Frontier Communications 2011 Annual Report Download - page 50

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
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Federal and state subsidies and surcharges for our Frontier legacy operations were $63.6 million, $9.3 million and $41.1
million, respectively, for 2010. Federal and state subsidies and surcharges were $69.1 million, $8.7 million and $35.5 million,
respectively, for 2009. The federal and state subsidy revenue for 2009 represents 5% of our consolidated revenues.
Federal subsidies have historically been driven by many factors, including the National Average Cost per Local Loop
(NACPL). The USF/ICC Report & Order changes how federal subsidies will be calculated and disbursed, with this change
being phased in beginning in 2012. These changes will transition the federal Universal Service High-Cost Fund, which
supports voice services in high-cost areas, to the Connect America Fund (CAF), which will support broadband deployment in
high-cost areas. CAF Phase I will be implemented in 2012, and price cap carriers will receive the same amount of support
from all USF high-cost programs as in 2011. In addition, the FCC in CAF Phase I will make available for price cap ILECs an
additional $300 million in incremental high cost broadband support to be used for broadband deployment to unserved areas.
The FCC anticipates that it will replace this interim program with a Phase II CAF long-term solution in 2013, though the
interim program will continue if no such solution is put in place. Frontier will receive a portion of the $300 million CAF
Phase I interim support, although the extent is not yet known. The USF/ICC Report and Order requires carriers receiving the
CAF Phase I interim support to deploy broadband in areas that are currently unserved based on an FCC formula that is
currently under reconsideration at the FCC and the outcome of that decision is not yet known. Some states where Frontier
operates continue to evaluate the manner in which they will determine state subsidy eligibility.
Certain states also have their own open proceedings to address reform to intrastate access charges and other intercarrier
compensation. In addition, we have been approached by, and/or are involved in formal state proceedings with, various carriers
seeking reductions in intrastate access rates in certain states. Although the FCC has pre-empted state jurisdiction on certain
access charges, many states are still considering moving forward with their proceedings. We cannot predict when or how
these matters will be decided or the effect on our subsidy or switched access revenues. However, future reductions in our
subsidy or switched access revenues may directly affect our profitability and cash flows as those regulatory revenues do not
have an equal level of associated variable expenses.
OPERATING EXPENSES
2009
($ in thousands) $ Increase % Increase $ Increase % Increase
Amount (Decrease) (Decrease) Amount (Decrease) (Decrease) Amount
Network access 518,682$ 135,003$ 35% 383,679$ 157,772$ 70% 225,907$
NETWORK ACCESS EXPENSES
2011 2010
Network access expenses for 2011 increased $135.0 million, or 35%, to $518.7 million, as compared with 2010. Network
access expenses for 2011 increased $171.3 million as a result of the additional six months of expenses in 2011 attributable to
the Acquired Business. Network access expenses, excluding the additional six months of expenses related to the Acquired
Business, decreased $36.3 million, or 9%, to $347.4 million, as compared with 2010, primarily due to reduced data network
and backbone costs, reflecting synergies realized in moving traffic onto the legacy backbone, and decreased long distance
carriage costs in 2011.
Network access expenses for 2010 increased $157.8 million, or 70%, to $383.7 million, as compared with 2009. Network
access expenses for 2010 increased $173.6 million as a result of the Acquired Business. Network access expenses for our
Frontier legacy operations decreased $15.8 million, or 7%, to $210.1 million, as compared with 2009, primarily due to lower
promotional gift and long distance carriage costs in 2010. In 2009, we expensed $10.0 million for the cost of new personal
computers provided to customers in connection with our other promotions that resulted in additional DISH video and HSI
subscribers.