FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 1. Business
Frontier Communications Corporation (Frontier) is a communications company providing services predominantly to rural areas and small and medium-sized towns and cities. Frontier and its subsidiaries are referred to as the “Company,” “we,” “us” or “our” throughout this report. Frontier was incorporated in the state of Delaware in 1935, originally under the name of Citizens Utilities Company, and was known as Citizens Communications Company from 2000 until July 31, 2008.
Our mission is to be the leader in providing communications services to residential and business customers in our markets. We are committed to delivering innovative and reliable products and solutions with an emphasis on convenience, service and customer satisfaction. We offer a variety of voice, data, internet, and television services and products, some that are available ‘a la carte, and others that are available as bundled or packaged solutions. We believe that our local management structure, superior 100% U.S.–based customer service and innovative product positioning will continue to differentiate us from our competitors in the markets in which we compete.
Highlights for 2010
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The Transaction
On July 1, 2010, Frontier acquired the defined assets and liabilities of the local exchange business and related landline activities of Verizon Communications Inc. (Verizon) in Arizona, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia and Wisconsin and in portions of California bordering Arizona, Nevada and Oregon (collectively, the Territories), including Internet access and long distance services and broadband video provided to designated customers in the Territories (which we refer to as the Acquired Business). This transaction (the Transaction or the Merger) was financed with approximately $5.2 billion of common stock (Verizon shareholders received 678.5 million shares of Frontier common stock) plus the assumption of approximately $3.5 billion principal a
mount of debt.
Frontier acquired approximately 4.0 million access lines in the Transaction. As a result, the Company is the nation’s largest communications services provider focused on rural areas and small and medium-sized towns and cities in 27 states, and the nation’s fifth largest Incumbent Local Exchange Carrier (ILEC), with approximately 5.7 million access lines, 1.7 million broadband connections and 14,800 employees as of December 31, 2010.
Revenue was $3.8 billion in 2010. On a pro forma basis, assuming the Transaction had occurred on January 1, 2010, our revenues would have been approximately $5.7 billion for the year ended December 31, 2010.
Based on the level of debt incurred and the additional cash flows resulting from the Transaction, our capacity to service our debt has been significantly enhanced as compared to our capacity immediately prior to the Merger, although our overall debt increased. At December 31, 2010, the ratio of our net debt to adjusted operating cash flow (“leverage ratio”) was 2.98 times.
Issuance of Debt Securities, Letter of Credit Facility and Credit Facility
On March 23, 2010, we entered into a $750.0 million revolving credit facility (the Credit Facility) that became effective on July 1, 2010, concurrently with the closing of the Merger and the termination of the Company’s previously existing revolving credit facility.
On April 12, 2010, and in anticipation of the Merger, the Verizon subsidiary then holding the assets of the Acquired Business completed a private offering of $3.2 billion aggregate principal amount of senior notes. Upon completion of the Merger on July 1, 2010, we entered into a supplemental indenture with The Bank of New York Mellon, as Trustee, pursuant to which we assumed the obligations under the senior notes. The senior notes consist of $500.0 million aggregate principal amount of Senior Notes due 2015, $1.1 billion aggregate principal amount of Senior Notes due 2017, $1.1 billion aggregate principal amount of Senior Notes due 2020 and $500.0 million aggregate principal amount of Senior Notes due 2022.
On September 8, 2010, we entered into a $190.0 million unsecured letter of credit facility.
Dividend Policy
During the first half of 2010, we continued to pay cash dividends at an annual rate of $1.00 per common share. Effective July 1, 2010, our Board of Directors set the annual cash dividend rate at $0.75 per share. Dividends are subject to applicable law and within the discretion of our Board of Directors.
Product Growth
During 2010, we added approximately 1,061,200 new High-Speed Internet (HSI) subscribers, including 1,045,000 as a result of the Transaction. At December 31, 2010, we had approximately 1,697,200 HSI customers. Throughout our properties, we offer a video product through DISH Network (DISH) and DirecTV and, in addition, we offer fiber optic video services in three states. We added approximately 358,500 video subscribers during 2010, including 345,900 as a result of the Transaction. At December 31, 2010, we had approximately 531,400 video customers.
Customer Revenue
During 2010, our customer revenue from both residential and business customers for our Frontier legacy operations was $1,721.7 million, and our average monthly customer revenue per access line improved by $2.86, or 4%, to $69.89.
Access Lines
During 2010, our rate of access line loss for our Frontier legacy operations improved from the prior year, and the rate of access line loss for the acquired Territories improved sequentially from the third quarter to the fourth quarter of 2010. We believe this is primarily attributable to customer recognition of the value of our products, services and bundled options, fewer residential moves out of territory, fewer moves by businesses to competitors and our ability to compete with cable telephony in a maturing market place.