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 SEPTEMBER 30, 2011







 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q
(Mark One)
x  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

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 [X]                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 October 28, 2011 was 995,127,000.
 
 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Index


 
Page No.
Part I.  Financial Information (Unaudited)
 
   
Item 1.  Financial Statements
 
   
     Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010
2
   
     Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010
3
   
     Consolidated Statements of Equity for the nine months ended September 30, 2010, the three months
     ended December 31, 2010 and the nine months ended September 30, 2011
 
4
   
     Consolidated Statements of Comprehensive Income for the three and nine months ended
September 30,  2011 and 2010
 
4
   
     Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010
5
   
     Notes to Consolidated Financial Statements
6
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
   
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
39
   
Item 4.  Controls and Procedures
40
   
Part II.  Other Information
 
   
Item 1.  Legal Proceedings
41
   
Item 1A.  Risk Factors
41
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
41
   
Item 6.  Exhibits
43
   
Signature
44
   





 
1
 
Explanatory Note
Effective July 1, 2010, Frontier’s scope of operations and balance sheet capitalization changed materially as a result of the completion of the Transaction, as described in Note 3 of the Notes to Consolidated Financial Statements.  Historical financial and operating data presented for Frontier is not indicative of the future financial position or operating results for Frontier, and includes the results of operations of the Acquired Business, as defined in Note 3 of the Notes to Consolidated Financial Statements, from the date of acquisition on July 1, 2010.  The financial discussion represents an analysis of our results of operations on a historical basis for our Frontier operations as of and for the three and nine months ended September 30, 2011 and 2010, which includes the results of operations of the Acquired Business for the three months ended September 30, 2011 and 2010, and the nine months ended September 30, 2011.
 
PART I.  FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
   
(Unaudited)
       
   
September 30, 2011
   
December 31, 2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 205,817     $ 251,263  
Accounts receivable, less allowances of $60,763 and $73,571, respectively
    527,395       568,308  
Prepaid expenses
    84,404       100,603  
Income taxes and other current assets
    152,130       208,245  
Total current assets
    969,746       1,128,419  
                 
Restricted cash
    161,065       187,489  
Property, plant and equipment, net
    7,630,515       7,590,614  
Goodwill
    6,416,473       6,292,194  
Other intangibles, net
    2,095,220       2,491,195  
Other assets
    220,748       200,319  
Total assets
  $ 17,493,767     $ 17,890,230  
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Long-term debt due within one year
  $ 43,763     $ 280,002  
Accounts payable
    469,219       436,886  
Advanced billings
    161,944       171,602  
Accrued other taxes
    71,694       167,857  
Accrued interest
    212,129       170,228  
Other current liabilities
    209,393       212,782  
Total current liabilities
    1,168,142       1,439,357  
                 
Deferred income taxes
    2,377,518       2,220,677  
Pension and other postretirement benefits
    780,142       816,588  
Other liabilities
    240,296       220,251  
Long-term debt
    8,151,081       7,983,614  
                 
Equity:
               
Shareholders' equity of Frontier:
               
Common stock, $0.25 par value (1,750,000,000 authorized shares,
               
995,137,000 and 993,855,000 outstanding, respectively, and
               
1,027,986,000 issued at September 30, 2011
               
and December 31, 2010)
    256,997       256,997  
Additional paid-in capital
    4,956,343       5,525,471  
Retained earnings
    184,474       77,107  
Accumulated other comprehensive loss, net of tax
    (221,225 )     (229,549 )
Treasury stock
    (414,997 )     (433,286 )
Total shareholders' equity of Frontier
    4,761,592       5,196,740  
Noncontrolling interest in a partnership
    14,996       13,003  
Total equity
    4,776,588       5,209,743  
Total liabilities and equity
  $ 17,493,767     $ 17,890,230  
                 
The accompanying Notes are an integral part of these Consolidated Financial Statements.
 
2
 

PART I.  FINANCIAL INFORMATION (Continued)


FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
($ in thousands, except for per-share amounts)
(Unaudited)


                         
   
For the three months ended
   
For the nine months ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenue
  $ 1,290,939     $ 1,402,968     $ 3,959,891     $ 2,438,954  
                                 
Operating expenses:
                               
Network access expenses
    119,941       136,373       397,854       243,055  
Other operating expenses
    571,388       614,123       1,729,824       996,797  
Depreciation and amortization
    351,907       339,894       1,062,150       540,917  
Acquisition and integration costs
    67,412       78,533       100,899       125,867  
Total operating expenses
    1,110,648       1,168,923       3,290,727       1,906,636  
                                 
Operating income
    180,291       234,045       669,164       532,318  
                                 
Investment income (loss)
    (666 )     397       2,624       6,394  
Other income, net
    1,502       2,207       7,415       13,497  
Interest expense
    165,755       166,607       500,034       354,362  
                                 
Income before income taxes
    15,372       70,042       179,169       197,847  
Income tax expense (benefit)
    (6,948 )     40,358       66,809       88,752  
                                 
Net income
    22,320       29,684       112,360       109,095  
Less: Income attributable to the noncontrolling interest in a partnership
    1,925       689       4,993       2,414  
Net income attributable to common shareholders of Frontier
  $ 20,395     $ 28,995     $ 107,367     $ 106,681  
                                 
Basic and diluted net income per common share attributable to common
                               
shareholders of Frontier
  $ 0.02     $ 0.03     $ 0.11     $ 0.18  
                                 


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

 
3
 
 PART I.  FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010, THE THREE MONTHS ENDED DECEMBER 31, 2010 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2011
($ and shares in thousands)
(Unaudited)
 
   
Frontier Shareholders
                         
                       
      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, 2010
    349,456   $ 87,364   $ 956,401     $ 2,756     $ (245,519 )     (37,128 )   $ (473,391 )   $ 11,459     $ 339,070  
Acquisition of the Acquired Business
    678,530     169,633     5,048,266       -       -       -       -       -       5,217,899  
Stock plans
    -     -     (31,927 )     -       -       3,025       40,212       -       8,285  
Dividends on common stock
    -     -     (264,720 )     (78,322 )     -       -       -       -       (343,042 )
Net income
    -     -     -       106,681       -       -       -       2,414       109,095  
Other comprehensive income, net
                                                                   
  of tax
    -     -     -       -       4,172       -       -       -       4,172  
Distributions
    -     -     -       -       -       -       -       (1,500 )     (1,500 )
Balance September 30, 2010
    1,027,986     256,997     5,708,020       31,115       (241,347 )     (34,103 )     (433,179 )     12,373       5,333,979  
Stock plans
    -     -     3,798       -       -       (28 )     (107 )     -       3,691  
Dividends on common stock
    -     -     (186,347 )     -       -       -       -       -       (186,347 )
Net income
    -     -     -       45,992       -       -       -       630       46,622  
Other comprehensive income, net
                                                                   
  of tax
    -     -     -       -       11,798       -       -       -       11,798  
Balance December 31, 2010
    1,027,986     256,997     5,525,471       77,107       (229,549 )     (34,131 )     (433,286 )     13,003       5,209,743  
Stock plans
    -     -     (9,325 )     -       -       1,282       18,289       -       8,964  
Dividends on common stock
    -     -     (559,803 )     -       -       -       -       -       (559,803 )
Net income
    -     -     -       107,367       -       -       -       4,993       112,360  
Other comprehensive income, net
                                                                   
  of tax
    -     -     -       -       8,324       -       -       -       8,324  
Distributions
    -     -     -       -       -       -       -       (3,000 )     (3,000 )
Balance September 30, 2011
    1,027,986   $ 256,997   $ 4,956,343     $ 184,474     $ (221,225 )     (32,849 )   $ (414,997 )   $ 14,996     $ 4,776,588  
                                                                     
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
($ in thousands)
(Unaudited)
 
 
For the three months ended
September 30,
 
 For the nine months ended
September 30,
 
2011
   
2010
 
2011
 
2010
                 
Net income
 $                  22,320
  $
29,684
 
 $           112,360
 
 $              109,095
Other comprehensive income (loss), net
               
   of tax
                       3,334
   
                    (3,782)
 
                  8,324
 
                     4,172
Comprehensive income
                     25,654
   
                   25,902
 
              120,684
 
                 113,267
                 
Less:  Comprehensive income
               
   attributable to the noncontrolling
               
   interest in a partnership
                     (1,925)
   
                       (689)
 
                 (4,993)
 
                   (2,414)
                 
Comprehensive income attributable to
               
   the common shareholders of Frontier
 $                  23,729
  $
25,213
 
 $           115,691
 
 $              110,853
                 
The accompanying Notes are an integral part of these Consolidated Financial Statements.
 
4
 
PART I.  FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
($ in thousands)
(Unaudited)
   
2011
   
2010
 
Cash flows provided by (used in) operating activities:
           
Net income
  $ 112,360     $ 109,095  
Adjustments to reconcile net income to net cash provided by
               
   operating activities:
               
Depreciation and amortization expense
    1,062,150       540,917  
Stock based compensation expense
    10,729       9,930  
Pension/OPEB costs
    22,515       24,224  
Other non-cash adjustments
    (3,320 )     5,866  
Deferred income taxes
    20,219       10,092  
Change in accounts receivable
    16,162       (13,356 )
Change in accounts payable and other liabilities
    (36,458 )     166,398  
Change in prepaid expenses, income taxes and other current assets
    68,297       33,004  
Net cash provided by operating activities
    1,272,654       886,170  
                 
Cash flows provided from (used by) investing activities:
               
Capital expenditures - Business operations
    (636,569 )     (252,360 )
Capital expenditures - Integration activities
    (62,641 )     (77,936 )
Cash paid for the Acquired Business (net of cash acquired)
    -       (82,560 )
Cash transferred to escrow
    -       (115,000 )
Other assets purchased and distributions received, net
    22,236       (1,728 )
Net cash used by investing activities
    (676,974 )     (529,584 )
                 
Cash flows provided from (used by) financing activities:
               
Long-term debt payments
    (78,990 )     (6,286 )
Dividends paid
    (559,803 )     (343,042 )
Financing costs paid
    -       (12,431 )
Repayment of customer advances for construction,
               
   distributions to noncontrolling interests and other
    (2,333 )     (2,455 )
Net cash used by financing activities
    (641,126 )     (364,214 )
                 
                 
Decrease in cash and cash equivalents
    (45,446 )     (7,628 )
Cash and cash equivalents at January 1,
    251,263       358,693  
                 
Cash and cash equivalents at September 30,
  $ 205,817     $ 351,065  
                 
Supplemental cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 447,645     $ 299,158  
Income taxes (refunds)
  $ (16,247 )   $ 4,042  
                 
                 
Non-cash investing and financing activities:
               
Financing obligation for contribution of real property
               
   to pension plan
  $ 58,100     $ -  
Reduction of pension obligation
  $ (58,100 )   $ -  
Shares issued for acquisitions
  $ -     $ 5,217,899  
Assumed debt
  $ -     $ 3,456,782  
Other acquired liabilities
  $ -     $ 1,058,956  
The accompanying Notes are an integral part of these Consolidated Financial Statements.
 
5
 

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(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. On July 1, 2010, Frontier completed the Transaction for the acquisition of the Acquired Business, as described further in Note 3 – The Transaction.  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, 2010. Certain reclassifications of balances previously reported have been made to conform to the current presentation. 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 periods ended September 30, 2011, 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).

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 expenses during the reporting period.  Actual results may differ from those estimates.  Estimates and judgments are used when accounting for allowance for doubtful accounts, impairment of long-lived assets, intangible assets, depreciation and amortization, income taxes, purchase price allocations, 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 delivered to customers.  Revenue that is billed in advance includes: monthly recurring network access services, special access services and monthly recurring local line and unlimited fixed long distance bundle charges.  The unearned portion of these fees is initially deferred as a component of other liabilities on our consolidated balance sheet and recognized as revenue over the period that the services are provided.  Revenue that is billed in arrears includes: non-recurring network access services, switched access services, non-recurring local services and long-distance 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 term 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 consolidated statements of operations.  We also collect Universal Service Fund (USF) surcharges from customers (primarily federal USF) which we have recorded on a gross basis in our consolidated statements of operations and included in revenue and other operating expenses at $24.5 million and $26.9 million, and $78.7 million and $48.7 million, for the three and nine months ended September 30, 2011 and 2010, respectively.

(c)  
Goodwill and Other Intangibles:
Intangibles represent the excess of purchase price over the fair value of identifiable tangible 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 other 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 losses.  We test for goodwill impairment at the “operating segment” level, as that term is defined in U.S. GAAP.  Effective with the third quarter of 2011, the Company reorganized into six operating segments in order to leverage the full benefits of its local engagement model. The six operating segments consist of the following regions: National, Northeast, Southeast, Central, Midwest and West.  Our operating segments are aggregated into one reportable segment.   In conjunction with the reorganization of our operating segments effective with the third quarter of 2011, we reassigned goodwill to our reporting units using a relative fair value allocation approach.
 
6
 
The Company amortizes intangible assets with estimated useful lives over those lives and reviews such intangible assets to assess any impairment and whether factors exist that would necessitate a change in useful life and a different amortization period.

(2)    Recent Accounting Literature:

Fair Value Measurements
In May 2011, the FASB issued Accounting Standards Update No. 2011-04 (ASU 2011-04), “Fair Value Measurements: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASC Topic 820).  ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively, and is effective for interim and annual periods beginning after December 15, 2011.  We do not expect the adoption of ASU 2011-04 to have a material impact on our financial position, results of operations or cash flows.

Presentation of Comprehensive Income
In June 2011, the FASB issued Accounting Standards Update No. 2011-05 (ASU 2011-05), “Comprehensive Income: Presentation of Comprehensive Income,” (ASC Topic 220).  ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively, and is effective for interim and annual periods beginning after December 15, 2011.  We do not expect the adoption of ASU 2011-05 to have a material impact on our financial position, results of operations or cash flows.

Testing Goodwill for Impairment
On September 15, 2011, the FASB ratified ASU No. 2011-08 (ASU 2011-08). “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not (a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. After assessing qualitative factors, if an entity determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, no further testing is necessary.  If an entity determines that it is more likely than not that the fair value of the reporting unit is less than its carrying value, then the traditional two-step goodwill impairment test must be performed.   The Company plans to perform its annual impairment test during the fourth quarter ending December 31, 2011. While ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, early adoption is permitted. The Company is currently evaluating the impact of ASU 2011-08 on its future goodwill impairment tests and early adoption is under consideration.
(3)     The Transaction:
On July 1, 2010, Frontier acquired the defined assets and liabilities of the local exchange business and related landline activities of Verizon Communications Inc. (Verizon) in Arizona, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia and Wisconsin and in portions of California bordering Arizona, Nevada and Oregon (collectively, the Territories), including Internet access and long distance services and broadband video provided to designated customers in the Territories (the Acquired Business).  Frontier is considered the accounting acquirer of the Acquired Business.

 
7
 
We are accounting for our acquisition of approximately 4.0 million access lines from Verizon (the Transaction) using the guidance included in Accounting Standards Codification (ASC) Topic 805. We incurred approximately $67.4 million and $100.9 million of integration related costs in connection with the Transaction during the three and nine months ended September 30, 2011, respectively, and $78.5 million and $125.9 million of acquisition and integration related costs during the three and nine months ended September 30, 2010, respectively.  Such costs are required to be expensed as incurred and are reflected in “Acquisition and integration costs” in our consolidated statements of operations.

The allocation of the purchase price of the Acquired Business is based on the fair value of assets acquired and liabilities assumed as of July 1, 2010, the effective date of the Transaction.  Our assessment of fair value was final as of June 30, 2011, and was adjusted during the first half of 2011 for information that was previously not available to us, primarily related to: deferred income tax assets and liabilities and other accrued liabilities.

The final allocation of the purchase price presented below represents the effect of recording the final fair value of assets acquired, liabilities assumed and related deferred income taxes as of the date of the Transaction, based on the total transaction consideration of $5.4 billion.  The following allocation of purchase price includes revisions to the preliminary allocation that was reported as of December 31, 2010, primarily for goodwill, deferred taxes and current liabilities.

($ in thousands)
           
Total transaction consideration:
        $ 5,411,705  
Current assets
  $ 454,513          
Property, plant & equipment
    4,407,676          
Goodwill
    3,774,151          
Other intangibles – primarily customer list
    2,532,200          
Other noncurrent assets
    75,092          
Current liabilities
    (483,118 )        
Deferred income taxes
    (1,430,122 )        
Long-term debt
    (3,456,782 )        
Other noncurrent liabilities
    (461,905 )        
Total net assets acquired
  $ 5,411,705          

The fair value of the total consideration issued to acquire the Acquired Business amounted to $5.4 billion and included $5.2 billion for the issuance of Frontier common shares and cash payments of $105.0 million.  As a result of the Transaction, Verizon stockholders received 678,530,386 shares of Frontier common stock.  Immediately after the closing of the Transaction, Verizon stockholders owned approximately 68.4% of the combined company’s outstanding equity, and existing Frontier stockholders owned approximately 31.6% of the combined company’s outstanding equity.

The following unaudited pro forma financial information presents the combined results of operations of Frontier and the Acquired Business as if the Transaction had occurred as of January 1, 2010.  The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the Transaction been completed as of January 1, 2010.  In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the future financial position or operating results of Frontier.  The unaudited pro forma financial information excludes acquisition and integration costs and does not give effect to any estimated and potential cost savings or other operating efficiencies that could result from the Transaction.

 
8
 

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF OPERATIONS INFORMATION

   
For the nine months ended September 30, 2010
 
( $ in millions, except
        per share amounts )
     
       
Revenue
  $ 4,293  
Operating income
    941  
Net income attributable to common
     shareholders of Frontier
    273  
         
Basic and diluted net income per common
    share attributable to common
    shareholders of  Frontier
  $ 0.28  
(4)     Accounts Receivable:
The components of accounts receivable, net are as follows:

    ($ in thousands)
 
September 30, 2011
   
December 31, 2010
 
    
               
    End user
 
$ 
559,411
   
$
627,573
 
    Other
   
28,747
     
14,306
 
    Less: Allowance for doubtful accounts
   
(60,763
)
   
(73,571
)
         Accounts receivable, net
 
$
527,395
   
$
568,308
 
                 
We maintain an allowance for estimated bad debts based on our estimate of our ability to collect accounts receivable. Bad debt expense, which is recorded as a reduction to revenue, was $19.3 million and $20.3 million for the three months ended September 30, 2011 and 2010, respectively, and $65.7 million and $31.6 million for the nine months ended September 30, 2011 and 2010, respectively.

(5) Property, Plant and Equipment:
  Property, plant and equipment is as follows:

    ($ in thousands)
 
September 30, 2011
   
December 31, 2010
 
    
               
    Property, plant and equipment
 
$ 
13,364,227
   
$
12,795,280
 
    Less:  Accumulated depreciation
   
(5,733,712
)
   
(5,204,666
)
         Property, plant and equipment, net
 
$
7,630,515
   
$
7,590,614
 
                 

Depreciation expense is principally based on the composite group method.  Depreciation expense was $226.7 million and $211.2 million for the three months ended September 30, 2011 and 2010, respectively, and $671.2 million and $384.1 million for the nine months ended September 30, 2011 and 2010, respectively.  As a result of an independent study of the estimated remaining useful lives of our Frontier legacy plant assets, we adopted new lives for certain plant assets as of October 1, 2010.   In addition, we commissioned an independent study to determine the estimated remaining useful lives of plant assets for our Acquired Business.  These new lives were adopted effective July 1, 2010.
 
9
 
(6)     Goodwill and Other Intangibles:
The components of goodwill and other intangibles are as follows:

     ($ in thousands)
 
September 30, 2011
   
December 31, 2010
 
    
               
Goodwill:
 
$
6,416,473
   
$
6,292,194
 
                 
Other Intangibles:
               
    Customer base
 
$ 
2,697,509
   
$
2,702,409
 
    Software licenses
   
104,923
     
105,019
 
    Trade name and license
   
135,285
     
135,285
 
          Other intangibles
   
2,937,717
     
2,942,713
 
    Less: Accumulated amortization
   
(842,497
)
   
(451,518
)
         Total other intangibles, net
 
$
2,095,220
   
$
2,491,195
 
                 

Amortization expense was $125.2 million and $128.7 million for the three months ended September 30, 2011 and 2010, respectively, and $391.0 million and $156.8 million for the nine months ended September 30, 2011 and 2010, respectively. Amortization expense for the three and nine months ended September 30, 2011 included $111.1 million and $348.8 million for intangible assets (primarily customer base) that were acquired in the Transaction based on an estimated fair value of $2.5 billion and an estimated useful life of nine years for the residential customer list and 12 years for the business customer list, amortized on an accelerated method.  Amortization expense for the three and nine months ended September 30, 2011 and 2010, respectively, included $14.1 million and $42.2 million in each period for intangible assets (customer base and trade name) that were acquired in the acquisitions of Commonwealth Telephone Enterprises, Inc., Global Valley Networks, Inc. and GVN Services.  Amortization expense, based on our current estimate of useful lives, is estimated to be approximately $515 million in 2011 and approximately $425 million in 2012.

(7)     Fair Value of Financial Instruments:
The following table summarizes the carrying amounts and estimated fair values for certain of our financial instruments at September 30, 2011 and December 31, 2010.  For the other financial instruments, representing 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 maturities 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 on quoted market prices at the reporting date for those financial instruments.

($ in thousands)
September 30, 2011
 
December 31, 2010
 
Carrying
     
Carrying
   
 
Amount
 
Fair Value
 
Amount
 
Fair Value
               
Long-term debt
$  8,151,081
 
$  8,023,443
 
$  7,983,614
 
$    8,376,515


 
10
 

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




(8) Long-Term Debt:
  The activity in our long-term debt from December 31, 2010 to September 30, 2011 is summarized as follows:

         
Nine months ended
             
         
September 30, 2011
         
Interest
 
                           
Rate* at
 
   
December 31,
         
New
   
September 30,
   
September 30,
 
($ in thousands)
 
2010
   
Payments
   
Borrowings
   
2011
   
2011
 
                               
  Rural Utilities Service
                             
    Loan Contracts
  $ 11,214     $ (763 )   $ -     $ 10,451       6.15 %
                                         
  Senior Unsecured Debt
    8,302,151       (78,227 )     -       8,223,924       8.00 %
 
                                       
  Industrial Development
                                       
     Revenue Bonds
    13,550       -       -       13,550       6.33 %
                                         
TOTAL LONG-TERM DEBT
  $ 8,326,915     $ (78,990 )   $ -     $ 8,247,925       8.00 %
                                         
  Less: Debt Discount
    (63,299 )                     (53,081 )        
  Less: Current Portion
    (280,002 )                     (43,763 )        
                                         
    $ 7,983,614                     $ 8,151,081          
                                         


* Interest rate includes amortization of debt issuance costs, debt premiums or discounts, and deferred gain on interest rate swap terminations.  The interest rates at September 30, 2011 represent a weighted average of multiple issuances.

 
11
 

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Additional information regarding our Senior Unsecured Debt is as follows:

 
September 30, 2011
 
December 31, 2010
   
Principal
   
Interest
     
Principal
   
Interest
 
($ in thousands)
 
Outstanding
   
Rate
     
Outstanding
   
Rate
 
                           
Senior Notes:
                         
  Due 5/15/2011
$
-
   
-
   
$
76,089
   
9.250%
 
  Due 10/24/2011 *
 
200,000
   
6.270%
     
             200,000
   
6.270%
 
  Due 12/31/2012 *
 
142,875
   
1.625% (Variable)
     
144,000
   
1.688% (Variable)
 
  Due 1/15/2013
 
580,724
   
6.250%
     
             580,724
   
6.250%
 
  Due 12/31/2013 *
 
130,275
   
2.000% (Variable)
     
131,288
   
2.063% (Variable)
 
  Due 5/1/2014
 
600,000
   
8.250%
     
             600,000
   
8.250%
 
  Due 3/15/2015
 
300,000
   
6.625%
     
             300,000
   
6.625%
 
  Due 4/15/2015
 
500,000
   
7.875%
     
500,000
   
7.875%
 
  Due 4/15/2017
 
1,100,000
   
8.250%
     
1,100,000
   
8.250%
 
  Due 10/1/2018
 
600,000
   
8.125%
     
             600,000
   
8.125%
 
  Due 3/15/2019
 
434,000
   
7.125%
     
             434,000
   
7.125%
 
  Due 4/15/2020
 
1,100,000
   
8.500%
     
1,100,000
   
8.500%
 
  Due 4/15/2022
 
500,000
   
8.750%
     
500,000
   
8.750%
 
  Due 1/15/2027
 
345,858
   
7.875%
     
             345,858
   
7.875%
 
  Due 2/15/2028
 
200,000
   
6.730%
     
200,000
   
6.730%
 
  Due 10/15/2029
 
50,000
   
8.400%
     
50,000
   
8.400%
 
  Due 8/15/2031
 
945,325
   
9.000%
     
             945,325
   
9.000%
 
   
7,729,057
           
          7,807,284
       
                           
                           
Debentures:
                         
  Due 11/1/2025
 
138,000
   
7.000%
     
             138,000
   
7.000%
 
  Due 8/15/2026
 
1,739
   
6.800%
     
                 1,739
   
6.800%
 
  Due 10/1/2034
 
628
   
7.680%
     
                    628
   
7.680%
 
  Due 7/1/2035
 
125,000
   
7.450%
     
             125,000
   
7.450%
 
  Due 10/1/2046
 
193,500
   
7.050%
     
             193,500
   
7.050%
 
   
458,867
           
             458,867
       
Subsidiary Senior
                         
   Notes due 12/1/2012
 
36,000
   
8.050%
     
               36,000
   
8.050%
 
Total
$
8,223,924
   
8.00%
   
$
8,302,151
   
8.04%
 
                           


* These debt facilities were repaid in October 2011 as part of a fourth quarter debt refinancing, as discussed below.

 
12
 

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We have a $750.0 million revolving credit facility (the Credit Facility).  As of September 30, 2011, we had not made any borrowings utilizing this facility.  The terms of the Credit Facility are set forth in the Credit Agreement, dated as of March 23, 2010, among the Company, the Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent (the Credit Agreement). Associated facility fees under the Credit Facility will vary from time to time depending on the Company’s credit rating (as defined in the Credit Agreement) and were 0.625% per annum as of September 30, 2011. The Credit Facility is scheduled to terminate on January 1, 2014. During the term of the Credit Facility, the Company may borrow, repay and reborrow funds, and may obtain letters of credit, subject to customary borrowing conditions. Loans under the Credit Facility will bear interest based on the alternate base rate or the adjusted LIBOR rate (each as determined in the Credit Agreement), at the Company’s election, plus a margin specified in the Credit Agreement based on the Company’s credit rating. Letters of credit issued under the Credit Facility will also be subject to fees that vary depending on the Company’s credit rating. The Credit Facility will be available for general corporate purposes but may not be used to fund dividend payments.

We also have a $100.0 million unsecured letter of credit facility.  The terms of the letter of credit facility are set forth in a Credit Agreement, dated as of September 8, 2010, among the Company, the Lenders party thereto, and Deutsche Bank AG, New York Branch (the Bank), as Administrative Agent and Issuing Bank (the Letter of Credit Agreement). An initial letter of credit for $190.0 million was issued to the West Virginia Public Service Commission to guarantee certain of our capital investment commitments in West Virginia in connection with the Transaction.  The initial commitments under the Letter of Credit Agreement expired on September 20, 2011, with the Bank exercising its option to extend $100.0 million of the commitments to September 20, 2012.  The Company is required to pay an annual facility fee on the available commitment, regardless of usage.  The covenants binding on the Company under the terms of the Letter of Credit Agreement are substantially similar to those in the Company’s other credit facilities, including limitations on liens, substantial asset sales and mergers, subject to customary exceptions and thresholds.

As of September 30, 2011, we were in compliance with all of our debt and credit facility financial covenants.

On October 14, 2011, the Company entered into a credit agreement (the “Credit Agreement”) with CoBank, ACB, as administrative agent, lead arranger and a lender, and the other lenders party thereto for a $575 million senior unsecured term loan facility with a final maturity of October 14, 2016.  Repayment of the outstanding principal balance will be made in quarterly installments in the amount of $14,375,000, commencing on March 31, 2012, with the remaining outstanding principal balance to be repaid on the final maturity date.  Borrowings under the Credit Agreement bear interest based on the margins over the Base Rate (as defined in the 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 Credit Agreement.  The initial pricing on this facility is LIBOR plus 2.875%, which will vary depending on the leverage ratio, as described above.  The maximum permitted leverage ratio is 4.5 times.
 
The entire facility was drawn on the closing date of the Credit Agreement.  Proceeds were used to repay in full the remaining outstanding principal on three debt facilities (Frontier’s $200 million Rural Telephone Financing Cooperative term loan maturing October 24, 2011, its $143 million CoBank term loan maturing December 31, 2012, and its $130 million CoBank term loan maturing December 31, 2013) and the remaining proceeds will be used for general corporate purposes.
 
The Credit Agreement contains customary representations and warranties, affirmative and negative covenants, including a restriction on the Company’s ability to declare dividends if an event of default has occurred or will result therefrom, a financial covenant that requires compliance with a leverage ratio, and customary events of default.  Upon proper notice, the Company may, in whole or in part, repay the facility without premium or penalty, but subject to breakage fees on LIBOR loans, if applicable.  Amounts pre-paid may not be re-borrowed.
 


 
13
 

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Our principal payments for the next five years reflect the Credit Agreement entered into on October 14, 2011 and the related debt repayments referred to above, and are as follows as of September 30, 2011:
 
   
($ in thousands)
 
   
Principal
 
   
Payments
 
    
     
2011 (remaining three months)
  $ 253  
2012
  $ 94,016  
2013
  $ 638,767  
2014
  $ 658,017  
2015
  $ 858,049  
2016
  $ 345,466  

(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 nine months ended
      September 30,     September 30,
     
2011
   
2010
   
2011
 
2010
                       
Consolidated tax provision at federal statutory rate
   
35.0%
   
35.0%
   
35.0%
 
35.0%
Reversal of tax credits
   
 -
   
 -
   
                 5.9
 
 -
State income tax provisions, net of federal income
                     
    tax benefit
   
9.6
   
                  7.1
   
                 3.8
 
                  3.3
Non-deductuctible Transaction costs
   
 -
   
                17.4
   
 -
 
                  6.1
Tax reserve adjustment
   
 (91.2)
   
 -
   
 (8.1)
 
 -
All other, net
   
1.4
   
                 (1.9)
   
                 0.7
 
                  0.5
Effective tax rate
   
(45.2%)
   
57.6%
   
37.3%
 
44.9%
                       
                       

Income taxes for the third quarter of 2011 and the nine months ended September 30, 2011 include the reversal of uncertain tax positions of $14.0 million.  Income taxes for the nine months ended September 30, 2011 includes the impact of a $10.5 million charge resulting from the enactment on May 25, 2011 of the Michigan Corporate Income Tax which eliminated certain future tax deductions.

In the third quarter of 2010, Frontier reduced certain deferred tax assets of approximately $12.0 million related to Transaction costs which were not tax deductible.  Prior to the closing of the Transaction, these costs were deemed to be tax deductible as the Transaction had not yet been successfully completed.  These costs were incurred to facilitate the Transaction and as such must be capitalized for tax purposes.  Income taxes for the nine months ended September 30, 2010 also includes the impact of a $4.1 million charge resulting from health care reform legislation associated with the passage of the Patient Protection and Affordable Care Act and of the Health Care and Education Reconciliation Act of 2010 (the Acts).  The health care reform legislation enacted in March 2010 under the Acts eliminated the tax deduction for the subsidy that the Company receives under Medicare Part D for prescription drug costs.

The amount of our uncertain tax positions whose statute of limitations are expected to expire during the next twelve months and which would affect our effective tax rate is $9.1 million as of September 30, 2011.

 
14
 

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(10) Net Income Per Common Share:
    The reconciliation of the net income per common share calculation is as follows:
 
   
For the three months ended
   
For the nine months ended
 
( $ and shares in thousands, except per share amounts )
 
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net income used for basic and diluted earnings
                       
    per common share:
                       
Net income attributable to common shareholders of Frontier
  $ 20,395     $ 28,995     $ 107,367     $ 106,681  
Less:  Dividends paid on unvested restricted stock awards
    (914 )     (865 )     (2,835 )     (2,240 )
Total basic and diluted net income attributable to common
                               
   shareholders of Frontier
  $ 19,481     $ 28,130     $ 104,532     $ 104,441  
                                 
Basic earnings per common share:
                               
Total weighted average shares and unvested restricted stock awards
                               
   outstanding - basic
    995,188       993,056       994,642       585,049  
Less:  Weighted average unvested restricted stock awards
    (4,929 )     (4,111 )     (4,917 )     (3,180 )
Total weighted average shares outstanding - basic
    990,259       988,945       989,725       581,869  
                                 
Net income per share attributable to common shareholders of Frontier
  $ 0.02     $ 0.03     $ 0.11     $ 0.18  
 
                               
Diluted earnings per common share:
                               
Total weighted average shares outstanding - basic
    990,259       988,945       989,725       581,869  
Effect of dilutive shares
    535       855       1,478       250  
Effect of dilutive stock units
    490       -       490       -  
Total weighted average shares outstanding - diluted
    991,284       989,800       991,693       582,119  
                                 
Net income per share attributable to common shareholders of Frontier
  $ 0.02     $ 0.03     $ 0.11     $ 0.18  

Stock Options
For the three and nine months ended September 30, 2011 and 2010, options to purchase 930,000 shares (at exercise prices ranging from $8.19 to $14.15) and 3,429,000 shares (at exercise prices ranging from $8.19 to $18.46), respectively, 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 would be antidilutive.  In calculating diluted EPS, we apply the treasury stock method and include future unearned compensation as part of the assumed proceeds.

In addition, for the three and nine months ended September 30, 2011 and 2010, we have deducted the impact of dividends paid on unvested restricted stock awards from net income attributable to common shareholders of Frontier.

Stock Units
At September 30, 2011 and 2010, we had 490,018 and 388,722 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 calculation for the three and nine months ended September 30, 2010, because their inclusion would have an antidilutive effect.

15
 
(11) Stock Plans:
At September 30, 2011, we had five stock-based compensation plans under which grants were made and awards remained outstanding.   No further awards may be granted under three of the plans: the 1996 Equity Incentive Plan, the Amended and Restated 2000 Equity Incentive Plan (collectively, together with the 2009 Equity Incentive Plan, the EIP) and the Deferred Fee Plan. At September 30, 2011, there were 12,540,761 shares authorized for grant under these plans and 7,090,425 shares available for grant under two of the plans.  
   
The following summary presents information regarding outstanding stock options as of September 30, 2011 and changes during the nine months then ended with regard to options under the EIP:

         
Weighted
 
Weighted
     
   
Shares
   
Average
 
Average
   
Aggregate
   
 Subject to
   
 Option Price
 
 Remaining
   
Intrinsic
   
 Option
   
 Per Share
 
 Life in Years
   
 Value
Balance at January 1, 2011
1,507,000
 
$
10.50
 
1.7
 
$
603,000
 
Options granted
-
 
$
-
         
 
Options exercised
(10,000)
 
$
8.19
     
$
12,000
 
Options canceled, forfeited or lapsed
(567,000)
 
$
11.52
         
Balance at September 30, 2011
930,000
 
$
9.92
 
1.5
 
$
-
                     
Exercisable at September 30, 2011
930,000
 
$
9.92
 
1.5
 
$
-
                     
There were no options granted or exercised during the first nine months of 2010.  There was no intrinsic value to the stock options outstanding and exercisable at September 30, 2010.  

The following summary presents information regarding unvested restricted stock as of September 30, 2011 and changes during the nine months then ended with regard to restricted stock under the EIP:

         
Weighted
     
         
Average
     
   
 Number of
   
 Grant Date
   
Aggregate
   
 Shares
   
 Fair Value
   
Fair Value
Balance at January 1, 2011
4,440,000
 
$
8.29
 
$
43,199,000
 
Restricted stock granted
1,721,000
 
$
9.41
 
$
10,513,000
 
Restricted stock vested
(1,135,000)
 
$
9.54
 
$
6,933,000
 
Restricted stock forfeited
(163,000)
 
$
8.03
     
Balance at September 30, 2011
4,863,000
 
$
8.41
 
$
29,711,000

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 September 30, 2011 was $29.6 million and the weighted average period over which this cost is expected to be recognized is approximately two years.

Shares granted during the first nine months of 2010 totaled 3,244,000.  The total fair value of shares granted and vested during the nine months ended September 30, 2010 was approximately $26.5 million and $7.1 million, respectively.  The total fair value of unvested restricted stock at September 30, 2010 was $36.6 million. The weighted average grant date fair value of restricted shares granted during the nine months ended September 30, 2010 was $7.53.


 
16
 

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




(12)  Segment Information:
We operate in one reportable segment, Frontier.  Frontier provides both regulated and unregulated voice, data and video services to residential, business and wholesale customers and is typically the incumbent 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 Frontier properties share similar economic characteristics, in that they provide the same products and services to similar customers using comparable technologies in all of the states in which we operate.  The regulatory structure is generally similar.  Differences in the regulatory regime of a particular state do not materially impact the economic characteristics or operating results of a particular property.  In conjunction with the reorganization of our operating segments effective with the third quarter of 2011, we reassigned goodwill to our reporting units using a relative fair value allocation approach.

(13)  Investment Income (Loss):
The components of investment income (loss) are as follows:
 
     
For the three months ended
     
For the nine months ended
      September 30,       September 30,
($ in thousands)
   
2011
     
2010
     
2011
 
2010
                           
Interest and dividend income
  $
87
    $
289
    $
2,971
 
 $           2,822
Investment gain
   
                   -
     
                    -
     
             1,071
 
              2,905
Equity earnings (losses)
   
               (753)
     
                 108
     
            (1,418)
 
                 667
Total investment income (loss)
  $
(666)
    $
397
    $
2,624
 
 $           6,394
                           

 
(14)   Other Income, Net:
The components of other income, net are as follows:
 
     
For the three months ended
    For the nine months ended
      September 30,       September 30,
($ in thousands)
   
2011
     
2010
     
2011
 
2010
                           
Gain on expiration/settlement of customer advances
  $
1,268
    $
1,175
    $
7,605
 
 $           6,023
Split-dollar life insurance policy settlement
   
                   -
     
                   75
     
                   -
 
              4,454
Litigation settlement proceeds
   
                236
     
              1,035
     
                252
 
              3,135
Other, net
   
                   (2)
     
                  (78)
     
               (442)
 
                (115)
     Total other income, net
  $
1,502
    $
2,207
    $
7,415
 
 $         13,497
                           

 
17

PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) Retirement Plans:
The following tables provide the components of net periodic benefit cost:
 
Pension Benefits
   
Pension Benefits
 
For the three months ended
     
For the nine months ended
    September 30,     September 30,
 
2011
   
2010
     
2011
 
2010
( $ in thousands )
                   
Components of net periodic pension benefit cost
                   
Service cost
 $          9,615
  $
8,994
    $
28,844
 
 $         12,212
Interest cost on projected benefit obligation
           21,172
   
            21,601
     
           63,516
 
            46,364
Expected return on plan assets
          (25,589)
   
           (23,262)
     
          (76,766)
 
           (46,561)
Amortization of prior service cost /(credit)
                 (50)
   
                  (49)
     
               (150)
 
                (149)
Amortization of unrecognized loss
             4,435
   
              7,048
     
           13,306
 
            20,545
Net periodic pension benefit cost
 $          9,583
  $
14,332
    $
28,750
 
 $         32,411
                     
 
Postretirement Benefits
   
Postretirement Benefits
 
Other Than Pensions (OPEB)
   
Other Than Pensions (OPEB)
 
For the three months ended
     
For the nine months ended
 
September 30,
     
September 30,
 
2011
   
2010
     
2011
 
2010
( $ in thousands )
                   
Components of net periodic postretirement benefit cost
                   
Service cost
 $          4,206
  $
3,842
    $
12,662
 
 $           4,041
Interest cost on projected benefit obligation
             5,986
   
              6,241
     
           18,642
 
            11,499
Expected return on plan assets
                 (79)
   
                (113)
     
               (242)
 
                (330)
Amortization of prior service cost/(credit)
            (2,552)
   
             (1,932)
     
            (7,651)
 
             (5,790)
Amortization of unrecognized loss
                607
   
                 528
     
             3,604
 
              3,690
Net periodic postretirement benefit cost
 $          8,168
  $
8,566
    $
27,015
 
 $         13,110
                     
During the first nine months of 2011 and 2010, we capitalized $9.8 million and $5.4 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 2011 pension and OPEB expenses will be between $70 million and $80 million before amounts capitalized into the cost of capital expenditures (they were $68.4 million in 2010 before amounts capitalized into the cost of capital expenditures, including the plan expenses of the Acquired Business for the second half of 2010).   We made con