Frontier Communications 2011 Annual Report Download - page 36

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
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(a) Liquidity and Capital Resources
As of December 31, 2011, we had cash and cash equivalents aggregating $326.1 million (excluding restricted cash of $144.7
million, representing funds escrowed for future broadband expansion and service quality initiatives). Our primary source of
funds continued to be cash generated from operations. For the year ended December 31, 2011, we used cash flow from
operations, cash on hand and debt proceeds to fund all of our cash investing and financing activities, primarily capital
expenditures, dividends and debt payments.
The consummation of the Transaction resulted in a combined company with significantly larger business operations and,
consequently, greater working capital, capital expenditure and other liquidity needs. Upon consummation of the Transaction,
we assumed approximately $3.5 billion principal amount of debt. As a result of our greater liquidity requirements, we entered
into a new revolving credit facility which increased our line of credit to $750.0 million to provide sufficient flexibility to meet
our liquidity needs. As of December 31, 2011, we had not made any borrowings utilizing this facility.
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 Transaction, although our overall
debt increased.
At December 31, 2011, we had a working capital surplus of $86.8 million. We believe our operating cash flows, existing cash
balances, and existing revolving credit facility will be adequate to finance our working capital requirements, fund capital
expenditures, make required debt payments, pay taxes, pay dividends to our stockholders, pay our integration costs and
capital expenditures, and support our short-term and long-term operating strategies through 2012. Effective February 16,
2012, our Board of Directors set the annual cash dividend at $0.40 per share. The Board reduced the dividend in order to
strengthen our balance sheet and improve operational and financial flexibility. However, a number of factors, including but
not limited to, losses of access lines, pricing pressure from increased competition, lower subsidy and switched access
revenues and the impact of the current economic environment are expected to reduce our cash generated from 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, this could change in the future. As of December 31,
2011, we had approximately $94.0 million and $638.8 million of debt maturing in 2012 and 2013, respectively.
In addition, the FCC and certain state regulatory commissions, in connection with granting their approvals of the Transaction,
specified certain capital expenditure and operating requirements for the acquired Territories for specified periods of time post-
closing. These requirements focus primarily on certain capital investment commitments to expand broadband availability to at
least 85% of the households throughout the acquired Territories with minimum speeds of 3 Mbps by the end of 2013 and 4
Mbps by the end of 2015. To satisfy all or part of certain capital investment commitments to three state regulatory
commissions, we placed an aggregate amount of $115.0 million in cash into escrow accounts and obtained a letter of credit
for $190.0 million in 2010. Another $72.4 million of cash in an escrow account (with a cash balance of $62.9 million and an
associated liability of $14.3 million as of December 31, 2011) was acquired in connection with the Transaction to be used for
service quality initiatives in the state of West Virginia. As of December 31, 2011, $43.0 million had been released from
escrow. As of December 31, 2011, the letter of credit had been reduced to $100.0 million. The aggregate amount of these
escrow accounts and the letter of credit has decreased and will continue to decrease over time as Frontier makes the required
capital expenditures in the respective states.
Cash Flows provided by Operating Activities
Cash flows provided by operating activities improved $350.5 million, or 29%, in 2011 as compared to 2010. The
improvement was primarily the result of the additional six months of cash flow from the Acquired Business during 2011.
Cash refunds (net of cash taxes paid) for taxes of $33.1 million were received in 2011, while cash paid for taxes was $19.9
million and $59.7 million in 2010 and 2009, respectively. Our 2011 cash taxes reflect the continued impact of bonus
depreciation under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. We expect that
in 2012 our cash taxes will be approximately $25 million.
In the third quarter of 2011, the Company contributed four administrative properties appraised at $58.1 million to its qualified
defined benefit pension plan. The Company is leasing back the properties from its pension plan for 15 years at a combined