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Frontier Communications Reports 2013 Fourth Quarter And Full Year Results

The Company’s broadband customer net additions were 27,800 during the fourth quarter of 2013, which was the fourth consecutive quarter that exceeded the total 23,400 net additions in all of 2012. During 2013, the Company’s net additions of broadband customers were 112,250 for the full year. The Company had 1,866,700 broadband customers at December 31, 2013. The Company added 7,400 net video customers during the fourth quarter of 2013. The Company had 385,400 video customers at December 31, 2013.

Network access expenses for the fourth quarter of 2013 were $110.6 million as compared to $104.0 million in the third quarter of 2013 and $108.5 million in the fourth quarter of 2012.

Other operating expenses for the fourth quarter of 2013 were $516.4 million as compared to $549.1 million in the third quarter of 2013 and $570.7 million in the fourth quarter of 2012. Included in other operating expenses were severance costs of $2.1 million, $2.6 million and $17.2 million in the fourth quarter of 2013, the third quarter of 2013 and the fourth quarter of 2012, respectively. Other operating expenses, excluding severance costs, in the fourth quarter of 2013 were lower than in the fourth quarter of 2012 by $39.2 million, primarily due to decreased compensation costs resulting from reduced headcount, lower outside service costs and lower storm related costs.

Also, during the third and fourth quarters of 2013, the Company recorded non-cash pension settlement costs of $40.3 million and $3.9 million, respectively, 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 fourth quarter of 2013 was $282.3 million as compared to $285.7 million in the third quarter of 2013 and $304.0 million in the fourth quarter of 2012. Amortization expense decreased by $11.2 million in the fourth quarter of 2013 as compared to the fourth quarter of 2012, primarily due to lower amortization related to the customer base that is amortized on an accelerated method.

Acquisition and integration costs of $9.7 million ($0.01 per share after tax) were incurred during the fourth quarter of 2013 in connection with the pending AT&T Connecticut transaction, as previously announced on December 17, 2013, as compared to approximately $13.5 million ($0.01 per share after tax) in the fourth quarter of 2012 in connection with the final integration work associated with the properties acquired from Verizon in July 2010.

Operating income for the fourth quarter of 2013 was $257.6 million and operating income margin was 21.8 percent as compared to operating income of $206.2 million and operating income margin of 17.4 percent in the third quarter of 2013 and operating income of $235.7 million and operating income margin of 19.1 percent in the fourth quarter of 2012.

Interest expense for the fourth quarter of 2013 was $165.6 million as compared to $163.8 million in the third quarter of 2013, and $178.9 million in the fourth quarter of 2012. Interest expense declined, as compared to the fourth 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 fourth quarter of 2013 was $24.3 million as compared to $9.5 million in the fourth quarter of 2012, an $14.8 million increase, principally due to higher pretax income resulting from improved operating income, the absence of losses on debt retirement and lower interest expense, as discussed above. The Company had an effective tax rate for the fourth quarter of 2013 and 2012 of 26.4% and 24.5%, respectively. The fourth quarter of 2013 includes discrete tax items arising from changes in certain deferred tax balances, federal research and development tax credits, non-deductible transaction costs and the net reversal of uncertain tax positions with a combined impact of $6.2 million in reduced income tax expense.

Net income attributable to common shareholders of Frontier was $67.8 million, or $0.07 per share, in the fourth quarter of 2013, as compared to $24.9 million, or $0.02 per share, in the fourth quarter of 2012. The fourth quarter of 2013 includes acquisition and integration costs of $9.7 million, pension settlement costs of $3.9 million, severance costs of $2.1 million and acquisition related interest expense of $1.3 million, partially offset by discrete tax items of $6.2 million (combined impact of $4.4 million after tax). Excluding the impact of the aforementioned items, non-GAAP adjusted net income attributable to common shareholders of Frontier for the fourth quarter of 2013 would be $72.2 million, or $0.07 per share, as compared to $56.5 million, or $0.06 per share, in the third quarter of 2013 and $57.0 million, or $0.06 per share, in the fourth quarter of 2012.

Capital expenditures for Frontier business operations were $150.6 million for the fourth quarter of 2013 and $634.7 million for the full year of 2013, as compared to $177.3 million in the fourth quarter of 2012 and $748.4 million for the full year of 2012. This was in line with the Company’s guidance, following a higher amount of investment in 2012 from broadband expansion in the acquired properties.

Operating cash flow, as adjusted and defined by the Company in the attached Schedule A, was $570.2 million for the fourth quarter of 2013 resulting in an operating cash flow margin of 48.3%. Operating cash flow, as reported, of $539.8 million has been adjusted to exclude $3.9 million of pension settlement costs, $2.1 million of severance costs, $9.7 million of acquisition and integration costs and $14.7 million of non-cash pension and other postretirement benefit costs.

Free cash flow, as defined by the Company in the attached Schedule A, was $248.2 million for the fourth quarter of 2013 and $862.5 million for the full year of 2013. The Company’s dividend represents a payout of 40% of free cash flow for the fourth quarter of 2013 and 46% for the full year of 2013.

Working Capital

At December 31, 2013, the Company had a working capital surplus of $317.3 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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