FRONTIER COMMUNICATIONS CORPORATION

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

 

 

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30 , 2014

 

 

 

 

 

 

 

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C.  20549

 

FORM 10-Q

(Mark One)

☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30 , 2014

 

or

 

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________to__________

 

Commission file number:  001-11001

 

FRONTIER COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware		06-0619596
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
3 High Ridge Park
Stamford, Connecticut		06905
(Address of principal executive offices)		(Zip Code)

 

(203) 614-5600

(Registrant's telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  X       No ___

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web   site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes  X       No ___

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☒            Accelerated filer ☐            Non-accelerated filer ☐          Smaller reporting company  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes           No X   

 

The number of shares outstanding of the registrant’s Common Stock as of July 25 , 2014   was 1,002,103,000 .

 

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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

Index

 

 

 

 

 

 

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PART I.  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

($ in thousands)

 

 

		(Unaudited)
		June 30, 2014			December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents		$	801,697		$	880,039
Accounts receivable, less allowances of $64,401 and $71,362 , respectively			463,932			479,210
Restricted cash			3,200			11,411
Prepaid expenses			64,596			68,573
Income taxes and other current assets			77,830			179,606
Total current assets			1,411,255			1,618,839
Restricted cash			2,000			2,000
Property, plant and equipment, net			7,162,649			7,255,762
Goodwill			6,337,719			6,337,719
Other intangibles, net			1,063,150			1,214,932
Other assets			202,505			206,232
Total assets		$	16,179,278		$	16,635,484
LIABILITIES AND EQUITY
Current liabilities:
Long-term debt due within one year		$	262,527		$	257,916
Accounts payable			275,119			327,256
Advanced billings			133,560			137,319
Accrued taxes			107,379			66,276
Accrued interest			185,130			188,639
Other current liabilities			318,539			324,181
Total current liabilities			1,282,254			1,301,587
Deferred income taxes			2,355,494			2,417,108
Pension and other postretirement benefits			697,708			725,333
Other liabilities			249,839			262,308
Long-term debt			7,650,833			7,873,667
Equity:
Common stock, $0.25 par value ( 1,750,000,000 authorized shares,
1,002,131,000 and 999,462,000 outstanding, respectively, and
1,027,986,000 issued, at June 30, 2014 and December 31, 2013)			256,997			256,997
Additional paid-in capital			4,086,548			4,321,056
Retained earnings			153,062			76,108
Accumulated other comprehensive loss, net of tax			(254,601)			(260,530)
Treasury stock			(298,856)			(338,150)
Total equity			3,943,150			4,055,481
Total liabilities and equity		$	16,179,278		$	16,635,484

 

 

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

2

 

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PART I.  FINANCIAL INFORMATION (Continued)

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30 , 2014 AND 2013

($ in thousands, except for per-share amounts)

(Unaudited)

 

 

		For the three months ended						For the six months ended
		June 30,						June 30,
		2014			2013			2014			2013
Revenue		$	1,147,265		$	1,190,533		$	2,301,311		$	2,395,929
Operating expenses:
Network access expenses			106,224			107,114			213,316			216,512
Other operating expenses			523,385			534,015			1,052,311			1,075,514
Depreciation and amortization			273,463			297,849			554,870			601,524
Acquisition and integration costs			19,851			-			30,447			-
Total operating expenses			922,923			938,978			1,850,944			1,893,550
Gain on sale of Mohave partnership interest			-			14,601			-			14,601
Operating income			224,342			266,156			450,367			516,980
Investment and other income (expense), net			(17)			2,956			1,378			7,610
Losses on early extinguishment of debt			-			159,780			-			159,780
Interest expense			167,611			166,547			338,568			337,967
Income (loss) before income taxes			56,714			(57,215)			113,177			26,843
Income tax expense (benefit)			19,034			(18,755)			36,223			14,520
Net income (loss)			37,680			(38,460)			76,954			12,323
Less: Income attributable to the noncontrolling
interest in a partnership			-			-			-			2,643
Net income (loss) attributable to common shareholders
of Frontier		$	37,680		$	(38,460)		$	76,954		$	9,680
Basic and diluted net income (loss) per common share
attributable to common shareholders of Frontier		$	0.04		$	(0.04)		$	0.08		$	0.01

 

 

 

 

 

CONSOLIDATED STATEMENT S OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30 , 2014 AND 2013

($ in thousands)

(Unaudited)

 

 

		For the three months ended						For the six months ended
		June 30,						June 30,
		2014			2013			2014			2013
Net income (loss)		$	37,680		$	(38,460)		$	76,954		$	12,323
Other comprehensive income, net of tax (see Note 13)			2,890			6,746			5,929			13,492
Comprehensive income (loss)			40,570			(31,714)			82,883			25,815
Less:  Income attributable to the
noncontrolling interest in a partnership			-			-			-			2,643
Comprehensive income (loss) attributable to
the common shareholders of Frontier		$	40,570		$	(31,714)		$	82,883		$	23,172

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

3

 

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PART I.  FINANCIAL INFORMATION (Continued)

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE SIX MONTHS ENDED JUNE 30 , 2013 , THE SIX MONTHS ENDED DECEMBER 31, 2013 AND THE

SIX MONTHS ENDED JUNE 30 , 2014

($ and shares in thousands)

(Unaudited)

 

 

		Equity of Frontier
													Accumulated
							Additional						Other
		Common Stock					Paid-In			Retained			Comprehensive			Treasury Stock					Noncontrolling			Total
		Shares		Amount			Capital			Earnings			Loss			Shares		Amount			Interest			Equity
Balance January 1, 2013		1,027,986		$	256,997		$	4,639,563		$	63,205		$	(483,576)		(29,576)		$	(368,593)		$	11,675		$	4,119,271
Stock plans		-			-			(31,045)			-			-		2,113			35,148			-			4,103
Dividends on common stock		-			-			(199,866)			-			-		-			-			-			(199,866)
Net income		-			-			-			9,680			-		-			-			2,643			12,323
Other comprehensive income, net
of tax		-			-			-			-			13,492		-			-			-			13,492
Distributions		-			-			-			-			-		-			-			(6,400)			(6,400)
Sale of Mohave partnership interest		-			-			-			-			-		-			-			(7,918)			(7,918)
Balance June 30, 2013		1,027,986			256,997			4,408,652			72,885			(470,084)		(27,463)			(333,445)			-			3,935,005
Stock plans		-			-			12,374			-			-		(1,061)			(4,705)			-			7,669
Dividends on common stock		-			-			(99,970)			(99,932)			-		-			-			-			(199,902)
Net income		-			-			-			103,155			-		-			-			-			103,155
Pension settlement costs, net of tax		-			-			-			-			27,381		-			-			-			27,381
Other comprehensive income, net
of tax		-			-			-			-			182,173		-			-			-			182,173
Balance December 31, 2013		1,027,986			256,997			4,321,056			76,108			(260,530)		(28,524)			(338,150)			-			4,055,481
Stock plans		-			-			(34,071)			-			-		2,669			39,294			-			5,223
Dividends on common stock		-			-			(200,437)			-			-		-			-			-			(200,437)
Net income		-			-			-			76,954			-		-			-			-			76,954
Other comprehensive income, net
of tax		-			-			-			-			5,929		-			-			-			5,929
Balance June 30, 2014		1,027,986		$	256,997		$	4,086,548		$	153,062		$	(254,601)		(25,855)		$	(298,856)		$	-		$	3,943,150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

4

 

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PART I.  FINANCIAL INFORMATION (Continued)

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30 , 2014 AND 2013

($ in thousands)

(Unaudited)

 

 

		2014			2013
Cash flows provided by (used in) operating activities:
Net income		$	76,954		$	12,323
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization			554,870			601,524
Losses on early extinguishment of debt			-			159,780
Pension/OPEB costs			(417)			8,608
Stock based compensation expense			11,892			8,927
Gain on sale of Mohave partnership interest			-			(14,601)
Other non-cash adjustments			19,567			5,568
Deferred income taxes			(66,493)			(19,148)
Change in accounts receivable			15,278			43,202
Change in accounts payable and other liabilities			(34,881)			(75,159)
Change in prepaid expenses, income taxes and other current assets			64,349			(50,317)
Net cash provided by operating activities			641,119			680,707
Cash flows provided from (used by) investing activities:
Capital expenditures - Business operations			(260,595)			(326,522)
Capital expenditures - Integration activities			(41,575)			-
Network expansion funded by Connect America Fund			(24,568)			(9,233)
Grant funds received for network expansion from Connect America Fund			3,748			5,998
Proceeds on sale of Mohave partnership interest			-			17,755
Cash transferred from escrow			8,211			21,790
Other assets purchased and distributions received, net			21,986			1,721
Net cash used by investing activities			(292,793)			(288,491)
Cash flows provided from (used by) financing activities:
Long-term debt borrowings			10,801			750,000
Financing costs paid			(6,140)			(19,360)
Long-term debt payments			(229,626)			(1,534,074)
Premium paid to retire debt			-			(159,429)
Dividends paid			(200,437)			(199,866)
Other financing activities			(1,266)			(7,389)
Net cash used by financing activities			(426,668)			(1,170,118)
Decrease in cash and cash equivalents			(78,342)			(777,902)
Cash and cash equivalents at January 1,			880,039			1,326,532
Cash and cash equivalents at June 30,		$	801,697		$	548,630
Supplemental cash flow information:
Cash paid during the period for:
Interest		$	319,326		$	348,459
Income taxes, net		$	14,408		$	83,462

 

 

 

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements

 

 

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(1)   Summary of Significant Accounting Policies :

(a)   Basis of Presentation and Use of Estimates :

Frontier Communications Corporation and its subsidiaries are referred to as “we,” “us,” “our,” “Frontier,” or the “Company” in this report. Our interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2013 .   All significant intercompany balances and transactions have been eliminated in consolidation. These interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring accruals) considered necessary, in the opinion of Frontier’s management, to present fairly the results for the interim periods shown. Revenues, net income and cash flows for any interim periods are not necessarily indicative of results that may be expected for the full year. For our interim financial statements as of and for the period ended June 30 , 2014 , we evaluated subsequent events and transactions for potential recognition or disclosure through the date that we filed this quarterly report on Form 10-Q with the Securities and Exchange Commission (SEC).

 

Frontier had a 33 ⅓ % controlling general partner interest in a partnership entity, the Mohave Cellular Limited Partnership (Mohave). Mohave’s results of operations were included in our consolidated financial statements through its date of disposal on April 1, 2013. The minority interest of the li mited partners was reflected in the consolidated statements of operations as “Income attributable to the noncontrolli ng interest in a partnership.” On April 1, 2013, the Company sold its partnership interest in Mohave and received proceeds of $17.8 million. The Company recognized a gain on sale of approximately $14.6 million before taxes in   the second quarter of 2013.

 

The preparation of our interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities at the date of the financial statements, (ii) the disclosure of contingent assets and liabilities, and (iii) the reported amounts of revenue and expense s during the reporting period. Actual results may differ from those estimates.  Estimates and judgments are used when acco unting for revenue recognition , including the allowance for doubtful accounts , impairment of long-lived assets, intangible assets, depreciation and amortization, income taxes, contingencies, and pension and other postretirement benefits, among others. Certain information and footnote disclosures have been excluded and/or condensed pursuant to SEC rules and regulations.   

 

(b)   Revenue Recognition :

Revenue is recognized when services are provided or when products are delivere d to customers. Revenue that is billed in advance includes: monthly recurring network access services (including data services), special access services and monthly recurring voi ce, video and related charges. The unearned portion of these fees is initially deferred as a component of “Advanced billings” on our consolidated balance sheet and recognized as revenue over the period t hat the services are provided. Revenue that is billed in arrears includes: non-recurring network access services (including data services), switched access services, non-recur ring voice and video services. The earned but unbilled portion of these fees is recognized as revenue in our consolidated statements of operations and accrued in accounts receivable in the period that the services are provided. Excise taxes are recognized as a liability when billed.  Installation fees and their related direct and incremental costs are initially deferred and recognized as revenue and expense over the average te rm of a customer relationship. We recognize as current period expense the portion of installation costs that exceeds installation fee revenue.

 

As required by law, the Company collects various taxes from its customers and subsequently remits these taxes to governmental authorities. Substantially all of these taxes are recorded through the consolidated balance sheet and presented on a net basis in our consolid ated statements of operations. We also collect Universal Service Fund (USF) surcharges from customers (primarily federal USF) that we have recorded on a gross basis in our consolidated statements of operations and included within “Revenue” and “Other operating expenses ”   of $30.7 million and $ 28.1 million , and $60.8 million and $58.0 million, for the three and six months ended June 30 , 2014 and 2013 , respectively .

 

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(c)   Goodwill and Other Intangibles :

Goodwill represent s the excess of purchase price over the fair value of identifiable tangible and intangible net assets acquired. We undertake studies to determine the fair values of assets and liabilities acquired and allocate purchase prices to assets and liabilities, including property, plant and equipment, goodwill and o ther identifiable intangibles. We annually (during the fourth quarter) or more frequently, if appropriate, examine the carrying value of our goodwill and trade name to determine whether there are any impairment l osses. We test for goodwill impairment at the “operating segment” level, as that term is defined in U.S. GAAP. Our four   operating segments consist of the following regions: Cen tral, East, National and West. Our regional operating segments are aggregated into one reportable segment .  

 

The Company amortizes finite-lived intangible assets over their estimated useful lives and reviews such intangible assets at least annually (during the fourth quarter) to assess whether any potential impairment exists and whether factors exist that would necessitate a change in useful life and a different amortization period. 

 

(2)   Recent Accounting Literature :

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 , “Revenu e from Contracts with Customers.”   This standard   requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchan ge for those goods or services. This new standard is effective for annual and interim reporting periods beginning after December 15, 2016. Early adoption is not permitted. Companies are permitted to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company is currently evaluating the impact of adopting the new standard on January 1, 2017 , but has not yet selected a transition method or determined the impact of adoption on its consolidated financial statements.

 

Discontinued Operations  

In April 2014, the FASB issu ed ASU No. 2014-08 , “Reporting Discontinued Operations and Disclosures of Dispo sals of Components of an Entity ”   which raises the threshold for a disposal to qualify as discontinued operations and requires new disclosures for individually material disposal transactions that do not meet the definition of a discontinue d operation. Under the new standard, companies report discontinued operations when they have a disposal that represents a strategic shift that has or will have a major impact on op erations or financial results. This new standard will be a pplied prospectively and will be effective for the Company on January 1, 2015. This new standard   is not expected to have a material impact on the Company's consolidated financial statements .    

 

Internal Control – Integrated Framework

In May 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued its updated Internal Control – Integrated Framework (the 2013 Framework) and related illustrative documents. COSO will continue to make available its original Framework during the transition period extending to December 15, 2014. The Company currently utilizes COSO’s original Framework, which was published in 1992 and is recognized as the leading guidance for designing, implementing and conducting internal controls over external financial reporting and assessing its effectiveness. The 2013 Framework is expected to help organizations design and implement internal control in light of many changes in business and operating environments since the issuance of the original Framework, broaden the application of internal control in addressing operations and reporting objectives, and clarify the requirements for determining what constitutes effective internal control. We plan to adopt the 2013 Framework during 2014 and do not expect that it will have a significant impact on the Company.

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(3)   The Transaction s :

The 2010 Transaction

On July 1, 2010, the Company acquired the defined assets and liabilities of the local exchange business and related landline activities of Verizon Communications Inc. (Verizon) in 14 states (the Acquired Territories), including Internet access , long distance services and broadband video provided to designated customers in the Acquired Territories (the 20 10 Acquired Business). Frontier was considered the acquirer of the 2010 Acquired Business for accounting purposes. All integration activities for the 2010 Transaction were completed as of the end of 2012.

 

The AT&T Transaction  

On December 17, 2013 , the Company announced that it entered into an agreement to acquire the wireline properties of AT&T Inc. (AT&T) in Connecticut (the AT&T Transaction) for a purchase price of $2.0 billion in cash, with ad justments for working capital. Upon completion of the AT&T Transaction, Frontier will operate AT&T’s wireline business and fiber optic network that provides services to residential, commercial and whole sale customers in Connecticut. The Company will also acquire AT&T’s U-verse® video and satellite TV customers in Connecticut. 

 

The Company will account for the AT&T Transaction in accordance with   the guidance included in U.S. GAAP for business combinations .   We incurred $ 19.9 million   and $ 30.4 million   of acquisition and integrat ion   relat ed costs in connection with the AT&T Transaction during the three and six months ended June 30 , 2014 , respectively .    

 

On July 25, 2014, the Federal Communications Commission (FCC) approved the AT&T Transaction. The Company is currently also seeking approval from the Connecticut Public Utilities Regulatory Authority , and has already receiv ed Justice Department approval.

 

(4)   Accounts Receivable :

The components of accounts receivable, net are as follows:

 

 

($ in thousands)		June 30, 2014			December 31, 2013
Retail and Wholesale		$	487,268		$	498,717
Other			41,065			51,855
Less: Allowance for doubtful accounts			(64,401)			(71,362)
Accounts receivable, net		$	463,932		$	479,210

 

We maintain an allowance for doubtful accounts based on our estimate of our ability to collect accounts receivable. Bad debt expense, which is recorded as a reduction to revenue,   was $11.8 million and $ 16.1 million , and $24.7 million and $32.3 million , for the three and six months ended June 30 , 2014 and 2013 , respectively.

 

(5)   Property, Plant and Equipment :

Property, plant and equipment, net is as follows:

 

 

($ in thousands)		June 30, 2014			December 31, 2013
Property, plant and equipment		$	15,139,272		$	14,850,697
Less:  Accumulated depreciation			(7,976,623)			(7,594,935)
Property, plant and equipment, net		$	7,162,649		$	7,255,762

 

Depreciation expense is principally based on the composite group method. Depreciation expense was $ 197.6 million and $ 210.8 million , and $ 403.1 million and $427.5 million, for the three and six months ended June 30 , 2014 and 2013 , respect ively. As a result of an independent study of the estimated remaining useful lives of our plant assets, we adopted

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new estimated remaining useful lives for certain pl ant assets as of October 1, 2013 , with an insignificant impact to depreciation expense. 

 

(6)   Goodwill and Other Intangibles :

The components of goodwill by the reporting units in effect as of both June 30 , 2014   and December 31, 2013 are as follows:

 

 

 

The components of other intangibles are as follows:

 

($ in thousands)		June 30, 2014									December 31, 2013
		Gross Carrying			Accumulated			Net Carrying			Gross Carrying			Accumulated			Net Carrying
		Amount			Amortization			Amount			Amount			Amortization			Amount
Other Intangibles:
Customer base		$	2,427,648		$	(1,488,634)		$	939,014		$	2,427,648		$	(1,336,852)		$	1,090,796
Trade name and license			124,136			-			124,136			124,136			-			124,136
Total other intangibles		$	2,551,784		$	(1,488,634)		$	1,063,150		$	2,551,784		$	(1,336,852)		$	1,214,932

 

Amortization expense was $ 75.9 million and   $ 87.0   million ,   and $ 151.8 million and $174.0   million, for the three and six months ended June 30 , 2014 and 2013 , respectively. Amortization expense represents the amortization of intangible assets (primarily customer base) that were acquired in the 2010 Transaction based on a useful life of nine years for the residential customer base and 12 years for the business customer base, amortized on an accelerated method.

 

(7)   Fair Value of Financial Instruments :

The following table summarizes the carrying amounts and estimated fair values for long-term debt at June 30 , 2014 and December 31, 2013 .   For the other financial instruments including cash, accounts receivable, long-term debt due within one year, accounts payable and other current liabilities, the carrying amounts approximate fair value due to the relatively short ma turities of those instruments.   Other equity method investments, for which market values are not readily available, are carried at cost, which approximates fair value.

 

The fair value of our long-term debt is estimated based upon quoted market prices at the reporting date for those financial instruments.

 

 

($ in thousands)		June 30, 2014						December 31, 2013
			Carrying						Carrying
			Amount			Fair Value			Amount			Fair Value
Long-term debt		$	7,650,833		$	8,419,064		$	7,873,667		$	8,191,744

 

 

 

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(8)   Long-Term Debt :

The activity in our long-term debt from December 31, 201 3 to June 30 , 2014 is summarized as follows:

 

 

 

					Six months ended
					June 30, 2014									Interest
														Rate at
		December 31,			Payments			New			June 30,			June 30,
($ in thousands)		2013			and Retirements			Borrowings			2014			2014 *
Senior Unsecured Debt		$	8,107,066		$	(228,750)		$	-		$	7,878,316		7.93%
Other Secured Debt			13,550			(669)			10,801			23,682		3.62%
Rural Utilities Service Loan Contracts			8,930			(207)			-			8,723		6.15%
Total Long-Term Debt		$	8,129,546		$	(229,626)		$	10,801		$	7,910,721		7.91%
Less: Debt (Discount)/Premium			2,037									2,639
Less: Current Portion			(257,916)									(262,527)
		$	7,873,667								$	7,650,833

 

* Interest rate includes amortization of debt issuance costs a nd debt premiums or discounts. The interest rates at June 30 , 2014 represent a weighted average of multiple issuances .

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Additional information regarding our Senior Unsecured Debt is as follows:

 

 

($ in thousands)		June 30, 2014					December 31, 2013
		Principal			Interest		Principal			Interest
		Outstanding			Rate		Outstanding			Rate
Senior Notes and Debentures Due:
5/1/2014			-		-			200,000		8.250%
3/15/2015			105,026		6.625%			105,026		6.625%
4/15/2015			96,872		7.875%			96,872		7.875%
10/14/2016 *			431,250		3.025% (Variable)			460,000		3.045% (Variable)
4/15/2017			606,874		8.250%			606,874		8.250%
10/1/2018			582,739		8.125%			582,739		8.125%
3/15/2019			434,000		7.125%			434,000		7.125%
4/15/2020			1,021,505		8.500%			1,021,505		8.500%
7/1/2021			500,000		9.250%			500,000		9.250%
4/15/2022			500,000		8.750%			500,000		8.750%
1/15/2023			850,000		7.125%			850,000		7.125%
4/15/2024			750,000		7.625%			750,000		7.625%
11/1/2025			138,000		7.000%			138,000		7.000%
8/15/2026			1,739		6.800%			1,739		6.800%
1/15/2027			345,858		7.875%			345,858		7.875%
8/15/2031			945,325		9.000%			945,325		9.000%
10/1/2034			628		7.680%			628		7.680%
7/1/2035			125,000		7.450%			125,000		7.450%
10/1/2046			193,500		7.050%			193,500		7.050%
			7,628,316					7,857,066
Subsidiary Senior Notes and Debentures Due:
2/15/2028			200,000		6.730%			200,000		6.730%
10/15/2029			50,000		8.400%			50,000		8.400%
Total		$	7,878,316		7.78% **		$	8,107,066		7.78% **

 

*      Represents borrowings under the 2011 CoBank Credit Agreement, as defined below .

**    Interest rate represents a weighted average of the stated interest rates of multiple issuances.

 

During the first six months of 2014, we entered into secured financings totaling $10. 8 million with four year terms and no stated interest rate for certain equipment purchases.

 

On December 16, 2013, we signed a commitment letter for a bridge loan facility (the Bridge Facility) and recognized interest expense related to this commitment of $7.5 million and $15.0 million during the three and six months ended June 30 , 2014. On January 29, 2014, we entered into a bridge loan agreement (the Bridge Loan Agreement) with the Lenders party thereto and JP Morgan Chase Bank, N.A., as administrative agent, pursuant to which the Lenders have agreed at closing of the AT&T Transaction to provide to us an unsecured bridge loan facility for up to $1.9 billion for the purposes of funding (i) substantially all of the purchase price for the AT&T Transaction and (ii) the fees and expenses incurred in connection with the transactions contemplated by the stock purchase agreement for the AT&T Transaction. Pursuant to the Bridge Loan Agreement, if and to the extent we do not, or are unable to, issue debt securities yielding up to $1.9 billion in gross cash proceeds on or prior to the closing of the AT&T Transaction, we shall draw down up to $1.9 billion, less the amount of the debt securities, if any, issued by us on or prior to the closing of the AT&T Transaction, in aggregate principal amount of loans under the Bridge Facility to fund the purchase price of the AT&T Transaction.

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On July 16 , 2014, t he Bridge Facility was reduced by $350.0 million following execution of the 2014 CoBank Credit Agreement, as defined below.  All other terms and conditions remain unchanged.

 

On June 2, 2014, the Company entered into a credit agreement with CoBank, ACB, as administrative agent, lead arranger and a lender, and the other lenders party thereto, for a $350.0 million senior unsecured delayed draw term loan facility (the 2014 CoBank Credit Agreement). The facility will be drawn upon closing of the AT&T Transaction with proceeds used to partially finance the acquisition. The maturity date is the earlie r of the fifth anniversary of the draw date and   December 15, 2019 . Repayment of the outstanding principal balance will be made in quarterly installments in the amount of $8.8 million, commencing one full fiscal quarter after the draw date, with the remaining outstanding principal balance to be repaid on the maturity date. Borrowings under the 2014 CoBank Credit Agreement will bear interest based on the margins over the Base Rate (as defined in the 2014 CoBank Credit Agreement) or LIBOR, at the election of the Company. Interest rate margins under the facility (ranging from 0.875% to 2.875% for Base Rate borrowings and 1.875% to 3.875% for LIBOR borrowings) are subject to adjustments based on the Total Leverage Ratio of the Company, as such term is defined in the 2014 CoBank Credit Agreement.

 

On June 2, 2014, t he Company entered into a new revolving credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, the lenders party thereto and the other parties named therein (the New Revolving Credit Agreement), for a $750.0 million revolving credit facility (the New Revolving Credit Facility) with a scheduled termination date of May 31, 2018 and terminated its existing revolving credit facility (the Prio r Revolving Credit Facility) under the Credit Agreement, dated as of May 3, 2013, among the Company, JPMorgan Chase Bank, N.A., as administrative agent, the lenders party thereto and the other parties named therein (the Prior Revolving Credit Agreement). As of June 30 , 2014 ,   the New Revolving Credit Facility was fully available and no borrowings had been made thereunder .   Associated commitment fees under the New   Revolving Credit Facility will vary from time to time depending on the Company’s debt rating (as defined in the New Revolving Credit Agreement) and were 0.400 % per annum as of June 30 , 2014 . During the term of the New Revolving Credit Facility, the Company may borrow, repay and reborrow funds, and may obtain letters of credit, subject to customary borrowing conditions. Loans under the New Revolving Credit Facility will bear interest based on the alternate base rate or the adjusted LIBO R ate (each as determined in the New Revolving Credit Agreement), at the Company’s election, plus a margin based on the Company’s debt rating (ranging from 0.50% to 1.50% for alternate base rate borrowings and 1.50% to 2.50% for adjusted LIBO   R ate borrowings). The current pricing on this facility would have been 1.0 0 % or 2.0 0 % , respectively, as of June 30 , 2014 . Letters of credit issued under the New Revolving Credit Facility will also be subject to fees that vary depending on the Company’s debt rating. The New Revolving Credit Facility is available for general corporate purposes but may not be u sed to fund dividend payments. The terms of the New Revolving Credit Facility are substantially similar to the terms of the Prior Revolving Credit Facility .

 

The Company has a credit agreement with CoBank, ACB, as administrative agent, lead arranger and a lender, and the other lenders party thereto, for a $575.0 million senior unsecured term loan facility with a final maturity of October 14, 2016 (the 2011 CoBank Credit Agreement). The entire facility was drawn upon execution of the 2011 CoBank Credit Agreement in October 2011.  Repayment of the outstanding principal balance is made in quarterly installments in the amount of $14.4 million, which commenced on March 31, 2012, with the remaining outstanding principal balance to be repaid on the final maturity date. Borrowings under the 2011 CoBank Credit Agreement bear interest based on the margins over the Base Rate (as defined in the 2011 CoBank Credit Agreement) or LIBOR, at the election of the Company. Interest rate margins under the facility (ranging from 0.875% to 2.875% for Base Rate borrowings and 1.875% to 3.875% for LIBOR borrowings) are subject to adjustments based on the Total Leverage Ratio of the Company, as such term is defined in the 2011 CoBank Credit Agreement. The current pricing on this facility is LIBOR plus 2.875% . 

 

As of June 30 , 2014 , we were in compliance with all of our debt and credit facility financial covenants.

 

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P rincipal payments for our currently outstanding debt for the next five years are as follows as of June 30 , 2014 :  

 

 

		Principal
($ in thousands)		Payments
2014 (remaining six months)		$	30,315
2015		$	262,541
2016		$	348,167
2017		$	610,075
2018		$	583,948
2019		$	434,565

 

 

 

 

(9)   Income Taxes:  

The following is a reconciliation of the provision for income taxes computed at federal statutory rates to the effective rates:  

 

 

		For the three months ended						For the six months ended
		June 30,						June 30,
		2014			2013			2014			2013
Consolidated tax provision at federal statutory rate		35.0	%		35.0	%		35.0	%		35.0	%
State income tax provisions, net of federal income
tax benefit		1.9			9.2			1.1			(8.2)
Noncontrolling interest		-			(0.6)			-			-
Tax reserve adjustment		(3.2)			7.7			(1.6)			(15.4)
Changes in certain deferred tax balances		-			(10.6)			(2.5)			22.6
IRS audit adjustments		-			(9.0)			-			19.3
All other, net		(0.1)			1.1			-			0.8
Effective tax rate		33.6	%		32.8	%		32.0	%		54.1	%

 

Income taxes for the three and six months ended June 30, 2014 include a $1.9 million benefit from the net reversal of reserves for uncertain tax positions. Income taxes for the six months ended June 30 , 2014 incl ude the impact of a   $ 2.9   million   benefit   arising from state tax law changes .

 

Income taxes for the three and six months ended June 30, 2013 include the impact of a charge of $5.2 million resulting from the settlement of the 2010 IRS audit and a $6.0 million charge resulting from the adjustment of deferred tax balances, partially offset by a $4.4 million benefit from the net reversal of reserves for uncertain tax positions.

 

As of June 30, 2014, there were no   uncertain tax positions for which the statutes of limitations are expected to expire during the next twelve months and which would affect our effective tax rate .

 

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(10) Net Income (Loss) Per Common Share :

The reconciliation of the net income per common share calculation is as follows:

 

 

	For the three months ended						For the six months ended
( $ and shares in thousands, except per share amounts )	June 30,						June 30,
	2014			2013			2014			2013
Net income (loss) used for basic and diluted earnings
per common share:
Net income (loss) attributable to common shareholders of Frontier	$	37,680		$	(38,460)		$	76,954		$	9,680
Less:  Dividends paid on unvested restricted stock awards		(746)			(755)			(1,513)			(1,276)
Total basic and diluted net income (loss) attributable to common
shareholders of Frontier	$	36,934		$	(39,215)		$	75,441		$	8,404
Basic earnings per common share:
Total weighted average shares and unvested restricted stock
awards outstanding - basic		1,002,191			999,234			1,001,474			998,770
Less:  Weighted average unvested restricted stock awards		(7,563)			(6,623)			(7,189)			(6,606)
Total weighted average shares outstanding - basic		994,628			992,611			994,285			992,164
Basic net income (loss) per share attributable to common
shareholders of Frontier	$	0.04		$	(0.04)		$	0.08		$	0.01
Diluted earnings per common share:
Total weighted average shares outstanding - basic		994,628			992,611			994,285			992,164
Effect of dilutive shares		2,157			603			2,645			449
Total weighted average shares outstanding - diluted		996,785			993,214			996,930			992,613
Diluted net income (loss) per share attributable to common
shareholders of Frontier	$	0.04		$	(0.04)		$	0.08		$	0.01

 

Stock Options

For the three and six months ended June 30 , 2014 , options to purchase 83,000 shares (at exercise prices ranging from $ 12.50 to $ 14.15 ) and for the three and six months ended June 30 , 2013 ,   options to purchase 93,000   shares (at exercise prices ranging from $ 12.50 to $ 14.15 ) , issuable under employee compensation plans were excluded from the computation of diluted earnings per share (EPS) for those periods because the exercise prices were greater than the average market price of our common stock and, therefore, the effect wou ld be antidilutive. In calculating diluted EPS, we apply the treasury stock method and include future unearned compensation as part of the assumed proceeds.

 

Stock Units

At June 30 , 2014 and 2013 , we had 1, 372,163 and 1,044,128 stock units, respectively, issued under our Non-Employee Directors’ Deferred Fee Equity Plan (Deferred Fee Plan) and the Non-Employee Directors’ Equity Incentive Plan (Directors’ Equity Plan). These securities have not been included in the diluted income per share of common stock cal culation for the three and six months ended June 30 , 2014 and 2013 because their inclusion would have an antidilutive effect.

 

(11) Stock Plans :

At June 30 , 2014 , we had six stock-based compensation plans under which grants were made and awards remained outstanding.   No further awards may be granted under four of the plans: the 1996 Equity Incentive Plan (the 1996 EIP), the Amended and Restated 2000 Equity Incentive Plan (the 2000 EIP), the 2009 Equity Incentive Plan (the 2009 E IP) and the Deferred Fee Plan. At June 30 , 2014 , there were 22,540,761 shares authorized for grant and 14,732,186 shares available for grant under the 2013 Equity Incentive Plan (the 2013 EIP and together with the 1996 EIP, the 2000 EIP and the 2009 EIP,

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the EIPs ) and the Directors’ Equity Plan. Our general policy is to issue shares from treasury upon the grant of restricted shares and the exercise of options.

 

Performance Shares

On February 15, 2012, the Company’s Compensation Committee, in consultation with the other non-management directors of the Company’s Board of Directors and the Committee’s independent executive compensation consultant, adopted the Frontier Long-Term Incentive Plan (the LTIP ). LTIP awards are granted in t he form of performance shares. The LTIP is currently offered under the Company’s 2009 EIP and 2013 EIP, and participants consist of senior vice presidents and above. The LTIP awards have performance, market and time-vesting conditions. 

Beginning in 2012, during the first 90 days of a three -year performance period (a M easurement Period ), a target number of performance shares are awarded to each LTIP participant with resp ect to the Measurement Period. The performance metrics under the LTIP are (1) annual targets for operating cash flow based on a goal set during the first 90 days of each year in the three-year Measurement Period and (2) an overall performance “modifier” set during the first 90 days of the Measurement Period, based on the Company’s total return to stockholders (i.e ., Total Shareholder Return or TSR ) relative to the Integrated Telecommunications Services Group (GICS Code 50101020) for the three-ye ar Measurement Period. Operating cash flow performance is determined at the end of each year and the annual results will be averaged at the end of the three-year Measurement Period to determine the preliminary number of shares earned under the LTIP award.   The TSR performance measure is then applied to decrease or increase payouts based on the Company’s three year relative TSR performance. LTIP awards, to the extent earned, will be paid out in the form of common stock shortly following the end of the three-year Measurement Period. 

In 2012, the Compensation Committee granted approximately 979, 000 performance shares under the LTIP and set the operating cash flow performance goal for the first year in the 2012-2014 Measurement Period and the TSR modifier for the three-year Measurement Period. In 2013, the Compensation Committee granted approximately 1,124,000 performance shares under the LTIP and set the operating cash flow performance goal for 2013, which applies to the first year of the 2013-2015 Measurement Period and the second year of the 2012-2014 Measurement Period. On February 17 , 2014 , the Compensation Committee granted 1,028,000 performance shares under the LTIP and set the operating cash flow performance goal for 2014, which applies to the first year in the 2014-2016 Measurement Period , the second year of the 2013-2015 Measurement Period and the third year of the 2012-2014 Measurement Period. The number of shares of common stock earned at the end of each three-year Measurement Period may be more or less than the number of target performance shares granted as a result of operating c ash flow and TSR performance. An executive must maintain a satisfactory performance rating during the Measurement Period and must be employed by the Company at the end of the three-year Measurement Period i n order for the award to vest. The Compensation Committee will determine the number of shares earned for each three year Measurement Period in February of the year following the end of the Measurement Period.

 

The following summary presents information regarding LTIP target performance shares as of June 30 , 2014 and changes during the six months then ended with regard to LTIP shares awarded under the 2009 EIP and the 2013 EIP :

 

 

		Number of
		Shares
Balance at January 1, 2014		1,749,000
LTIP target performance shares granted		1,028,000
LTIP target performance shares forfeited		(80,000)
Balance at June 30, 2014		2,697,000

 

For the six months ended June 30 , 2014 and 2013 , the Company recognized an expense of $ 2.0 million and $ 0.7 million, respectively, for the LTIP.

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Restricted Stock

The following summary presents information regarding unvested restricted stock as of June 30 , 2014 and changes during the six months then ended with regard to restricted stock under the 2009 EIP and the 2013 EIP:

 

 

				Weighted
				Average
		Number of		Grant Date			Aggregate
		Shares		Fair Value			Fair Value
Balance at January 1, 2014		6,234,000		$	4.80		$	28,988,000
Restricted stock granted		3,766,000		$	4.71		$	21,995,000
Restricted stock vested		(2,282,000)		$	5.23		$	13,329,000
Restricted stock forfeited		(242,000)		$	4.50
Balance at June 30, 2014		7,476,000		$	4.64		$	43,661,000

 

For purposes of determining compensation expense, the fair value of each restricted stock grant is estimated based on the average of the high and low market price of a share of our common stock on the date of grant. Total remaining unrecognized compensation cost associated with unvested restricted stock awards at June 30 ,   2014 was $ 28.9 million and the weighted average period over which this cost is expected to be recognized is approximately two years.

 

Shares granted during the first six months of 2013 totaled 3,340,000 . The total fair value of shares granted and vested at June 30 , 2013 was approximately $ 13.5 million and $ 7.6 million , respectively. The total fair value of unvested restricted stock at June 30 , 2013 was $ 31.2 million .   The weighted average grant date fair value of restricted shares granted during the six month s ended June 30 , 2013 was $ 4.10 .

 

We have granted restricted stock awards to employees in the form of our common stock. None of the restricted stock awards may be sold, assigned, pledged or otherwise transferred, voluntarily or involuntarily, by the employees until the restrictions lapse, subject to limited exceptions. The restrictions are time-based. Compensation expense, recognized in “Other operating expenses”, of $ 9.6   million   and $ 8.4 million for the six months ended June 30 , 2014 and 2013, respectively, has been recorded in connection with these grants.

 

Stock Options

There ha s been no activity with regard to stock options during the first six months of 2014.  There was no intrinsic value for the stock options outstanding and exercisable at June 30 ,   2014 and 2013 .

 

(12) Segment Information :

We operate in one reportable segment. Frontier provides both regulated and unregulated voice, data and video services to residential, business and wholesale customers and is typically the incumbent voice services provider in its service areas.   

 

As permitted by U.S. GAAP, we have utilized the aggregation criteria to combine our operating segments because all of our properties share similar economic characteristics, in that they provide the same products and services to similar customers using comparable technologies in all of t he states in which we operate. The regulatory s tructure is generally similar. Differences in the regulatory regime of a particular state do not significantly impact the economic characteristics or operating results of a particular property . 

 

 

 

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(13 )   Comprehensive Income :

Comprehensive income consists of net income and other gains and losses affecting shareholders’ investment and pension/postretirement benefit (OPEB) liabilities that, under U.S. GAAP, are excluded from net income.

 

The components of accumulated other comprehensive loss, net of tax at June 30 , 2014 and 2013 , and changes for the six months then ended, are as follows:

($ in thousands)		Pension Costs			OPEB Costs			Deferred taxes on pension and OPEB costs			All other			Total
Balance at January 1, 2014		$	(411,432)		$	(5,230)		$	156,280		$	(148)		$	(260,530)
Other comprehensive income before reclassifications			-			-			-			148			148
Amounts reclassified from accumulated other comprehensive loss			9,660			(336)			(3,543)			-			5,781
Net current-period other comprehensive income (loss)			9,660			(336)			(3,543)			148			5,929
Balance at June 30, 2014		$	(401,772)		$	(5,566)		$	152,737		$	-		$	(254,601)

 

($ in thousands)		Pension Costs			OPEB Costs			Deferred taxes on pension and OPEB costs			All other			Total
Balance at January 1, 2013		$	(697,874)		$	(74,264)		$	288,712		$	(150)		$	(483,576)
Other comprehensive income before reclassifications			(230)			-			356			2			128
Amounts reclassified from accumulated other comprehensive loss			20,148			1,406			(8,190)			-			13,364
Net current-period other comprehensive income (loss)			19,918			1,406			(7,834)			2			13,492
Balance at June 30, 2013		$	(677,956)		$	(72,858)		$	280,878		$	(148)		$	(470,084)

 

The significant items reclassified from each component of accumulated other comprehensive loss for the three and six months ended June 30 , 2014 and 2013 are as follows:

 

($ in thousands)		Amount Reclassified from
		Accumulated Other Comprehensive Loss (a)
Details about Accumulated Other Comprehensive		For the three months ended June 30,						For the six months ended June 30,						Affected Line Item in the Statement Where
Loss Components		2014			2013			2014			2013			Net Income is Presented
Amortization of Pension Cost Items (b)
Prior-service costs		$	(11)		$	(2)		$	(22)		$	(4)
Actuarial gains/(losses)			(4,819)			(10,072)			(9,638)			(20,144)
			(4,830)			(10,074)			(9,660)			(20,148)		Income (loss) before income taxes
Tax impact			1,835			3,828			3,671			7,656		Income tax (expense) benefit
		$	(2,995)		$	(6,246)		$	(5,989)		$	(12,492)		Net income (loss)
Amortization of OPEB Cost Items (b)
Prior-service costs		$	890		$	1,525		$	1,780		$	3,050
Actuarial gains/(losses)			(722)			(2,228)			(1,444)			(4,456)
			168			(703)			336			(1,406)		Income (loss) before income taxes
Tax impact			(64)			267			(128)			534		Income tax (expense) benefit
		$	104		$	(436)		$	208		$	(872)		Net income (loss)

(a) Amounts in parentheses indicate losses.

(b) These accumulated other comprehensive loss components are included in the computation of net periodic pension and OPEB cost s (see Note 1 4 - Retirement Plans for additional details).

 

 

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(14 )   Retirement Plans : 

The following tables provide the components of net periodic benefit cost:

 

		Pension Benefits
		For the three months ended						For the six months ended
		June 30,						June 30,
		2014			2013			2014			2013
( $ in thousands )
Components of net periodic pension benefit cost
Service cost		$	9,940		$	12,834		$	19,880		$	25,668
Interest cost on projected benefit obligation			19,824			18,880			39,648			37,760
Expected return on plan assets			(23,512)			(24,590)			(47,024)			(49,180)
Amortization of prior service cost /(credit)			11			2			22			4
Amortization of unrecognized loss			4,819			10,072			9,638			20,144
Net periodic pension benefit cost		$	11,082		$	17,198		$	22,164		$	34,396

 

		Postretirement Benefits
		Other Than Pensions (OPEB)
		For the three months ended						For the six months ended
		June 30,						June 30,
		2014			2013			2014			2013
( $ in thousands )
Components of net periodic postretirement benefit cost
Service cost		$	2,553		$	3,179		$	5,106		$	6,358
Interest cost on projected benefit obligation			4,788			4,440			9,576			8,880
Expected return on plan assets			(7)			(43)			(14)			(86)
Amortization of prior service cost/(credit)			(890)			(1,525)			(1,780)			(3,050)
Amortization of unrecognized loss			722			2,228			1,444			4,456
Net periodic postretirement benefit cost		$	7,166		$	8,279		$	14,332		$	16,558

 

During the first six months of 201 4 and 201 3 , we capitalized $ 7.9 million and $ 10.0 million, respectively, of pension and OPEB expense into the cost of our capital expenditures, as the costs relate to our engineering and plant construction activities. Based on current assumptions and plan asset values, we estimate that our 201 4 pension and OPEB expenses will be approximately $65 million to $ 85 million for our current business operations, excluding amounts capitalized into the cost of capital expenditures, as compared to   $ 97.1 million in 2013, excluding the impact of pension settlement costs and amounts capitalized into the cost of capital expenditures . We made total cash contributions to our pension plan during the six months ended June 30 , 2014 of $ 31.2 million .   An additional cash contribution of $19.6 million was made on July 15, 2014. We expect that we will make total contributions of cash and/or other assets to our pension plan of approximately $100 million in 2014.

 

The Compa ny’s pension plan assets have in creased from $1,2 16.5 million at December 31, 201 3   to $ 1,276.5   million at June 30 , 2014 , an in crease of $ 60.0 million, or 5 % .   This in crease is a result of positive investment returns of $ 95.5 million and cash contributions of $ 31.2 million, offset by   benefit payments of $ 66.7   million during the first six months of 2014 .  

 

(1 5 )   Commitments and Contingencies :  

We anticipate total capital expenditures for our current business operations of approximately $575 million to $ 625 million for 2014 , excluding the expenditure of funds previously received from th e Connect America Fund program. Although we from time to time make short-term purchasing commitments to vendors with respect to these expenditures, we generally do not enter into firm, written contracts for such activities. 

 

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In connection with the pending AT&T Transaction, the Company currently expects to incur operating expenses and capital expenditures of approximately $225 million to $275 million in 2014 relate d to integration ini tiatives. The Company incurred $ 30.4 million of operating expenses, consisting of   $ 1.6 million and $ 28.8 million of acquisition and integration costs , respectively ,   and $ 41.6 million in capital expenditures related to the AT&T Transaction during the six months ended June 30 , 2014.

 

In connection with the 2010 Transaction, the FCC   and certain state regulatory commissions, in connection with granting their approvals of the 2010 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 download speeds of 3 megabits per second (Mbps) by the end of 2013 .   We are required to provide download speeds of 4 Mbps to at least 75%, 80% and 85% of the households throughout the Acquired Territories by the end of 2013, 2014 and 2015, respectively . As of December 31, 2013, we met our FCC requirement to provide 3 Mbps coverage to 85% of the hou seholds in the Acquired Territories by the end of 2013. As of December 31, 2012 , w e also met our FCC requirement to provide 4 Mbps coverage to 75% and 80% of the households in the Acquired Territories by the end of 2013 and 2014 , respectively .   As of June 30 , 2014 , we expanded broadband availability in excess of 4 Mbps to 83.9 % of the households throughout the Acquired Territories.

 

To satisfy all or part of certain capital investment commitments to three state regulatory commissions in connection with the 2010 Transaction , we placed a total of $115.0 million in cash into escrow accounts and obtained a letter of credit for $190 million in 2010. In September 2013, the letter of credit expired.   Another $72.4 milli on of cash in an escrow account was acquired in connection with the 2010 Transaction to be used for service quality initiatives in the state of West Virginia. As of June 30 , 2014 ,   $ 184.5 million had been released from the escrow accounts and the Company had a restricted cash balance in the remaining escrow account in the aggregate amount of $ 3.2 milli on , including interest earned. The aggregate amount of this escrow account will continue to decrease over time as we make the required capital expenditures in West Virginia .  

 

In our normal course of business, we have obligations under certain non-cancela ble arrangements for services. During 2012, we entered into a “take or pay” arrangement for the purchase of future long distance and carrier services. Our remaining commitments under the arrangement are $145. 5 million and $140.8 million for the years ending December 31, 2014 and 2015, respectively. As of June 30 , 2014 , we expect to utilize the services included within the arrangement and no liability for the “take or pay” provision has been recorded.

 

We are party to various legal proceedings (including individual, class and putative class actions) arising in the normal course of our business covering a wide range of matters and types of claims including, but not limited to, general contracts, billing disputes, rights of access, taxes and surcharges, consumer protection, trademark and patent infringement, employment, regulatory, tort, claims of competitors and disputes with other carriers. 

 

We accrue an expense for pending litigation when we determine that an unfavorable outcome is probable and the amount of the los s can be reasonably estimated. Legal defense costs are expensed as incurred.  None of our existing accruals , after considering insurance coverage, fo r pending matters is material .   We monitor our pending litigation for the purpose of adjusting our accruals and revisi ng our disclosures accordingly, when required. Litigation is, however, subject to uncertainty, and the outcome of any particu lar matter is not predictable. We will vigorously defend our interests for pending litigation, and as of this date, we believe that the ultimate resolution of all such matters, after considering insurance coverage or other indemnities to which we are entitled, will not have a material adverse effect on our consolidated financial position, results of operations, or our cash flows. 

 

We sold all of our utility b usinesses as of April 1, 2004. However, we have retained a potential payment obligation associated with our previous electric utility activ ities in the State of Vermont. The Vermont Joint Owners (VJO), a consortium of 14 Vermont utilities, including us, entered into a purchase power agree ment with Hydro-Quebec in 1987. The agreement contains “step-up” provisions that state if any VJO member defaults on its purchase obligation under the contract to purchase power from Hydro-Quebec, then the other VJO participants will assume responsibility for the defaulting part y’s share on a pro-rata basis. Our pro-rata share of the purchase power obligation is 10% .   If any member of the VJO defaults on its obligations under the Hydro-Quebec agreement, then the remaining members of the VJO,

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including us, may be required to pay for a substantially larger share of the VJO’s total purchase power obligation for the remainder of the agreem ent (which runs through 2015). U.S. GAAP rules require that we disclose “the maximum potential amount of future payments (undiscounted) the guarantor could be required to make under the guarantee.” U.S. GAAP rules also state that we must make such disclosure “… even if the likelihood of the guarantor’s having to make any payments u nder the guarantee is remote…” As noted above, our obligation only arises as a result of default by another VJO me mber, such as upon bankruptcy. Therefore, to satisfy the “maximum potential amount” disclosure requirement we must assume that all members of the VJO simultaneously default, an unlikely scenario given that all VJO members are regulated utility providers with regulated cost recovery. Despite the remote chance that such an event could occur, or that the State of Vermont could or would allow such an event, assuming that all the members of the VJO defaulted on January 1, 201 4 and remained in default for the duration of the contract (another 2 years), we estimate that our undiscounted purchase obligation for 201 4 through 2015 would be approximately $ 287.4 million. In such a scenario, the Company would then own the power and could seek to recover its costs.  We would do this by seeking to recover our costs from the defaulting members and/or reselling the power to other utility provider s or the northeast power grid. There is an active market for the sale of power.  We could potentially lose money if we were una ble to sell the power at cost. We caution that we cannot predict with any degree of certainty any potential outcome.