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Frontier Communications Corporation (NASDAQ:FTR)

Morgan Stanley Leveraged Finance Conference Call

June 11, 2014 02:45 PM ET

Executives

John Jureller - Chief Financial Officer

Analysts

Steve Flynn - Morgan Stanley

Steve Flynn - Morgan Stanley

Good afternoon. My name is Steve Flynn from Morgan Stanley. Thanks for joining us, as we kick off the 2014 Leverage Finance Committee Conference. And I'm very happy to have as our first speaker today John Jureller, CFO of Frontier.

John Jureller

Thanks Steve. Glad to be here.

Steve Flynn - Morgan Stanley

Didn’t know you want to kick off with some opening comments before we jump on Q&A?

John Jureller

Yes. Just I know a lot of people have asked us and really how we're doing with Connecticut these days it's really sort of the primary reason that we're going to be out in the markets again shortly. So why don’t I just sort of hit that right off Steve and just sort of let everybody know and that is our integration planning and process together with AT&T on the handover of this net business in Connecticut is being going really well. We've actually been pleasantly surprised and continue to be pleasantly surprised by the quality of the asset and the quality of the market and the opportunity.

So our planning streams operationally are going well from a regulatory perspective, things are all on track. So we don't see any impairment to what both we and AT&T believe as an early fourth quarter close. So related to that we've actually have I will call it three part financing plan. And you saw us last week execute really on parts one and parts two of that. Part of one of that was really working on extending our revolving credit facility, we had a revolving credit facility settlement of 50 million that was maturing in November 2016.

We thought we take the opportunity to actually push out that maturity, so we did that. So our revolving credit facility which is in senior unsecured facility, still of the same size is now expiring in May of 2018. So we have got a long runway, a lot of headroom there on our revolving credit facility. The second part of what we did is we took advantage of a great term loan A market and completed a $350 million delayed draw term loan A facility, agented by our good colleagues at cobank, a lot of others that were involved as well. It creates a great opportunity for us, very little of our capital structure is floating rate about 95% today is on a fixed rate basis and we thought we could certainly afford to take some little bit of floating rate risk in that portfolio.

So this is a floating rate LIBOR based piece of paper delayed draw facility so we don’t have the negative carry until we need it, until we actually reach the closing. So then part three then of the financing plan will be as we’ve described is to be out in the public markets for the balance of it. We have talked about, about 1.9 billion of total financing. So with 350 million under our belt already it’s probably about 1.550 billion that will be out in the market for in the not too distant future and we’ll to decide really maturity profile sizing of towers et cetera when the time comes. But we are excited, we know that the markets are really receptive to issuers and even though that the level of issuance these days is about what it was last year, the appetite continue so with the good help of our banking colleagues we are seeing spreads compress and so a great environment for us.

Question-and-Answer Session

Steve Flynn - Morgan Stanley

Got you, great thank you. Given it is a leveraged finance conference I would like to continue on that topic.

John Jureller

Sure.

Steve Flynn - Morgan Stanley

So it’s safe to assume you are still going to be targeting high yield senior unsecured market of that 1.55.

John Jureller

That’s correct, yes.

Steve Flynn - Morgan Stanley

Given we have seen a lot of demand in the longer end part of the market and your maturity stack, I mean would you consider like a long tenure going all the way up to 2025 or?

John Jureller

Well, last time we were in the market which was last March, April we actually went out for an 11 year tranche. It was, we weren’t sure whether or not we have had the reception, but the market was opened for us to be able to do that. If we’re out an 11 years today, it is something that we think about, but we wanted get the trade off of duration versus rate and we want to do the right thing. But as we think about anywhere from 7 to 12 years call it somewhere in there and dividing that up would be ideal for us. We don’t want to build our towers too large in any one year in any one maturity. So, we’ll consider the long end but we also balance out against the cost of doing that.

Steve Flynn - Morgan Stanley

Got you. And then Frontier has shied away from tapping the secured market, it hasn’t been necessary, but should we assume despite having the capacity would you so with your existing agreement, is that something that we should look for Frontier to continue to do in the future is focused on the senior unsecured both bank and bond?

John Jureller

Yes, that’s you should expect that we’re focused on the senior unsecured marketplace.

Steve Flynn - Morgan Stanley

Okay. Can you talk a little bit about your leverage target? In past there was a leverage target, I don’t know if you just shied away from that leverage target, but there was a little bit of a change now here with the Connecticut acquisition. Can you talk about maybe what your target leverage is or where do you feel comfortable with leverage in the future?

John Jureller

Yes. Rather than really talk about this in terms of a leverage target which is something really we’ve steered away from beginning of last year. We really talk about in terms of what is our capital allocation strategy what's the right thing for us to be doing? Now first of all that said is at the end of Q1 is our net debt to EBITDA was just over 3.2 times. So, level that we feel really comfortable about, we've talked about on a pro forma basis, once we complete the entirety of the financing we'd be up at about 0.4 turns and even at that level we're still very comfortable about that level of leverage, our ability to comfortably to service bad debt.

But our capital allocation strategy is really something that you should think about, the market should think about, because it really guides, our guiding principles on how we think about, what to do with the cash flow. And the first is we wanted to continue invest appropriately in our network.

Our network is really what our core asset, it's what drives long-term stakeholder value for our customers, for our shareholders, for our creditors, for our employees; it's for every -- for all of our stakeholders. So, we're going to make sure that our network continues to remain robust, competitive and you'll see that it is very robust and competitive today; and we want it to continue to be so.

The second thing is that we know that our shareholders really appreciate our dividend. We have a strong dividend payout ratio. We want to make sure that we continue to provide for that dividend. The good news as part of the Connecticut transaction with to respect to both of those two elements is we're going to be adding incremental cash flow, incremental EBITDA and free cash flow. And there is going to no share insurance attached to that. So, our share count doesn't increase, our dividend obligation doesn't increase as well.

The third part then after investing in our network, protecting our dividend is paying down our debt in the ordinary course. We have a lot of capital on our balance sheet. We’re very comfortable even absent Connecticut that we didn’t have to be on the capital markets until 2016 or 2017. So for example, the beginning of May this year, we had a $200 million maturing and in this year and we just paid it off in cash from our balance sheet. We got a lot of cash still to be able to do it to support our Connecticut integration cost to support our business in the ordinary course. And so even over the next couple of years despite where we are going is, we don’t have to be back out in the capital markets, and adding Connecticut perhaps could even lengthen that.

Steve Flynn - Morgan Stanley

Got you. And given like have been running 2014 with probably over $700 million of cash on balance sheet, so was there ever consideration not to raise as much money and use some of that cash for the Connecticut acquisition or you’re just like having that excess capacity and flexibility?

John Jureller

Right. So what we did is, we really kind of backed into really how much debt do we need if we think about not wanting to do required to access the capital markets through 2016, let’s just say. So we run -- we model it out, we say okay, what’s our cash flow during that period, what do we start with, what do we want to make sure that we have for ordinary course operations and sort of net it all back is how much do we need to raise.

Now recognize the two that we are probably in the course of our Connecticut transaction and use about $350 million from our own balance sheet to do that, right, because if you take the $2 billion purchase price, plus transaction cost, plus all the integration costs and then back out the $1.9 billion that we’d raise is that net debt [450] is what we are taking from our balance sheet and using for the transaction. And that’s we think is the right way to think about reinvesting our cash in the business in a way that earns a greater return and if we did anything else with it.

Steve Flynn - Morgan Stanley

Got you. And then as on the system sides as far as the flash-cut that will have announced, sounds like in early fourth quarter, can you talk about what's been done so far and what still needs to be done and maybe what are the issues that you most concern about that flash-cut coming out?

John Jureller

Right. So let me bring it back to when we did the Verizon transaction. The Verizon transaction is we acquired the properties in 14 different states. But we flash-cut one of the states or the larger state at that time -- at the time of closing that was West Virginia. So, and we converted 7 billing systems already, so this is something that's not new for us, right, this flash-cut, this flash-cut concept.

So we're working through everything as it relates to whether it's customer billing, IT systems, back office support, customer service, network provisioning, the network assets and making sure that we're pulling that data into our systems and it gets replicated in a seamless way. So we're doing data testing, data replication, we're working with our counterparts at AT&T for example on things like bill separation, so that the first time that the customer gets a bill under our ownership is that well they've already seen it. So we're working together with AT&T, because both of us want to make sure that we have a great outcome for our customer. Because recall, AT&T still going to be present in the state, they're still going to have their enterprise customer base, they're still going to have their wireless customers out there as well. So, we want this to be good on the both sides, but our planning has been going well. And they have been very open with us. And our integration planning really started at the same time as we were doing our diligence. These things were actually running in parallel. So as we said okay, presuming that we get there on diligence and a deal is we want to make sure that we're also starting operationally and over. And that's been really a great process with our counterparts at AT&T.

Steve Flynn - Morgan Stanley

Great. And then earlier in your opening statements, you talked about the regulatory process being on track. Is there still lot left in the approval process for the state of Connecticut, is there any faster requirement, or is there anything that's come up or…?

John Jureller

So we have obviously gotten a lot of interrogatories from the Connecticut Public Utility Regulatory Authority, the PURA. And they're going to be holding hearings. Those hearings start at the end of June. So there would be a number of us participating in those, but we don’t anticipate anything unusual that’s coming out of this, they ask the usual questions about to take over a telecom utility in the state to make sure that we’re good actors and good providers, but we clearly have a track record here of having done this in so many other different places with a great outcome that we don’t think that this should be an issue I mean again…

Steve Flynn - Morgan Stanley

How many states with the Verizon?

John Jureller

It was 14 states with Verizon, remember the time of the Verizon transaction, we tripled the size of our company, right. We went on a pro forma basis to 3x where we were, with the Connecticut acquisition we will increase the size of our revenue stream by about 25%. So orders of magnitude is this is materially less, less challenge for us than the Verizon transaction was and we have got a great track record. Obviously the regulatory authorities need to do their work they need to do their diligence around this and we have been accommodating all of the questions they have had and we will be sitting down with them again towards the end of this month.

Steve Flynn - Morgan Stanley

Okay, great. Just wanted to shift gears on to taxes, so bonus depreciation obviously comes up all the time it’s a huge issue for this industry and sector. Can you talk a little bit about what’s the latest in Frontier’s view on the potential for bonus depreciation to be retroactive for 2014 past for future years?

John Jureller

Yes. I don’t think Steve we have any greater insight than you have or anybody else in this room and if anybody does I am glad to sort of take anybody’s insights here. Listen, I think there could be a general sale made of things but there could be an unlocking of opportunity whether it’s a 50% bonus depreciation whether it’s a full year we don’t know whether something gets signed but it’s not effective until 2015, again we don’t know. Our planning has been that there is no extension of bonus depreciation, so if there is it’s a pleasant surprise on the upside for us.

Steve Flynn - Morgan Stanley

Got you. And you are currently 130 to 160 of cash taxes in ‘14….

John Jureller

That’s right, that’s in our guidance.

Steve Flynn - Morgan Stanley

And if it goes higher in ‘15 I assume, normal course?

John Jureller

That’s right.

Steve Flynn - Morgan Stanley

Can you talk about the impact that the Connecticut acquisition will have on that with the -- I don’t know if you run those numbers yet with sort of the on asset base of the Connecticut operations coming in and what that could do as far as?

John Jureller

Yes. We’ve told people we’ve been very clear as we’re going to face that same headwind in the Connecticut business as we have in our own. The structure of our transaction is, it’s a share purchase. We will get a small step up in one piece of the assets. But it’s a share purchase so we’re going to inherit the tax characteristics of the [F&ET] business which also embedded in that has some bonus depreciation elements and reversals and that was all factored into our analysis when we did the transaction.

Steve Flynn - Morgan Stanley

Okay great. Sticking on some financial issues, it sounds a little bit of pension OPEB, so I know it’s your obligation has come down a fair amount over the last couple of years.

John Jureller

Right.

Steve Flynn - Morgan Stanley

However it’s still pretty meaningful I think pension at the end of the year it was probably net about 450 OPEB about close to 400. We’ve seen some of your larger peers take the action to so move that liability opportune insurance company move the assets, move the liability maybe an upfront cost to do that, given the way that planned assets have increased over the last few years, are you close to position where you would consider doing that and have you thought about what was kind of the upfront cost to remove that sort of longer-term liability?

John Jureller

Yes. Steve I will say it would be pretty healthy price to decease that entire liability. We are not at neutrality. If we were closer I think that’s something that we more strongly consider, but we still have the ways to go. Listen, we're going to spend a lot of money. We have got an obligation out there to our employees and to our beneficiaries. We are going to obviously need that. We are going to contribute over $100 million to our pension plan this year, that's part of our free cash flow number in our guidance.

And again, I think as the rate environment improves, as returns continue to at least stay steady state, we will obviously be in a better position. But the interesting thing remember is while you had your GAAP numbers, as your cash numbers kind of move, I shouldn’t say in a different direction, but move at a different pace because your cash calculations are feared either on a PPA or a Map 21 basis. And on a Map 21 basis, there is really a long tale of smoothing that goes on. So even if rates went up let's say by a 100 basis points, it still doesn't necessarily impact the actual cash contributions but for a period of years. So, it takes a while for that smoothing to really -- the interest rate increase to impact this moving.

Steve Flynn - Morgan Stanley

Got you. And then you also have the ability to introduce other assets and not potentially all cash for your contribution.

John Jureller

That's right. Last year our total contributions to our pension plan were about $60 million, about $23 million of which were in a form of real estate related assets. And the fiduciaries for the pension plan our independent consultants looked at that, advised us, and advised the fiduciaries on that.

And we're looking at where are those opportunities but it's the right balance because from a pension asset perspective. We almost say okay, we will although taking Frontier credit risk (inaudible) because we're also, let's see on those assets.

So, we want to make sure that we have the right balance, but then we have a limitation in our plan on the amount of assets that we put in. We still had headroom, there is still more opportunity to do that and that headroom obviously would increase when we roll in the Connecticut pension asset size in that pool as well, as well as those real estate properties.

Steve Flynn - Morgan Stanley

Okay. Just shifting gears to sort of revenues. So we have seen an improvement in year-over-year rate of decline at Frontier, so that is moving in the right direction. But what is going to take, what are the drivers to get to revenue stability and how far off do you think that could be in the future?

John Jureller

I think the drivers -- the drivers are two-fold and let’s -- we can break this down into two different parts. Firstly, in our residential business, we like everybody else have a secular headwind of the [cord] cutters, the decline in just our voice business. Now the question is at what point does that stabilize. I mean my thought is in the researches that I have seen is if that’s (inaudible) to some level, it doesn’t go away. We are trying to sort of figure out where that level is, but at the same time is we are doing what we can to still encourage in a bundled perspective the cord cutters, those that are considering cutting the cord to keep it. We are trying to keep our voice service really competitively priced so that when we think about a security and a life line so to speak is that hard wired landline and voice line is pretty necessary whether it comes to storm seasons, whether you just want it for an elderly relative or couple, you are concerned about you got small kids at home, with babysitters. So we are reinforcing that element. And people are out there, and they are continuing to re up their voice service. But still when you look at in totality, our voice revenue is in decline. So the question is data revenue, so they are getting that inflection point of when data crosses over, the rate of data increases.

You have seen us really had great success in our broadband net adds. In 2013, it was over 112,000 broadband net adds; in Q1, it was 37,000 broadband net adds. We continue at a good pace. We've said that we got some real positive momentum into this second quarter, we've also said generally our second quarter is seasonally a little less than Q1, but nevertheless we're still seeing good things.

So, it's really our broadband penetration, it's our whole thesis and our whole strategy around leading with broadband together with retaining customers, right? So, we've been doing a great job, we believe internally not just in getting new broadband customers but reducing our churn. And you saw that churn reduction in the first quarter, you saw we were at the lowest level of residential losses, customer losses in the first quarter.

So that's the inflection point for residential. When do we get to that crossover? We're still looking for it. We think it's -- it will be sooner rather than later, but we're -- I think we're not ready to call when that might be.

Steve Flynn - Morgan Stanley

And the success in the broadband, has that been mainly due to increased speed? I know you've increased your speeds a lot versus the combination of speed and different things that you've done with all your marketing. What's been -- what's behind the success that you have…

John Jureller

Steve, it’s interesting, yes or network is well enabled. We think we've got one of the best networks out there. In fact, a lot of people don't know this, we have the second largest fiber-to-the-home network residential network in the U.S. on [Verizon]. Almost 10% of our network is fiber-to-the-home and the rest is for fiber-to-the-node within copper fed to the home. But more than 53% of our footprint to get speeds of 20 megs or better; 74% of our footprint can get 12 meg speed or better. So our network is really well enabled, it’s very robust. We’re really proud of what we have been able to do. But here is the but; over 80% of our customer base is still at a 6 meg speed and the reason is its price value. We’re out there not really selling speed but we are asking the customers what are the activities in which you are engaged, what are the things that you do every day, whether it’s online gaming, whether it’s streaming Netflix, whether it’s [VP] ending into your office, how many devices that you have in the home and what we’re finding and when we talk to the customers about this is that a 6 meg experience gives them all what they need. In fact Netflix just by the way as a site came out with its May rating, there is [person] at 3 megs, that still being at 3 megs and everybody else is 2 or less. We’re actually ahead of Verizon FiOS, we are ahead Comcast in our speed delivery but that’s at a separate side, but it’s price value equation.

So when we say what’s the price for our broadband product as compared to our competition, our cable competition, it’s a much better value proposition. And that’s why in the first quarter, we took share in 91% of our markets; in Q4 last year, we took share in 84% of our markets. And that’s we’re winning is that equation. Now I told you 80% of our base is probably at 6 meg speed. Well, of our activity in the first quarter, 30% of the activity was at a higher base, higher than that.

So they are taking 12, they’re taking 20, they’re taking more than that in our fiber footprints, in our FiOS footprints. So, we are able to deliver when they want it but in the meantime it’s a right value proposition and no hidden charges, no add-on modem fees like some of our cable competitors are doing.

So when you look at call it over the life of two years or three years is what’s the price that the consumer is paying it’s a great proposition for them. So that’s how we’re really winning in our broadband market.

Steve Flynn - Morgan Stanley

And then if you remind us what percentage of your market was overlapped with Time Warner Cable I know they are Rochester and in (inaudible).

John Jureller

Time Warner is about 23% of our market. We’ve got cable competition in about 95% of our footprint.

Steve Flynn - Morgan Stanley

And most of those Time Warner markets are going to Comcast right now?

John Jureller

We compete against Comcast in 36% of our market.

Steve Flynn - Morgan Stanley

Or is there any concern that in those markets the competition, competitive environment may change with that?

John Jureller

Well listen I am not going to throw stone to anybody, but you look at where there customer service ratings are right and that’s how we’re winning, it’s our customers service proposition as well. And remember it’s not quite as simple as just Comcast taking over Time Warner’s footprint, but they’re also doing swaps with Charter. So there is going to be a lot of churn, a lot of activity between those three companies from a systems, from a service, from a provisioning side that perhaps will create a little bit of [turmoil] at least for the end customer for a time to come. And we’re going to take advantage of that. We’re going to be out there really marketing our price value equation and our customer service against all of what’s happening in that dynamic. So dynamic will happen, we respect our competition, we know that they fight hard for the same customer base that we do every day. But we know that we’re winning in that market.

Steve Flynn - Morgan Stanley

All right.

John Jureller

So anyway so that was residential, right.

Steve Flynn - Morgan Stanley

Okay, sorry, business.

John Jureller

So -- business?

Steve Flynn - Morgan Stanley

Yes.

John Jureller

So on the business side when do we get the point there well firstly I think there are three parts to this. One is what’s happening on our wireless backhaul business. And we’ve called out last year that wireless backhaul in total accounts for about 5% of our total revenue stream and that we’re going to be down this year in wireless backhaul revenue and that’s just as we’re getting disconnected from towers that were in our footprint, others have chosen to build fiber to a set of towers, where we haven't found the right economics. We've said, no we're going to take a pause. So we have called out that we're going to continue to have that headwind throughout this year and perhaps that might roll into the first quarter of next year, it all depends on the schedule of the towers, owners how they build out how AT&T and Sprint and Verizon choose to build out those towers.

Steve Flynn - Morgan Stanley

Sorry on the towers there is not only the towers that you lose to competitors because the economics but then even the ones that you win, isn't there a typically a short term revenue hit as they….

John Jureller

That's right. So, it's a combination of both. So, it’s those two things. So, but we think that that trough is somewhere Q4 to Q1 next year, where we'd get that stability.

The second is our carrier wholesale business and that's actually been a nice business for us. We've invested a lot in Ethernet and quality of service. We have got central offices wired. 80% plus of our central offices are wired with fiber. And we're winning and we're doing some good business in that market.

And then it's kind of -- now it’s the small medium size marketplace and that's really where we probably face our highest level of competition from cable. And from a economic headwind perspective, we try to marry our data together with DNB’s and others’ and we continue to see a decline in the number of businesses, that our in our footprint, just since 2008.

But interestingly the way we have analyzed the data is we believe we're actually growing share. But it's growing share in a smaller business right. So, we've got to continue to even enhance our share wins and which really are against cable in the medium-sized market that's with the (inaudible). We've repriced our bundles. We have re-purposed some of our packages. We have put a new different service elements for example in our medium business sector we are just rolling out a product called Frontier anywhere which is a hosted telephony solution. So no one has to have undrawn [PDX] specialist within each of the businesses.

So -- and that we are partnering with Mitel on. So we are creating our own in-house solutions and partnered solutions to help win in that. Now where we find that, we have seen signs that were starting to stabilize in our small and medium business and we are optimistic about where we are going with that for the rest of the year, we are putting a lot of effort into that sector.

John Jureller

All right. Okay. At this point I would like to open up for the audience, if anybody has any questions out there.

Unidentified Analyst

(Inaudible).

John Jureller

Right.

Unidentified Analyst

(Inaudible).

John Jureller

Right. So the question is to repeat for him, here it is, with a good portion of our customer base at 6 meg, what activities would drive them to reach for higher speeds or the need for higher speeds. And I think for the most part it is about number of devices in the home. It’s about between yourself, one spouse, the kids, it is how many devices you connect with, whether it’s a tablet, whether it’s a smartphone, whether it’s a laptop, that really drives it and also what is driving it during your peak hours.

So if for some reason you are not finding an optimal experience during those peak hours that would probably drive you. You're not really worried if you're -- if you’re in the office or the kids are in school during the hours of 10 in the morning to 2 in the afternoon, I mean that's kind of not where your usage is, it’s what's happening between 4 in the afternoon and 9 at night or 10 at night.

So I think it's a number of connected devices that will really drive that. But again, the good thing for us is that our network is really very robust and well enabled. As I mentioned over about 73% of our market, 74% of our market can get 12 meg speed or better, 53 is at 20 meg speed or better. And that's when I say 20 meg or better, that include -- 10% of our market is [FiOS], so we're at 50, 75 plus meg speed.

But quite frankly is people like, I think they’re entranced by speed, but they really don't know what they need. So we try to have the discussion with them about activities and then say, alright, so let’s give you the capabilities that will help you to do that rather than just market speeds but at a really high price.

Steve Flynn - Morgan Stanley

Any other questions from the audience? Follow-up, go ahead.

Unidentified Analyst

(Inaudible).

John Jureller

We do and even for the small customers, small customers, we're going to start off 30 meg, 40 meg speed and go up from there all the way upto dedicated Ethernet for obviously for our larger enterprise size customers. So, we work with them, we have that same conversation with them every day. And it's really on a even more of the stock basis is that we'll craft solution to what they need and make that offering to them at a very competitive price. And also at the higher level with the higher businesses with quality of service and SLAs as well. So we can deliver sort of a designed product at a guaranteed level of service offering.

Unidentified Analyst

(Inaudible).

John Jureller

We are going to continue. Well, there is couple of things, one is technologies always change. Obviously given Moore’s law, one of the things that works on our benefit is we get better enabled technology at lower prices. But we are going to continue to spend to keep our network very robust; we are going to continue to spend -- to upgrade our markets because as more people come on with more devices as we want capabilities during those peak hours to be able to service everybody at what they want.

So, it’s that capacity where we continue to spend money. We will also spend money too in terms of our geographic reach. Now a lot of that will come from the CAF money that we have already received to continue to build out broadband. 90% of the households in our footprint of the 7.2 million households in our footprint have a wired broadband solution. And obviously we are encouraged through CAF money to continue to build that out and give as many people as we can. Now some places we just economically can’t get to we have a different solution, we have a satellite broadband solution for them that we do sort of use. But we’ll continue to spend our capital and the CAF money to build that expansion as well and then continuous upgrades in our systems, in our back office systems is really important in our call centers, in our network, those are important places for us as we spend our capital.

Steve Flynn - Morgan Stanley

I just want to ask question on M&A, and we had good fireside chat but I’m talking about M&A. You seem to have a different approach than some of your peers. Some of your peers are destined to acquire faster growing assets to boost the top-line whether it’s data centers, [CLACs], fiber providers things like that where you’ve gone more towards peer-to-peer consolidation. Can you talk about why is it? I mean those other assets are very expensive.

John Jureller

They are.

Steve Flynn - Morgan Stanley

Yes.

John Jureller

And perhaps don’t produce the kinds of returns that one hope for, but our strategy has been -- our thought process has been Steve, what is that they create shareholder value for us. There is plenty of revenue out there to buy. If there was all about driving the top-line, we could do that every day. There is not a lack of opportunity. For us it’s what drives shareholder value. Part of the starts with investing and looking in opportunities and businesses that you know because once you buy these things, you actually have to run them.

We’ve found that and this is why the Connecticut opportunity was so attractive for us, it’s in the business that we know today. It’s delivering business in residential, voice, broadband and video. We do that it today, we know how to run and we know how to manage that going forward. So it starts with shareholder value. What is it that perhaps will increase our leverage free cash flow per share, what is it that helps us long-term with our capital structure, what is it that improves our dividend payout ratio, what is it that really helps drive where we want to be. Now, some will argue that perhaps by not broadening this, the scope of what we do, we may be limiting ourselves. But as you say, those scope opportunities come A, at a higher multiple; B, at a lower margin; and C, perhaps at a different CapEx investment profile as well, all of which add up to say unless you are getting a really, really robust and good price, which is for the part of [era], then it just doesn't work from a shareholder value creation perspective.

So, we think that today our head is down in terms of completing the Connecticut transaction, we like it because it fits all those different criteria. And again, we want to be -- make sure that we're responsible owners that we can manage these businesses, when we buy them. That's what drove us to think about what we did in the Verizon transaction, what's driving us around the AT&T transaction, and to the extent that other opportunities may come about, will put that same filter and that same lens on it.

Steve Flynn - Morgan Stanley

Got you. Do you expect to see more divestitures from it?

John Jureller

I don't know. Listen, we're focused on Connecticut right now, we've got another 1.3 million households that we're going to pass, we're trying to get that close, we're going to drive another 400 plus million of EBITDA day one; if I can, all of the synergies that we believe that we can achieve, it's over $525 million of EBITDA. So, we're going to focus on execution there. And whatever opportunities come up, we'll take a look at, but they've really got to be in our sweet spot.

Steve Flynn - Morgan Stanley

Got you. Any other questions from the audience? So, just maybe when we talk about on the video side with the U-verse in Connecticut, so you will just continue to operate that as you did with the Verizon video platform…

John Jureller

That's right. We'll have both platforms running both FiOS and U-verse.

Steve Flynn - Morgan Stanley

And for programming possibly, you also leverage off of AT&T sales or will you have to use some of the independent consortiums or…

John Jureller

No, we buy content today for our FiOS markets. We do it both in one on one negotiation with the content providers as well as through co-operatives. So we'll do the same going forward. So right now, we're in the process of negotiating those licensing agreements for Connecticut, because those content deals that are in Connecticut are really at the AT&T level, so we are negotiating individually and that process has been going fine, no issues there.

Steve Flynn - Morgan Stanley

Okay, any last question?

John Jureller

I think the one last thing Steve that others have been asking me about today is really is on CAF, CAF money going forward and where we think about. And I think the second of CAF, CAF 2 sort of full outline of rules are yet to be written. We are looking at what maybe the capital requirements against any money that we will receive. But obviously perhaps you have seen some of the numbers out there, but even on the equity side your colleagues as put out and that is we think we are going to be a very strong beneficiary of CAF money from a revenue perspective. I think the question is, is what’s the related CapEx commitment associated with it, but on a net basis we see it as a very strong positive for us, not only just during the period of time which we will get that net inflow but bringing on those new customers as well.

And now we think that we are really excited about part two, whether that gets finalized this year or into 2015 yet to be discerned.

Steve Flynn - Morgan Stanley

Okay, great. Well, we’re just about out of time. Thank you very much.

John Jureller

Great. Thanks very much, Steve. Thank you.

Steve Flynn - Morgan Stanley

Okay. Thank you.

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