Verizon Wireless 2007 Annual Report Download - page 35

date. The proposal relating to the merger was approved by the FairPoint
shareowners in August 2007. Both the spin-off and merger are expected
to qualify as tax-free transactions, except to the extent that cash is paid to
Verizon shareowners in lieu of fractional shares.
Based upon the number of shares (as adjusted) and price of FairPoint
commonstock(NYSE:FRP)onthedateoftheannouncementofthe
merger, the estimated total value to be received by Verizon and its shar-
eowners in exchange for these operations was approximately $2,715
million. This consisted of (a) approximately $1,015 million of FairPoint
common stock that was to be received by Verizon shareowners in the
merger, and (b) $1,700 million in value that was to be received by Verizon
through a combination of cash distributions to Verizon and debt securi-
ties issued to Verizon prior to the spin-off. Verizon currently intends to
exchange these newly issued debt securities for certain debt that was
previously issued by Verizon, which would have the effect of reducing
Verizon’s then-outstanding debt. The actual total value to be received
by Verizon and its shareowners will be determined in part based on the
number of shares (as adjusted) and price of FairPoint common stock on
the date of the closing of the merger. This value is now expected to be
less than $2,715 million because (a) FairPoint expects to issue approxi-
mately 54 million shares of common stock in the merger and the price
of FairPoint common stock has declined since the announcement of the
merger (the closing price of FairPoint common stock on the last business
day prior to the announcement of the merger was $18.54 per share) and
(b) in connection with the regulatory approval process, Verizon currently
expects to make additional contributions of approximately $320 million
to the entity that will merge with FairPoint.
Environmental Matters
During 2003, under a government-approved plan, remediation com-
menced at the site of a former Sylvania facility in Hicksville, New York
thatprocessednuclearfuelrodsinthe1950sand1960s.Remediation
beyond original expectations proved to be necessary and a reassessment
of the anticipated remediation costs was conducted. A reassessment of
costs related to remediation efforts at several other former facilities was
also undertaken. In September 2005, the Army Corps of Engineers (ACE)
acceptedtheHicksvillesiteintothe FormerlyUtilizedSitesRemedial
Action Program. This may result in the ACE performing some or all of the
remediation effort for the Hicksville site with a corresponding decrease
in costs to Verizon. To the extent that the ACE assumes responsibility for
remedial work at the Hicksville site, an adjustment to a reserve previously
established for the remediation may be made. Adjustments may also be
made based upon actual conditions discovered during the remediation
at any of the sites requiring remediation.
New York Recovery Funding
In August 2002, President Bush signed the Supplemental Appropriations
bill that included $5.5 billion in New York recovery funding. Of that amount,
approximately $750 million was allocated to cover utility restoration and
infrastructure rebuilding as a result of the September 11th terrorist attacks
on lower Manhattan. These funds will be distributed through the Lower
Manhattan Development Corporation following an application and audit
process. As of September 2004, we had applied for reimbursement of
approximately $266 million under Category One and in 2004 and 2005
we applied for reimbursement of an additional $139 million of Category
Two losses. Category One funding relates to Emergency and Temporary
ServiceResponsewhileCategoryTwofundingisforpermanentrestora-
tion and infrastructure improvement. According to the plan, permanent
restoration is reimbursed up to 75% of the loss. On November 3, 2005, we
received the results of preliminary audit findings disallowing all but $49.9
million of our $266 million of Category One application. On December 8,
OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
Recent Developments
Rural Cellular Corporation
In late July 2007, Verizon Wireless announced that it had entered into an
agreementtoacquireRuralCellularCorporation(RuralCellular),for$45
per share in cash (or approximately $757 million). As a result of the acqui-
sition,VerizonWirelesswillassumeRuralCellular’soutstandingdebt.The
totalvalueofthetransactionisapproximately$2.7billion.RuralCellular
has more than 700,000 customers in markets adjacent to Verizon Wireless’s
existingcustomerserviceareas.RuralCellular’snetworksarelocatedin
the states of Maine, Vermont, New Hampshire, New York, Massachusetts,
Alabama, Mississippi, Minnesota, North Dakota, South Dakota, Wisconsin,
Kansas,Idaho,Washington,and Oregon.RuralCellular’sshareholders
approved the transaction on October 4, 2007. The acquisition, which is
subject to regulatory approvals, is expected to close in the first half of
2008.
In a related transaction, on December 3, 2007, Verizon Wireless signed a
definitive exchange agreement with AT&T. Under the terms of the agree-
ment, Verizon Wireless will receive cellular operating markets in Madison
and Mason, KY, and 10MHz PCS licenses in Las Vegas, NV; Buffalo, NY;
Sunbury-Shamokin and Erie, PA; and Youngstown, OH. Verizon Wireless
will also receive minority interests held by AT&T in three entities in which
Verizon Wireless also holds an interest plus a cash payment. In exchange,
Verizon Wireless will transfer to AT&T six cellular operating markets in
Burlington, Franklin and the northern portion of Addison, VT; Franklin, NY;
and Okanogan and Ferry, WA; and a cellular license for the Kentucky-6
market. The operating markets Verizon Wireless is exchanging are among
thoseitistoacquirefromRuralCellular.TheexchangewithAT&Tissubject
to regulatory approvals and is expected to close in the first half of 2008.
Telephone Access Lines Spin-off
On January 16, 2007, we announced a definitive agreement with FairPoint
that will result in Verizon establishing a separate entity for its local exchange
and related business assets in Maine, New Hampshire and Vermont,
spinning off that new entity into a newly formed company, known as
Northern New England Spinco Inc. (Spinco), to Verizon’s shareowners, and
immediately merging it with and into FairPoint. These local exchange and
business assets are included in Verizon’s continuing operations. It is antici-
pated that as long as all conditions are satisfied and assuming completion
of the related financing transactions, both the spin-off of Spinco to Verizon
shareowners and the merger of Spinco with FairPoint will occur on March
31, 2008. Verizon’s Board of Directors established a record date of March
7, 2008, and a closing date of March 31, 2008, for the proposed spin-off of
shares of Spinco to Verizon shareowners.
During 2007, we recorded pretax charges of $84 million ($80 million after-
tax, or $.03 per diluted share) for costs incurred related to certain network
and work center re-arrangements, the isolation and extraction of related
business information, and other activities to separate the wireline facili-
ties and operations in Maine, New Hampshire and Vermont from Verizon
at the closing of the transaction, as well as professional advisory and legal
fees in connection with this transaction.
Upon the closing of the transaction, Verizon shareowners will own approx-
imately 60 percent of the new company, and FairPoint shareowners will
own approximately 40 percent. Verizon Communications will not receive
any shares in FairPoint as a result of the transaction. In connection with
the merger, Verizon shareowners will receive one share of FairPoint stock
for approximately every 53 shares of Verizon stock held as of the record
33
Management’s Discussion and Analysis
ofFinancialConditionandResultsofOperations continued