Frontier Communications 2006 Annual Report Download - page 23

CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
OVERVIEW
We are a full–service communications provider and one of the largest exchange telephone carriers in the
country. We offer our incumbent local exchange carrier (ILEC) services under the “Frontier” name. On July 31,
2006 we sold our competitive local exchange carrier (CLEC), Electric Lightwave, LLC (ELI). We are accounting
for ELI as a discontinued operation in our consolidated statements of operations. In September 2006, we entered
into a definitive agreement to acquire Commonwealth. This acquisition, if successfully completed, will expand
our presence in Pennsylvania and strengthen our position as a market-leading full-service communications
provider to rural markets. The acquisition is subject to approval by the Pennsylvania PUC. All other regulatory
approvals have been received.
Competition in the telecommunications industry is intense and increasing. We experience competition from
many telecommunications service providers including cable operators, wireless carriers, voice over internet
protocol (VOIP) providers, long distance providers, competitive local exchange carriers, internet providers and
other wireline carriers. We believe that competition will continue to intensify in 2007 across all of our products
and in all of our markets. Our Frontier business experienced erosion in access lines and switched access minutes
in 2006 as a result of competition. Competition in our markets may result in reduced revenues in 2007.
The communications industry is undergoing significant changes. The market is extremely competitive,
resulting in lower prices. These trends are likely to continue and result in a challenging revenue environment.
These factors could also result in more bankruptcies in the sector and therefore affect our ability to collect money
owed to us by carriers.
Revenues from data and internet services such as high-speed internet continue to increase as a percentage of
our total revenues and revenues from services such as local line and access charges and subsidies are decreasing
as a percentage of our revenues. These factors, along with the potential for increasing operating costs, could
cause our profitability and our cash generated by operations to decrease.
(a) LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATING ACTIVITIES
As of December 31, 2006, we had cash and cash equivalents aggregating $1.04 billion. Our primary source
of funds continued to be cash generated from operations. Our cash balance increased significantly in December
2006 when we borrowed $550.0 million. For the year ended December 31, 2006, we used cash flow from
continuing operations, proceeds from the Rural Telephone Bank (RTB), proceeds from the sale of ELI and cash
and cash equivalents to fund capital expenditures, dividends, interest payments, debt repayments and stock
repurchases.
We believe our operating cash flows, existing cash balances, and credit facilities will be adequate to finance
our working capital requirements, fund capital expenditures, make required debt payments through 2007, pay
taxes, pay dividends to our stockholders in accordance with our dividend policy and support our short-term and
long-term operating strategies. We have approximately $39.3 million and $497.7 million of debt maturing in
2007 and 2008, respectively.
A number of factors, including but not limited to, losses of access lines, increases in competition and lower
subsidy and access revenues are expected to reduce our cash generated by operations and may require us to
increase capital expenditures. Our below investment grade credit ratings may make it more difficult and
expensive to refinance our maturing debt. We have in recent years paid relatively low amounts of cash taxes. We
expect that in 2007 our cash taxes will increase substantially.
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