0 million cash contribution to our pension plan in 2010, including a payment of $2.6 million which was made in April 2010.

All other operating expenses
All other operating expenses for the three months ended March 31, 2010 decreased $6.4 million, or 7%, to $88.0 million, as compared with the three months ended March 31, 2009, due to lower marketing expenses and consulting fees.     
 
DEPRECIATION AND AMORTIZATION EXPENSE