Frontier Communications 2009 Annual Report Download - page 36

Download and view the complete annual report

Please find page 36 of the 2009 Frontier Communications annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 107

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107

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 revolving credit facility
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, the current credit market
turmoil and our below-investment grade credit ratings may also make it more difficult and expensive to
refinance our maturing debt. As of December 31, 2009, we have approximately $7.2 million and $280.0 million
of debt maturing in 2010 and 2011, respectively.
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 $3.4 billion of
Spinco debt. As a result of the greater liquidity requirements of the combined company, it is anticipated that we
will seek to expand our revolving credit facility in order to ensure that the combined company has 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 made to governmental agencies in connection with their
approval of the Verizon Transaction, including commitments with regard to capital expenditures.
In addition, if Spinco (with Frontier’s consent and participation) chooses to raise all or a portion of the
financing required to complete the Verizon Transaction prior to the closing of the Verizon Transaction, and the
Verizon Transaction is ultimately not consummated or is delayed for a significant period of time, we could be
obligated to pay significant interest expense and other costs in connection with the financing without ever
achieving 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 December 31, 2009, the ratio of Frontier’s net debt to 2009 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 improved $3.5 million for 2009 as compared to 2008.
Cash flow provided by operating activities declined $82.4 million, or 10%, for 2008 as compared to 2007.
The decline resulted from a drop in operating income, as adjusted for non-cash items, lower investment income,
a decrease in accounts payable and an increase in current income tax expenditures. These declines were
partially offset by a decrease in accounts receivable that positively impacted our cash position as compared to
the prior year. We paid $78.9 million in cash taxes during 2008.
Cash paid for taxes was $59.7 million, $78.9 million and $54.4 million in 2009, 2008 and 2007,
respectively. Our 2009 cash taxes were lower than 2008 and reflect the benefits from accelerated tax
depreciation arising from the 2009 American Recovery and Reinvestment Act (ARRA), utilization of AMT
credits and higher interest expense arising from our debt offerings not fully offset by debt repurchases. We
expect that in 2010 our cash taxes will be less than $10.0 million. We expect that our 2010 cash taxes will be
reduced by the receipt of tax refunds arising from the retroactive application of a change in tax accounting for
repairs and maintenance costs. In addition, our 2010 cash taxes will be impacted by approximately $60.0
million of tax benefits arising from our integration activities and secondarily, our 2009 debt refinancing
activities. Absent the tax benefits generated by these integration and refinancing activities, 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 during the second quarter of 2010, and enable
the combined company to implement its “go to market” strategy at closing. As a result, the Company incurred
$28.3 million of acquisition and integration costs and $25.0 million in capital expenditures related to Verizon
integration activities in 2009. While the Company continues to evaluate certain other expenses, we currently
34
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES