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Frontier Communications Reports 2013 Third Quarter Results

The Company’s broadband customer net additions were approximately 26,800 during the third quarter of 2013, which was the third consecutive quarter that exceeded the total 23,400 net additions in all of 2012. For the nine month period of 2013, the Company’s net addition of broadband customers was approximately 84,500. The Company had approximately 1,838,900 broadband customers at September 30, 2013. The Company added 10,500 net video customers during the third quarter of 2013. The Company had approximately 377,900 video customers at September 30, 2013.

Network access expenses for the third quarter of 2013 were $104.0 million as compared to $107.1 million in the second quarter of 2013 and $102.1 million in the third quarter of 2012.

Other operating expenses for the third quarter of 2013 were $549.1 million as compared to $534.0 million in the second quarter of 2013 and $572.3 million in the third quarter of 2012. Included in other operating expenses were severance costs of $2.6 million, $4.3 million and $6.8 million in the third quarter of 2013, the second quarter of 2013 and the third quarter of 2012, respectively. Other operating expenses, excluding severance costs, in the third quarter of 2013 were lower than in the third quarter of 2012 by $19.0 million, primarily due to decreased compensation costs resulting from reduced headcount and lower outside service costs.

Also, during the third quarter of 2013, the Company recorded non-cash pension settlement costs of $40.3 million for the accelerated recognition of a portion of the previously unrecognized actuarial losses in the Company’s pension plan as a result of the significant level of lump sum retirement benefit payments made during 2013.

Depreciation and amortization for the third quarter of 2013 was $285.7 million as compared to $297.8 million in the second quarter of 2013 and $298.4 million in the third quarter of 2012. Amortization expense decreased by $11.5 million in the third quarter of 2013 as compared to the third quarter of 2012, primarily due to lower amortization related to the customer base that is amortized on an accelerated method.

Operating income for the third quarter of 2013 was $206.2 million (reflecting pension settlement costs of $40.3 million, partially offset by lower amortization and other operating expenses, as well as the absence of integration costs, as compared to the third quarter of 2012) and operating income margin was 17.4 percent as compared to operating income of $266.2 million and operating income margin of 22.4 percent in the second quarter of 2013 and operating income of $275.2 million and operating income margin of 22.0 percent in the third quarter of 2012.

Interest expense for the third quarter of 2013 was $163.8 million as compared to $166.5 million in the second quarter of 2013, and $172.2 million in the third quarter of 2012. Interest expense declined, as compared to the third quarter of 2012, primarily due to lower average debt levels resulting from the debt refinancing activities and debt retirements during 2013.

Income tax expense for the third quarter of 2013 was $8.5 million as compared to $35.7 million in the third quarter of 2012, a $27.2 million decrease, principally due to lower pretax income resulting from the pension settlement costs of $40.3 million. The Company had an effective tax rate for the third quarter of 2013 and 2012 of 19.3% and 33.3%, respectively. The third quarter of 2013 includes discrete tax items arising from state law changes and the reversal of uncertain tax positions with a combined impact of $5.6 million in reduced income tax expense.

Net income attributable to common shareholders of Frontier was $35.4 million, or $0.04 per share, in the third quarter of 2013, as compared to $67.0 million, or $0.07 per share, in the third quarter of 2012. The third quarter of 2013 includes pension settlement costs of $40.3 million, severance costs of $2.6 million, offset by discrete tax items of $5.6 million (combined impact of $21.1 million, or $0.02 per share after tax). Excluding the impact of the aforementioned items, non-GAAP adjusted net income attributable to common shareholders of Frontier for the third quarter of 2013 would be $56.5 million, or $0.06 per share, as compared to $61.3 million, or $0.06 per share, in the second quarter of 2013 and $68.4 million, or $0.07 per share, in the third quarter of 2012.

Capital expenditures for Frontier business operations were $157.6 million for the third quarter of 2013 and $484.1 million for the first nine months of 2013, as compared to $195.0 million in the third quarter of 2012 and $571.1 million for the first nine months of 2012.

Operating cash flow, as adjusted and defined by the Company in the attached Schedule A, was $548.8 million for the third quarter of 2013 resulting in an operating cash flow margin of 46.3%. Operating cash flow, as reported, of $491.9 million has been adjusted to exclude $40.3 million of pension settlement costs, $2.6 million of severance costs and $14.0 million of non-cash pension and other postretirement benefit costs.

Free cash flow, as defined by the Company in the attached Schedule A, was $232.2 million for the third quarter of 2013 and $614.3 million for the first nine months of 2013. The Company’s dividend represents a payout of 43% of free cash flow for the third quarter of 2013 and 49% for the first nine months of 2013.

Working Capital

At September 30, 2013, the Company had a working capital surplus of $198.6 million, which includes the classification of certain debt maturing in the second quarter of 2014 of $214.4 million as a current liability.

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