Frontier Communications 2009 Annual Report Download - page 34

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 in the
Spinco territory, including Internet access and long distance services and broadband video provided to
designated customers in the Spinco territory. Assuming that the merger occurred on December 31, 2009, the
merger would have resulted in Frontier acquiring approximately 4.2 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 $3.33 billion in debt. Certain of the conditions to the
closing of the Verizon Transaction have already been met: (1) Frontier’s shareholders approved the Verizon
Transaction at a special meeting of shareholders 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 the satisfaction of certain conditions); (4) receipt by
Verizon of a favorable ruling from the IRS regarding the tax consequences of the Verizon Transaction; and
(5) five 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 four state regulatory approvals, approval
from the FCC, the completion of financing on terms that satisfy certain conditions as well as other customary
closing conditions. Subject to satisfaction of these conditions, we anticipate closing this transaction during the
second quarter of 2010.
During 2007, we completed the acquisitions of Commonwealth Telephone Enterprises, Inc. (Common-
wealth or CTE), and Global Valley Networks, Inc. and GVN Services (together GVN) which expanded our
presence in Pennsylvania and California, and strengthened our position as a leading full-service
communications provider to rural markets.
Our revenues declined in 2009. Revenues from data and internet services such as HSI grew and increased
as a percentage of our total revenues and revenues from local access lines and access charges (including federal
and state subsidies) declined and decreased as a percentage of our total revenues.
Regulatory revenue includes switched access and subsidy revenue and represents 17% of our revenues in
2009. Switched access revenue was $246.3 million in 2009, or 12% of our revenues, down from $284.9 million
in 2008, or 13% of our revenues. Federal and state subsidy revenue, including surcharges billed to customers
that are remitted to the FCC, was $113.3 million in 2009, or 5% of our revenues, down from $119.8 million in
2008, or 5% of our revenues. We expect these revenue trends in switched access and subsidy revenue to
continue in 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 December 31, 2009, approximately 73% 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 in 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
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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES