Frontier Communications 2004 Annual Report Download - page 10

CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
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Competitors in ELI's markets include, in addition to the incumbent providers: AT&T, Sprint, Time Warner Telecom, MCI,
Integra and XO Communications. In each of the markets in which ELI operates, at least one other CLEC, and in some cases
several other CLECs, offer many of the same services that ELI provides, generally at similar prices.
Competition is based on price, quality, network reliability, customer service, service features and responsiveness to the
customer's needs. Many of these competitors have greater market presence and greater financial, technical, marketing and
human resources, more extensive infrastructure and stronger customer and strategic relationships than are available to us.
Competition in the CLEC industry is intense and pricing continues to decline. ELI’s revenues have declined every year
since 2000.
Divestiture of Public Utilities Services
In the past we provided public utilities services including natural gas transmission and distribution, electric transmission and
distribution, water distribution and wastewater treatment services to primarily rural and suburban customers throughout the
United States. In 1999, we announced a plan of divestiture for our public utilities services properties. Since then, we have
divested all of our public utility operations for an aggregate of $1.9 billion.
In 2001, we sold our Louisiana gas operations for $363.4 million in cash and our Colorado gas division for $8.9 million in
cash. In 2002, we sold our water and wastewater services operations for $859.1 million in cash and $122.5 million in assumed
debt and other liabilities, and our Kauai electric division for $215.0 million in cash. In 2003, we completed the sales of The
Gas Company in Hawaii division for $119.3 million in cash and assumed liabilities, our Arizona gas and electric divisions
for $224.1 million in cash and our electric transmission operations in Vermont for $7.3 million in cash. In 2004, we completed
the sale of our Vermont electric division for an aggregate of approximately $14.0 million in cash, net of selling expenses.
These transactions are subject to routine purchase price adjustments.
Our electric segment accounted for $9.7 million of our total revenues in 2004. At December 31, 2004, we had sold all of
our public utilities services segments and, as a result, will have no operating results in future periods for these businesses.
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 which 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, the remaining members of the VJO, including us, may be required to pay for a substantially larger share of the
VJO’s total power purchase obligation for the remainder of the agreement (which runs through 2015). Paragraph 13 of FIN
45 requires that we disclose “the maximum potential amount of future payments (undiscounted) the guarantor could be
required to make under the guarantee.” Paragraph 13 also states 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 investment grade credit ratings, and that all VJO members are regulated utility providers with
regulated cost recovery. Regardless, 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, 2006 and remained
in default for the duration of the contract (another 10 years), we estimate that our undiscounted purchase obligation for
2006 through 2015 would be approximately $1.4 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.
Segment Information
Note 23 to Consolidated Financial Statements provides financial information about our industry segments for the last three
fiscal years.