Frontier Communications Parent, Inc. - Annual Report: 2019 (Form 10-K)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

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

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (203) 614-5600

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ☐            Accelerated Filer ☒            Non-Accelerated Filer ☐

Smaller Reporting Company ☒            Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2019 was $181,402,000 based on the closing price of $1.75 per share on June 28, 2019. The number of shares outstanding of the registrant’s common stock as of March 27, 2020 was 104,987,947.

DOCUMENT INCORPORATED BY REFERENCE

Items 10, 11, 12, 13 and 14 of Part III will be incorporated by reference from a Form 10K/A to be filed with the Securities and Exchange Commission.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Unless the context indicates otherwise, the use of the terms the "Company,” “we,” “us” or “our” shall refer to Frontier Communications Corporation, and following the Restructuring, the Reorganized Company.

Frontier Communications Corporation (Frontier) is a provider of communications services in the United States, with approximately 4.1 million customers, 3.5 million broadband subscribers and 18,300 employees, operating in 29 states.

In May 2019, Frontier entered into a definitive agreement to sell its operations and associated assets in Washington, Oregon, Idaho, and Montana (Northwest Operations) for $1,352 million, subject to certain closing adjustments, including adjustments for working capital and certain pension and retiree medical liabilities. The sale is expected to close during the first half of 2020, subject to customary closing conditions. In connection with the sale, Frontier has entered into a transition services agreement with the purchaser to provide various network and support services for a minimum of six months following the transaction closing. Approximately 1,000 employees will transition upon the closing of the sale. Revenues for the Northwest Operations represented approximately 7% of consolidated revenue for the year ended December 31, 2019.

Frontier’s Service Territories

(Service territories indicated in red below represent the Northwest Operations)

Recent Developments

Restructuring

The Company engaged in discussions with certain holders of the Company’s unsecured notes that executed confidentiality agreements with the Company (the Unsecured Noteholders) with respect to potential deleveraging or restructuring transactions from January 2020 until the expiration of such agreements and corresponding release of certain confidential information on March 27, 2020. These discussions have included negotiations of the terms and conditions of a financial restructuring (the Restructuring) of the existing debt of, existing equity interests in, and certain other obligations of the Company and certain of its direct and indirect subsidiaries (the Company Parties). The Restructuring is currently expected to be effected pursuant to a plan of reorganization (Plan) to be filed in cases commenced under chapter 11 (Chapter 11 Cases) of the United States Bankruptcy Code (the Bankruptcy Code). Although the Company continues to be open to all discussions with the Unsecured Noteholders regarding a potential Restructuring, there can be no assurance we will reach an agreement with the Unsecured Noteholders in a timely manner, on terms that are attractive to us, or at all. The Company expects to continue to provide quality service to its customers without interruption and work with its business partners as usual during the course of these discussions and any potential transaction.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Our ability to continue as a going concern is dependent upon our ability to consummate the Restructuring and to generate sufficient liquidity from the Restructuring to meet our obligations and operating needs. These factors, among others, create substantial doubt about Frontier’s ability to continue as a going concern.

See “Risk Factors—Risks Related to the Restructuring, Our Indebtedness and Liquidity,” “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview” and “—(b) Liquidity and Capital Resources—Subsequent Events Related to the Restructuring” and Note 23 of the Notes to Consolidated Financial Statements for more information on the Restructuring and the risks related thereto. Refer to “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Recent Developments—Going Concern” and Note 1 of the Notes to Consolidated Financial Statements for further discussion of the Company’s ability to continue as a going concern and Note 9 for further detail of our debt obligations as of and for the year ended December 31, 2019.

Deferral of Interest Payment to Holders of Certain Senior Unsecured Notes

As of December 31, 2019, the Company had outstanding $55 million aggregate principal amount of 8.875% notes due 2020 (the 2020 notes), $2,188 million aggregate principal amount of 10.500% notes due 2022 (the 2022 notes), $3,600 million aggregate principal amount of 11.000% notes due 2025 (the 2025 notes) and $220 million aggregate principal amount of 6.25% notes due 2021 (collectively with the 2020 notes, the 2022 notes and the 2025 notes, the deferred payment senior notes).

On March 16, 2020, we deferred making $322 million in scheduled interest payments due on the deferred payment senior notes and a 60-day grace period commenced under the indentures governing the deferred payment senior notes. We elected to enter into the grace period in order to collaborate with certain Unsecured Noteholders regarding the Restructuring.

The Company has also elected to defer making scheduled interest payments due on April 1, 2020 with respect to certain of its debentures.

See “Risk Factors—Risks Related to the Restructuring, Our Indebtedness and Liquidity—We have elected to defer making interest payments in respect of certain of our senior notes and debentures, which may lead to default under our debt arrangements and which could materially adversely affect our business, operating results and financial condition,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Recent Developments—Going Concern” and "Item 9B Other Information."

Noncompliance with Nasdaq’s Minimum Bid Price Requirement

On December 16, 2019, the Company was notified by The Nasdaq Stock Market (Nasdaq) that it was not in compliance with Nasdaq’s Listing Rule 5450(a)(1), as the minimum bid price of our common stock had been below $1.00 per share for 30 consecutive business days.

Under Nasdaq’s rules, the notification of noncompliance had no immediate effect on the listing or trading of Frontier’s common stock on the Nasdaq Global Select Market under the symbol “FTR”. Under Nasdaq’s rules, we were given 180 days, or until June 15, 2020, to achieve compliance with the minimum bid price requirement. To regain compliance, the minimum bid price of Frontier’s common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days prior to the expiration of the 180-day grace period. Failure to regain compliance during this period could result in delisting. Since we received the notification, our share price has continued to consistently trade under $1.00.

See “Risk Factors—Risks Related to Our Common Stock—If we fail to regain and maintain compliance with the continued listing standards of Nasdaq, or if we file for protection under the federal bankruptcy laws, our common stock may be delisted and have a material adverse effect on our business, results of operations, financial condition, liquidity and stock price.” for more information on the potential delisting of our common stock and the risks related thereto.

Our Customers

We conduct business with both consumer and commercial customers.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

We provide broadband, video, voice and other services and products to our consumer customers. We deliver these services generally over a combination of fiber and copper-based networks.

We provide a broad range of services to our SME customers, including broadband service, ethernet service, traditional circuit-based services, software defined wide area network (SDWAN), managed Wi-Fi and cloud IT solutions, voice and Unified Communications as a Service (UCaaS) services and Voice over Internet Protocol (VoIP). We also offer advanced hardware and network solutions and services.

Services and Products

We offer a broad portfolio of communications services for consumer and commercial customers. These services are offered on either a standalone basis or in a bundled package, depending on each customer’s needs.

Data and internet services: We offer a comprehensive range of broadband and networking services. The principal consumer service we provide is broadband internet. Commercial services include a complete portfolio of ethernet services, dedicated internet, SDWAN, managed Wi-Fi, time division multiplexing data transport services and optical transport services. These services are all supported by 24/7 technical support and an advanced network operations center. We also offer wireless broadband services (through unlicensed spectrum) in select markets utilizing networks that we own or operate.

Video services: We offer video services under FiOS brand in portions of California, Texas, Florida, Indiana, Oregon and Washington, and the Vantage brand in portions of Connecticut, North Carolina, South Carolina, Minnesota, Illinois, New York, and Ohio. We also offer satellite TV video service to our customers under an agency relationship with Dish Network Corp. (“Dish”) in all of our markets.

Voice services: We provide voice services, including data-based VoIP and UCaaS, long-distance and voice messaging services, to consumer and commercial customers in all of our markets. These services are billed monthly in advance. Long-distance service to and from points outside our operating properties are provided by interconnection with the facilities of interexchange carriers. Our long-distance services are billed in advance for unlimited use service and billed in arrears for services on a per minute-of-use basis.

Access services: We offer a range of access services. Our switched access services allow other carriers to use our facilities to originate and terminate their local and long-distance voice traffic. These services are generally offered on a month-to-month basis and the service is billed primarily on a minutes-of-use basis. Switched access charges are based on access rates filed with the Federal Communications Commission (FCC) for interstate services and with the respective state regulatory agency for intrastate services. See “Regulatory Environment” below.

 

Advanced hardware and network solutions: We offer our SME customers various hardware and network solutions utilizing cloud functionality, including end-to-end solutions like cloud managed services and Managed Wireless LAN, as well as providing customer premise equipment (CPE). We offer third-party communications equipment tailored to their specific business needs by partnering with Mitel, Cisco, Ingram Micro, Airbus, Avaya, Hewlett Packard, Adtran and other equipment manufacturers. CPE is typically sold in conjunction with voice, data and Internet services, and may also be sold on a standalone basis.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Network Architecture and Technology

Our local exchange carrier networks consist of host central office and remote sites, primarily equipped with digital and Internet Protocol switches. The outside plant consists of transport and distribution delivery networks connecting our host central office with remote central offices and ultimately with our customers. We own fiber optic and copper cable, which have been deployed in our networks and are the primary transport technologies between our host and remote central offices and interconnection points with other communication carriers.

We have expanded and enhanced our fiber optic and copper transport systems to support increasing demand for high bandwidth transport services. We routinely enhance our network and upgrade with the latest internet protocol transport and routing equipment, reconfigurable optical add/drop multiplexers transport systems, passive optical network, very high speed digital subscriber line broadband equipment, and VoIP switches. These systems support advanced services such as ethernet, dedicated internet, VoIP, and SDWAN. The network is designed with redundancy and auto-failover capability on our major circuits.

We connect to households and business locations in our service territory using a combination of fiber optic, copper and wireless technologies. In some cases we provide direct fiber into a residence or a business premises. In other cases a location is served with a hybrid combination of fiber and copper. Residences in our service territory are served by fiber-to-the-home and by fiber-to-the-node, meaning fiber carries the traffic to an intermediate location where the signals are converted to copper wire for the final delivery to the household. We provide data, video, and voice services to customers over both of these architectures. Additionally, fixed wireless broadband (FWB) will play an important part of our future broadband strategy and is deployed for some business ethernet services. FWB is delivered by the use of an antenna on a Frontier base location and another antenna at the customer location.

Competition

Competition within the communications industry is intense. Technological advances as well as regulatory and legislative changes have enabled a wide range of historically non-traditional communications service providers to compete with traditional providers, including Frontier. More market participants are now competing to meet the communications needs of the same customer base, thus increasing competitive pressures. Many of these service providers are not subject to the same regulations as traditional communications providers and have lower cost structures than we do. The industry has also experienced substantial consolidation in recent years. Many of our competitors are larger, have stronger brand recognition, have more service offerings and have greater financial resources than we currently do. All of these factors create downward pressure on the demand for and pricing of our services. In addition to traditional communication providers we have competition with the following:

Competition for consumer customers is based on price, bandwidth, quality and speed of service, including pricing and promotions as well as bundling of service offerings. Competition comes from other communications providers, cable operators, Competitive Local Exchange Companies (“CLECs”) and other enterprises. Our focus is to improve our customers’ experience through the deployment of efficient responses for their specific needs. This will improve the overall service quality provided and encourage migration to higher speed internet services. Some consumer customers prefer the convenience and discounts available when voice, data, Internet and or video services are bundled by a single provider. To address this demand, we offer satellite TV video service through a partnership with Dish in areas where we don’t otherwise have our own video capabilities.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Competition for commercial customers is also based on price, bandwidth, quality and speed of service, including pricing and promotions and bundled offerings. Competition comes from other communications providers, cable operators, CLECs and other enterprises. As compared to our consumer customers, commercial customers often require more sophisticated and more data-centered solutions (e.g., IP PBX, E911 networks, ethernet and SIP trunking). In order to differentiate ourselves from other service providers, Frontier delivers end-to-end solutions such as cloud managed services and managed wireless LAN.

As customers continue to migrate to OTT video models, broadband is a core growth component for attracting and retaining consumer customers as well as our smaller commercial customers. We are committed to growing our customer base through providing higher broadband speeds and capacity that will enable us to reach new markets, target new customers and grow the business while maximizing our full geographic footprint.

In addition to the focus on our broadband capabilities, we must continue to evolve our other product offerings to stay current with the changing needs of the market, provide strong customer service and support, invest in our network to enable adequate capacity and capabilities, and package our offerings at attractive prices. We are continuing to execute on our initiatives to drive operational performance, invest in our fiber network, add talent to our organization and become a stronger partner to our residential and enterprise customers.

Regulatory Environment

Some of our operations are subject to regulation by the FCC and various state regulatory agencies, often called public service or utility commissions. We expect federal and state lawmakers, the FCC and the state regulatory agencies to continue to revise the statutes and regulations governing communications services.

 

Regulation of our business

We are subject to federal, state and local regulation and we have various regulatory authorizations for our regulated service offerings. At the federal level, the FCC generally exercises jurisdiction over information services, interstate or international telecommunications services and over facilities to the extent they are used to provide, originate or terminate interstate or international services. State regulatory commissions generally exercise jurisdiction over intrastate telecommunications services and the facilities used to provide, originate or terminate those services. Most of our local exchange companies operate as incumbent carriers in the states in which they operate and are certified in those states to provide local telecommunications services. Certain federal and state agencies, including attorneys general, monitor and exercise oversight related to consumer protection issues, including marketing, sales, provision of services, and service charges. In addition, local governments often regulate the public rights-of-way necessary to install and operate networks and may require service providers to obtain licenses or franchises regulating their use of public rights-of-way. Municipalities and other local government agencies also may regulate other limited aspects of our business, by requiring us to obtain cable franchises and construction permits and to abide by applicable building codes.

 

Some state regulatory agencies have substantial oversight over incumbent telephone companies, and their interconnection with competitive providers and provision of non-discriminatory network access to certain network elements to them. Under the Federal Telecommunications Act of 1996, state regulatory commissions have jurisdiction to set certain rates, arbitrate, and review interconnection disputes and agreements between incumbent telephone companies and CLECs, in accordance with rules set by the FCC. The FCC and some state regulatory commissions also impose fees on providers of telecommunications services to support the federal and state universal service programs. Many of the states in which we operate require prior approvals or notifications for certain acquisitions and transfers of assets, customers, or ownership of regulated entities.

Additionally, in some states we are subject to operating restrictions and minimum service quality standards. Failure to meet such restrictions may result in penalties. We also are required to report certain financial information. At the federal level and in a number of the states in which we operate, we are subject to price cap or incentive regulation plans under which prices for regulated services are capped. Some of these plans have limited terms and, as they expire, we may need to renegotiate with various states. These negotiations could impact rates, service quality and/or infrastructure requirements, which could also impact our earnings and capital expenditures. In other states in which we operate, we are subject to rate of return regulation that limits levels of earnings and returns on investments. Approximately 16% of our total access lines as of December 31, 2019 are in state jurisdictions under the rate of return regulatory model. We continue to advocate for no or reduced regulation with the regulatory agencies in those states. In some of the states we operate in we have already been successful in reducing or eliminating price regulation on end-user services.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Federal Regulatory Environment

Frontier, along with all telecommunications providers, is subject to FCC rules governing privacy of specified customer information. Among other things, these rules obligate carriers to implement procedures to: protect specified customer information from inappropriate disclosure; obtain customer permission to use specified information in marketing; authenticate customers before disclosing account information; and annually certify compliance with the FCC’s rules. Although most of these regulations are generally consistent with our business plans, they may restrict our flexibility in operating our business.

Some regulations are, or could in the future be, the subject of judicial proceedings, legislative hearings and administrative proposals or challenges that could change the manner in which the entire industry operates or the way we provide our services. Neither the outcome of any of these developments, nor their potential impact on us, can be predicted at this time. Regulation can change rapidly in the communications industry, and such changes may have an adverse effect on us.

The current status of material regulatory initiatives is as follows:

Connect America Fund (CAF)/Rural Digital Opportunity Fund (RDOF): In 2015, Frontier accepted the FCC’s CAF Phase II offer in 29 states, which provides $332 million in annual support through 2020 (since extended to 2021 under RDOF, see below) in return for the Company’s commitment to make broadband available to approximately 774,000 locations within Frontier’s footprint. This amount includes approximately $19 million in the four states of the Northwest Operations. The CAF Phase II program is intended to provide long-term support for carriers for establishing and providing broadband service with at least 10 Mbps downstream/1 Mbps upstream speeds in high-cost unserved or underserved areas. CAF Phase II support is a successor to the approximately $198 million in annual USF frozen high-cost support that Frontier used to receive prior to CAF II. In addition to the annual support levels, these amounts also include frozen support phasedown amounts in states where the annual CAF II funding is less than the prior annual frozen high-cost support funding. Phasedown funding provided to Frontier was complete as of December 31, 2018.

On January 30, 2020, the FCC adopted an order establishing the RDOF, the next phase of the CAF program. With this order, the FCC plans to hold two auctions totaling $20.4 billion of support over ten years. In the first auction, the FCC plans to offer up to $16 billion in support over ten years ($1.6 billion annually) for an estimated 6 million locations that lack access to speeds of at least 25/3 Mbps based on the FCC’s current maps. After the FCC updates its maps with more granular broadband availability information, the FCC plans to hold a second auction for any remaining locations with the remaining funding, at least $4.4 billion. Recognizing that the RDOF auction is unlikely to conclude before the end of the sixth year of CAF Phase II support (year-end 2020), the order explains that CAF recipients are entitled to a seventh year of CAF Phase II support through 2021, whether or not they are successful in the RDOF auction. The Commission released a public notice tentatively establishing October 22, 2020, as the date for the RDOF auction and is still soliciting technical details on the mechanics of the auction. As such, Frontier will continue to receive annual CAF Phase II support in 2021. While the RDOF has not yet been completely finalized, it could result in a material change in the level of funding that Frontier receives from the FCC under CAF II as early as 2022.

Intercarrier Compensation: In the 2011 Universal Service Fund (USF)/Intercarrier Compensation (ICC) Report and Order (the 2011 Order), the FCC reformed Intercarrier Compensation, which is the payment framework that governs how carriers compensate each other for the exchange of interstate switched traffic and began a multi-year transition to the new rates. The 2011 Order provided for the gradual elimination of effectively all terminating traffic charges by July 2017. The 2011 Order did not resolve all questions on originating access rates and the FCC continues to consider the possibility of a transition of originating access rates, and the potential impact on Frontier from such a change, if any, is unknown at this time. Our total revenue for Intercarrier Compensation was $3 million for the year ended December 31, 2019.

Special Access: On April 20, 2017, the FCC issued an Order (the 2017 Order) that significantly altered how commercial data services are regulated. Specifically, the 2017 Order adopted a test to determine, on a county-by-county basis, whether price-cap ILEC services, such as Frontier’s DS1 and DS3 services, will continue to be regulated. The test resulted in deregulation in a substantial number of our markets and is allowing Frontier to offer its DS1 and DS3 services in a manner that better responds to the competitive marketplace and allows for commercial negotiation. The areas that remain regulated may be subject to price fluctuations depending upon the price cap formula in each year. While multiple parties appealed the 2017 Order, the 8th Circuit issued a decision that upheld the majority of the 2017 Order. As to the part of the decision that was vacated and remanded to the FCC, the FCC has reinstated the deregulation and the FCC’s decision to reaffirm its deregulation has not been appealed.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Intrastate Services: Some state regulatory commissions regulate some of the rates ILECs charge for intrastate services, including originating switched access rates for intrastate access services paid by providers of intrastate long-distance services. Some states also have their own open proceedings to address reform to originating intrastate access charges and other intercarrier compensation and state universal service funds. Although the FCC has pre-empted state jurisdiction on most access charges, some states could consider moving forward with their proceedings. We cannot predict when or how these matters will be decided or the effect on our subsidy or switched access revenues. Our total revenue for Intrastate switched access services was $33 million for the year ended December 31, 2019, spread across all the states we serve.

Current and Potential Internet Regulatory Obligations: On October 1, 2019, the D.C. Circuit Court largely upheld the FCC decision in its 2018 Restoring Internet Freedom Order to reclassify broadband as an “information service.” However, the Court invalidated the FCC’s preemption of a state’s ability to pass their own network neutrality rules and remanded back to the FCC other parts of the 2018 Order. We anticipate that this ruling will be appealed. California’s network neutrality provisions will remain on hold until all appeals of this case have been exhausted. It is unclear whether pending or future appeals will have any impact on the regulatory structure, and it is unclear the degree to which the FCC will preempt state regulation of net neutrality issues.

Spectrum: On September 25, 2019, the FCC released an order scheduling its CBRS (3.5 GHz) auction, in which the FCC will auction 7 blocks of 10 MHz TDD per county, or 22,631 licenses nationwide, to begin on June 25, 2020. Short form applications to participate need to be filed by April 9, 2020. Frontier is evaluating whether to participate in this auction.

Privacy: Privacy-related legislation has been considered in a number of states. Legislative and regulatory action could result in increased costs of compliance, claims against broadband internet access service providers and others, and increased uncertainty in the value and availability of data. On June 28, 2018, the state of California enacted comprehensive privacy legislation that, effective as of January 1, 2020, gives California consumers the right to know what personal information is being collected about them, and whether and to whom it is sold or disclosed, and to access and request deletion of this information. Subject to certain exceptions, it also gives consumers the right to opt-out of the sale of personal information. The law applies the same rules to all companies that collect consumer information.

Coronavirus/COVID-19: On March 13, in response to the COVID-19 pandemic, over 550 providers of critical communications services, including Frontier, took the FCC’s Keep Americans Connected pledge pursuant to which providers agree for the following 60 days (i) not to terminate service to any residential or small business customers because of their inability to pay their bills due to the disruptions caused by the coronavirus pandemic; (ii) waive any late fees that any residential or small business customers incur because of their economic circumstances related to the coronavirus pandemic; and (iii) to open its Wi-Fi hotspots to any American who needs them. We have seen a number of the states we operate in issue executive orders prohibiting the disconnection of services for customers for the length of the state of emergency. State and federal governments continue to ask companies to aid in pandemic response and some are reviewing possibilities of providing additional funding for connectivity, although potential amounts are still unknown. Given the unprecedented and evolving nature of the pandemic and the swift moving response of multiple levels of government, the impact of these changes and potential changes on the Company are unknown at this time.

For information on the tax-related legislative response to the COVID-19 pandemic, see “Risk Factors―Risks Related to the Restructuring, Our Indebtedness and Liquidity―We may not be able to fully utilize our net operating loss and other tax carryforwards.” and “Risks Related to Regulation and Oversight―Tax legislation may adversely affect our business and financial condition.”

Video Programming

Federal, state and local governments extensively regulate the video services industry. Our FiOS and Vantage video brand services are subject to, among other things: subscriber privacy regulations; requirements that we carry a local broadcast station or obtain consent to carry a local or distant broadcast station; rules for franchise renewals and transfers; the manner in which program packages are marketed to subscribers; and program access requirements.

We provide video programming in some of our markets in California, Connecticut, Florida, Illinois, Indiana, Minnesota, New York, North Carolina, Ohio, Oregon, South Carolina, Texas and Washington pursuant to franchises, permits and similar authorizations issued by state and local franchising authorities. Most franchises are subject to termination proceedings in the event of a material breach. In addition, most franchises require payment of a franchise fee as a requirement to the granting of authority.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Many franchises establish comprehensive facilities and service requirements, as well as specific customer service standards and monetary penalties for non-compliance. In many cases, franchises are terminable if the franchisee fails to comply with material provisions set forth in the franchise agreement governing system operations. We believe that we are in compliance and meeting all material standards and requirements. Franchises are generally granted for fixed terms of at least ten years and must be periodically renewed. Local franchising authorities may resist granting a renewal if either past performance or the prospective operating proposal is considered inadequate.

Environmental Regulation

The local exchange carrier subsidiaries we operate are subject to federal, state and local laws and regulations governing the use, storage, disposal of, and exposure to hazardous materials, the release of pollutants into the environment and the remediation of contamination. As an owner and former owner of property, we are subject to environmental laws that could impose liability for the entire cost of cleanup at contaminated sites, including sites formerly owned by us, regardless of fault or the lawfulness of the activity that resulted in contamination. We believe that our operations are in substantial compliance with applicable environmental laws and regulations.

Segment Information

We currently operate in one reportable segment.

Financial Information about Foreign and Domestic Operations and Export Sales

We have no foreign operations.

General

The dollar amount of our order backlog is not a significant consideration in our business and is not a meaningful metric for us. We have no material contracts or subcontracts that may be subject to renegotiation of profits or termination at the election of the federal government.

Intellectual Property

We believe that we have the trademarks, trade names and intellectual property licenses that are necessary for the operation of our business.

We own or have the rights to use various trademarks, service marks and trade names referred to in this report. Solely for convenience, we refer to trademarks, service marks and trade names in this report without the ™, ^SM and ^® symbols. Such references are not intended to indicate, in any way, that we will not assert, to the fullest extent permitted by law, our rights to our trademarks, service marks and trade names. Other trademarks, trade names or service marks appearing in this report are the property of their respective owners.

Employees

As of December 31, 2019, we had approximately 18,300 employees, as compared to approximately 21,200 employees as of December 31, 2018. During 2019, reduction in workforce activities resulted in the severance of approximately 1,200 employees. As of December 31, 2019, approximately 13,100 of our total employees are represented by unions including approximately 1,900 employees covered by collective bargaining agreements that have expired but have been extended and are still effective for 2020. Of the union-represented employees as of December 31, 2019, approximately 4,200 employees are covered by collective bargaining agreements that expire in 2020 and approximately 4,900 employees are covered by collective bargaining agreements that expire in 2021. We consider our relations with our employees to be good. In connection with the sale of the Northwest Operations, we anticipate that we will transfer approximately 1,000 employees, including approximately 800 employees represented by unions.

Available Information

We make available, free of charge on our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as practicable after we electronically file these documents with, or furnish them to, the SEC. These documents may be accessed through our website at www.frontier.com under “Investor Relations.” The information posted or linked on our website is not part of, or incorporated by reference into, this report. We also make our Annual Report available in printed form upon request at no charge.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

We also make available on our website, as noted above, or in printed form upon request, free of charge, our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Specific Code of Business Conduct and Ethics Provisions for Certain Officers, and the charters for the Audit, Compensation, and Nominating and Corporate Governance committees of the Board of Directors. Stockholders may request printed copies of these materials by writing to: 401 Merritt 7, Norwalk, Connecticut 06851 Attention: Corporate Secretary.

Forward-Looking Statements

This Annual Report on Form 10-K contains “forward-looking statements,” related to future events. Forward-looking statements address our expected future business and financial performance and financial condition, and contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “may,” “will,” “would,” or “target.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include, but are not limited to:

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Any of the foregoing events, or other events, could cause our results to vary from management’s forward-looking statements included in this report. You should consider these important factors, as well as the risks set forth under Item 1A. “Risk Factors,” in evaluating any statement in this report or otherwise made by us or on our behalf. We have no obligation to update or revise these forward-looking statements and do not undertake to do so.

Investors should also be aware that while we do, at various times, communicate with securities analysts, it is against our policy to disclose to them selectively any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by an analyst, irrespective of the content of the statement or report. To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Before you make an investment decision with respect to any of our securities, you should carefully consider all the information we have included in this Annual Report on Form 10-K and our subsequent filings with the SEC. In particular, you should carefully consider the risk factors described below and the risks and uncertainties related to “Forward-Looking Statements,” any of which could materially adversely affect our business, operating results, financial condition and the actual outcome of matters as to which forward-looking statements are made in this annual report. The risks and uncertainties described below are not the only ones facing Frontier. Additional risks and uncertainties that are not presently known to us or that we currently deem immaterial or that are not specific to us, such as general economic conditions, may also adversely affect our business and operations. The following risk factors should be read in conjunction with the balance of this annual report, including the consolidated financial statements and related notes included in this report.

Risks Related to the Restructuring, Our Indebtedness and Liquidity

There is no assurance that we will be able to reach an agreement in principle in the form of a Restructuring Term Sheet, enter into the Restructuring Support Agreement, comply with the terms of any Restructuring Support Agreement or successfully complete the Restructuring contemplated thereby, creating substantial doubt about our ability to continue as a going concern.

The Company engaged in discussions with the Unsecured Noteholders with respect to potential deleveraging or restructuring transactions from January 2020 until the expiration of such agreements and corresponding release of certain confidential information on March 27, 2020. These discussions have included negotiations of the terms and conditions of the Restructuring of the existing debt of, existing equity interests in, and certain other obligations of the Company Parties, expected to be set forth in a non-binding Restructuring Term Sheet (Restructuring Term Sheet) and ultimately documented in a binding Restructuring Support Agreement (Restructuring Support Agreement). We have not yet reached an agreement on mutually acceptable terms and conditions with the Unsecured Noteholders regarding a possible transaction.  There can be no assurance that we will be able to reach an agreement-in-principle with respect to a Restructuring Term Sheet or successfully negotiate or enter into a Restructuring Support Agreement on the terms set forth in a Restructuring Term Sheet, or at all.

Our ability to continue as a going concern is dependent upon our ability to consummate the Restructuring and to generate sufficient liquidity from the Restructuring to meet our obligations and operating needs. If the Company enters into a Restructuring Term Sheet and a Restructuring Support Agreement, we expect there will be certain material conditions we must satisfy, including the timely satisfaction of specified milestones related to the solicitation of votes to approve a Plan, commencement of Chapter 11 Cases under the Bankruptcy Code, confirmation of a Plan, consummation of a Plan, and the entry of orders relating to any DIP Facility (as defined herein). Our ability to timely complete such milestones required to consummate the Restructuring is subject to risks and uncertainties many of which are beyond our control. These factors, together with the Company’s limited liquidity, recurring losses from operations and accumulated deficit, create substantial doubt about Frontier’s ability to continue as a going concern. There can be no assurance that we will be able to successfully consummate the Restructuring on the terms set forth in a Restructuring Term Sheet, a Restructuring Support Agreement, or at all, or realize all or any of the expected benefits from the Restructuring.

See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview” and “—(b) Liquidity and Capital Resources—Subsequent Events Related to the Restructuring” and Note 23 of the Notes to Consolidated Financial Statements for more information on the Restructuring and the risks related thereto. Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Overview—Going Concern” and Note 1 of the Notes to Consolidated Financial Statements for further discussion of the Company’s ability to continue as a going concern and Note 9 for further detail of our debt obligations as of and for the year ended December 31, 2019.

We may seek the protection of the Bankruptcy Court, which would subject us to the risks and uncertainties associated with bankruptcy and may harm our business and place our equity holders at significant risk of losing all of their investment in the Company.

If we seek the protection of the Bankruptcy Court, our operations and ability to develop and execute our business plan, and our ability to continue as a going concern, are subject to the risks and uncertainties associated with bankruptcy. As such, seeking Bankruptcy Court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. During any Chapter 11 Cases, our senior management would be required to spend a significant amount of time and effort attending to the Restructuring instead of focusing exclusively on our business operations. Bankruptcy Court protection also might make it more difficult to retain management and other employees necessary to the success and growth of our business.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Other significant risks include the following:

Delays in Chapter 11 Cases increase the risks of our being unable to reorganize our business and emerge from bankruptcy and increase our costs associated with the bankruptcy process.

Although we expect the confirmation of a Plan will be effected through an orderly plan of reorganization, there can be no assurance that we will be able to implement such a Plan. In order for any proposed plan of reorganization to be confirmed, the Bankruptcy Code, in addition to other legal requirements, requires that at least one impaired class of claims votes to accept the plan of reorganization. In order for a class of creditors to approve a plan of reorganization, the plan must be approved by more than one-half of the total number of claim holders and at least two-thirds in claim amount by those who vote within the class. In addition to obtaining the required votes, the requirements for a Bankruptcy Court to approve a plan of reorganization include, among other judicial findings, that:

In the event there are any impaired classes of claims that do not vote to accept the plan of reorganization, we would have to satisfy the “cram down” requirements of the Bankruptcy Code and show that the plan of reorganization does not unfairly discriminate and is fair and equitable with respect to those classes of claims that did not vote to accept the plan of reorganization.

Furthermore, we may not be able to obtain approval of a disclosure statement and/or the required votes or the required judicial approval to a Plan promptly, if at all. In such event, a prolonged bankruptcy proceeding could adversely affect our relationships with customers, suppliers, regulators and employees, among other parties, which in turn could adversely affect our business, competitive position, financial condition, liquidity and results of operations and our ability to continue as a going concern. A weakening of our financial condition, liquidity and results of operations could adversely affect our ability to implement a Plan. In addition, if a Plan is not confirmed by the Bankruptcy Court, we may be forced to liquidate our assets.

If we pursue any Chapter 11 Cases, it is also possible that the Bankruptcy Court may dismiss the proceeding or otherwise decide to abstain from hearing it on procedural grounds. In addition, the confirmation and effectiveness of a Plan is subject to certain conditions and requirements in addition to those described above that may not be satisfied, and the Bankruptcy Court may conclude that the requirements for confirmation and effectiveness have not been satisfied.

If we are unable to enter into a Restructuring Support Agreement or if a Restructuring Support Agreement is terminated, our ability to confirm and consummate the Plan may be materially and adversely affected.

Even if we are able to reach an agreement-in-principle with respect to a Restructuring Term Sheet, the final terms of the Restructuring Term Sheet would remain subject to documentation in a binding Restructuring Support Agreement. There can be no assurance that we will be able to successfully negotiate or enter into a Restructuring Support Agreement on the terms set forth in a Restructuring Term Sheet or at all. If we are unable to enter into a Restructuring Support Agreement, there can be no assurance we will be able to successfully negotiate for an alternative orderly pre-negotiated plan of reorganization.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Furthermore, we expect any Restructuring Support Agreement will contain a number of termination events, some of which would give any consenting Unsecured Noteholders the right to terminate such Restructuring Support Agreement, which could adversely affect our ability to confirm and consummate a Plan. If a Plan is not consummated, there can be no assurance that we would be able to enter into a new plan or that any new plan would be as favorable to holders of claims as a Plan contemplated by a Restructuring Support Agreement. In addition, any Chapter 11 Cases may become protracted, which could significantly and detrimentally impact our relationships with our suppliers, service providers, customers, employees, and other third parties.

We may not be able to obtain confirmation of the Plan.

There can be no assurance that a Plan as outlined in a Restructuring Term Sheet (or any other plan of reorganization) will be approved by the Bankruptcy Court. The success of any reorganization will depend on approval by the Bankruptcy Court and the willingness of existing debt and security holders to agree to the exchange or modification of their interests as outlined in a Plan, and there can be no guarantee of success with respect to a Plan or any other plan of reorganization. For instance, we might receive objections to confirmation of a Plan from various stakeholders in any Chapter 11 Cases. We cannot predict the impact that any objection might have on a Plan or on a Bankruptcy Court’s decision to confirm a Plan. Any objection may cause us to devote significant resources in response which could materially and adversely affect our business, financial condition and results of operations.

There can be no assurance as to whether we will successfully reorganize and emerge from any Chapter 11 Cases or, if we do successfully reorganize, as to when we would emerge from any Chapter 11 Cases. If we are unable to successfully reorganize, we may not be able to continue our operations.

Our limited liquidity could materially and adversely affect our business operations.

We require certain capital resources in order to operate our business and our limited liquidity could materially and adversely affect our business operations. We are highly leveraged, and a substantial portion of our liquidity needs will arise from debt service on our outstanding indebtedness and from funding the costs of operations, working capital and capital expenditures. Our $850 million revolving credit facility is fully utilized as of the date of filing and our access to capital and debt markets is significantly limited. A number of factors, including but not limited to, losses of customers, pricing pressure from increased competition, lower subsidy and switched access revenues, and the impact of economic conditions may negatively affect our cash generated from operations. As of December 31, 2019, we had $245 million and $327 million of long-term debt maturing in 2020 and 2021, respectively, excluding interest obligations. In connection with the Restructuring, we expect to enter into a DIP Facility. While we anticipate being able to obtain a DIP Facility, there can be no assurance we can enter into such a facility of the expected terms or at all, nor any assurance that we would have sufficient liquidity from any DIP Facility and other future indebtedness to fund our operations and consummate the Restructuring.

See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview” and “—(b) Liquidity and Capital Resources—Subsequent Events Related to the Restructuring” for more information on the Restructuring and our liquidity. Refer to Note 9 to Consolidated Financial Statements for further detail of our debt obligations as of and for the year ended December 31, 2019.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

We expect that the terms of any DIP Facility  or other future indebtedness (including any exit financing to consummate the Restructuring) would contain a number of restrictive covenants that would impose certain operating and other restrictions. Such covenants may, among other things, limit our ability and the ability of certain of our subsidiaries to:

In addition, any DIP Facility or future indebtedness may require us to comply with specified covenants, including financial ratios. These restrictions on our ability to operate our business could harm our business by, among other things, limiting our ability to take advance of financings, mergers, acquisitions and other corporate opportunities.

Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants. Failure to comply with any of the covenants in our future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity of the debt under these agreements and to foreclose upon any collateral securing the debt.

The negotiations regarding the Restructuring have consumed and will continue to consume a substantial portion of the time and attention of our management, which may have an adverse effect on our business and results of operations, and we may face increased levels of employee attrition.

Our management has spent, and will continue to be required to spend, a significant amount of time and effort focusing on the Restructuring. This diversion of attention may have a material adverse effect on the conduct of our business, and, as a result, on our financial condition and results of operations, particularly if the Restructuring is protracted. During the pendency of the Restructuring, our employees will face considerable distraction and uncertainty and we may experience increased levels of employee attrition. A loss of key personnel or material erosion of employee morale could have a materially adverse effect on our ability to meet customer expectations, thereby adversely affecting our business and results of operations. The failure to retain or attract members of our management team and other key personnel could impair our ability to execute our strategy and implement operational initiatives, thereby having a material adverse effect on our financial condition and results of operations. Likewise, we could experience losses of customers who may be concerned about our ongoing long-term viability.

We have elected to defer making interest payments in respect of certain of our senior notes and debentures, which may lead to default under our debt arrangements and which could materially adversely affect our business, operating results and financial condition.

We elected to defer making the interest payments of approximately $322 million due on March 16, 2020 with respect to certain of our senior notes and approximately $6.8 million due on April 1, 2020 with respect to certain of our debentures. The indentures governing those senior notes and debentures provide for a 60-day grace period prior to the exercise of remedies by holders for defaults related to missed interest payments. If we do not make these interest payments for the notes by May 15, 2020 or if we do not make any required principal payments required under the indentures governing our notes, an event of default would occur under the applicable indentures, which would give the trustee or the holders of at least 25% of principal amount the option to accelerate maturity of the principal, plus any accrued and unpaid interest on such notes. If we do not make these interest payments for the debentures by May 31, 2020 or if we do not make any required principal payments required under the indentures governing our debentures, an event of default would occur under the applicable indentures, which would give the trustee or the holders of at least a majority of the principal amount the option to accelerate maturity of the principal, plus any accrued and unpaid interest on such debentures. This acceleration of our debt could materially adversely affect our business, operating results and financial condition.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Frontier is primarily a holding company and, as a result, we rely on the receipt of funds from our subsidiaries in order to meet our cash needs and service our indebtedness.

Frontier is primarily a holding company and our principal assets consist of the shares of capital stock or other equity instruments of our subsidiaries. As a holding company, we depend on dividends, distributions and other payments from our subsidiaries to fund our obligations. We cannot assure you that the operating results of our subsidiaries at any given time will be sufficient to make dividends, distributions or other payments to us in order to allow us to make payments on our indebtedness. In addition, the payment of these dividends, distributions and other payments, as well as other transfers of assets, between our subsidiaries and from our subsidiaries to us may be subject to legal, regulatory or contractual restrictions. Some state regulators have imposed, and others may consider imposing on regulated companies, including us, cash management practices that could limit the ability of such regulated companies to transfer cash between subsidiaries or to the parent company. While none of the existing state regulations materially affects our cash management, any changes to the existing regulations or imposition of new regulations or restrictions may materially adversely affect our ability to transfer cash within our consolidated companies.

In certain instances, any Chapter 11 Cases may be converted to a case under Chapter 7 of the Bankruptcy Code.

Following the commencement of any Chapter 11 Cases, upon a showing of cause, the Bankruptcy Court may convert such Chapter 11 Cases to cases under Chapter 7 (Chapter 7) of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. We believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to our creditors than those provided for in a Plan because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than a controlled manner and as a going concern, (ii) additional administrative expenses involved in the appointment of a Chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.

Upon emergence from bankruptcy, our historical financial information may not be indicative of our future financial performance.

Our capital structure will likely be significantly altered under a Plan or any other plan of reorganization ultimately confirmed by the Bankruptcy Court. Under fresh-start reporting rules that may apply to us upon the effective date of a plan of reorganization, our assets and liabilities would be adjusted to fair value and our accumulated deficit would be restated to zero. Accordingly, if fresh-start reporting rules apply, our financial condition and results of operations following our emergence from Chapter 11 would not be comparable to the financial condition and results of operations reflected in our historical consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in our historical consolidated financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.

Upon our emergence from bankruptcy, the composition of our Board of Directors will likely change significantly.

Under a Plan, the composition of our Board of Directors will likely change significantly. Any new directors are likely to have different backgrounds, experiences and perspectives from those individuals who previously served on our Board of Directors and, thus, may have different views on the issues that will determine the future of the Company. As a result, the future strategy and plans of the Company may differ materially from those of the past.

We expect to make contributions to our pension plan in future years, the amount of which will be impacted by volatility in asset values related to Frontier’s pension plan and/or changes in pension plan assumptions.

We made contributions of $166 million and $150 million to our pension plan in 2019 and 2018, respectively, and we expect to continue to make contributions in future years. Volatility in our asset values, liability calculations, or returns may impact the costs of maintaining our pension plan and our future funding requirements. Any future material contribution could have a negative impact on our liquidity by reducing cash flows.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Significant changes in discount rates, rates of return on pension assets, mortality tables and other factors could adversely affect our earnings and equity and increase our pension funding requirements.

Pension costs and obligations are determined using actual results as well as actuarial valuations that involve several assumptions. The most critical assumptions are the discount rate, the long-term expected return on assets and mortality tables. Other assumptions include salary increases, lump sum payments, and retirement age. Some of these assumptions, such as the discount rate and return on pension assets, are reflective of economic conditions and largely out of our control. Changes in the pension assumptions could adversely affect our earnings, equity and funding requirements.

We may not be able to fully utilize our net operating loss and other tax carryforwards.

As of December 31, 2019, we had federal net operating loss (NOLs) carryforwards of approximately $1.6 billion and state NOL carryforwards of approximately $9.8 billion. However, our ability to utilize these NOLs to offset taxable income may be limited in the future.

A corporation that undergoes an “ownership change” is typically subject to limitations on its ability to utilize its pre-ownership change NOLs to offset future taxable income. In general, under the U.S. Internal Revenue Code (IRC), an ownership change occurs if the aggregate stock ownership of certain stockholders (generally 5% stockholders, applying certain look-through and aggregation rules) increases by more than 50 percentage points over such stockholders’ lowest percentage ownership during the testing period (generally three years). Purchases or sales of our common stock in amounts greater than specified levels could create a limitation on our ability to utilize our NOLs for tax purposes in the future. Limitations imposed on our ability to utilize NOLs could cause U.S. federal and state income taxes to be paid earlier than would be paid if such limitations were not in effect.

Furthermore, we may not be able to generate sufficient taxable income to utilize our NOLs before they expire. In addition, NOLs incurred in one state generally are not available to offset income earned in a different state and there may be periods during which the use of NOLs is suspended or otherwise limited for state tax purposes, which could accelerate or permanently increase state taxes owed.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company is currently evaluating the impact of the CARES Act, but at present does not expect that the NOL carryback provision of the CARES Act would result in a material cash benefit to us.

In an effort to safeguard our NOLs, our Board of Directors adopted a shareholder rights plan in July 2019, under which Frontier’s shareholders of record as of the close of business on July 11, 2019 received one preferred share purchase right for each share of common stock outstanding. Pursuant to the rights plan, if a shareholder (or group) acquires beneficial ownership of 4.9 percent or more of the outstanding shares of Frontier’s common stock without prior approval of our Board of Directors or without meeting certain customary exceptions, the rights would become exercisable and entitle shareholders (other than the acquiring shareholder or group) to purchase additional shares of Frontier at a significant discount and result in significant dilution in the economic interest and voting power of the acquiring shareholder or group. Although the rights plan is intended to reduce the likelihood of an “ownership change” that could adversely affect us, there is no assurance that the restrictions on transferability in the rights plan will prevent all transfers that could result in an “ownership change”.

We expect to request that the Bankruptcy Court approve restrictions on certain transfers of our stock to limit the risk of an “ownership change” prior to the consummation of our restructuring in any Chapter 11 Cases. In addition, we anticipate that pursuant to a Restructuring Support Agreement, any consenting Unsecured Noteholders will agree not to transfer their shares of Frontier’s stock to the extent doing so would violate the terms of any order entered by the Bankruptcy Court with respect to preservation of NOLs.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

The impact of the Restructuring on the Company’s NOLs will depend on whether the Restructuring is structured as (i) a taxable disposition of substantially all of the assets and/or subsidiary stock of the Company, (ii) a recapitalization of the Company, or (iii) some other alternative structure. If structured as a taxable disposition, we anticipate that NOLs of the Company (if any) remaining after the Restructuring will not be available to the Reorganized Company. If structured as a recapitalization, we anticipate that the Company will experience an ownership change, and thus NOLs of the Company (if any) remaining after the Restructuring will be subject to limitation, such that the Reorganized Company may not derive all of the benefits of any such remaining NOLs. While not free from doubt, we expect that the Restructuring will be structured as a taxable disposition, in which case the Company’s NOLs will not be available to the Reorganized Company.

Risks Related to Our Business

We have experienced declining revenues and may experience further declines in our revenues going forward.

We have experienced declining revenues as a result of declining voice services revenues, lower switched and nonswitched access revenues and declining video and data services revenues. Such declines have been driven primarily by customer losses, changing technology and consumer behavior (such as wireless displacement of wireline use, e-mail use, instant messaging and increasing use of VoIP), increased competition, regulatory constraints and financial decisions by governmental authorities. There can be no assurances that we will be able to stabilize or increase our revenues in the future. Future declines in our revenues could materially and adversely impact our ability to execute on our business strategy, comply with our financial covenants, repay our debts as they become due, negotiate with third parties or attract and retain employees.

We face intense competition.

The communications industry is extremely competitive. Through mergers and various service expansion strategies, service providers are striving to provide integrated solutions both within and across geographic markets. Our competitors include CLECs, internet service providers, wireless companies, OTT, VoIP providers and cable companies, some of which may be subject to less regulation than we are. These entities may provide services competitive with the services that we offer or intend to introduce. For example, our competitors may seek to introduce networks in our markets that are competitive with or superior to our copper-based networks in those markets. We also believe that wireless and cable providers have increased their penetration of various services in our markets. We expect that competition will remain robust. Our revenue and cash flow will be adversely impacted if we cannot reverse our customer losses or continue to provide high-quality services.

We cannot predict which of the many possible future technologies, products or services will be important in order to maintain our competitive position or what expenditures will be required to develop and provide these technologies, products or services. Our ability to compete successfully will depend on the effectiveness of capital expenditure investments in our properties, our marketing efforts, our ability to deliver high quality customer service, our ability to anticipate and respond to various competitive factors affecting the industry, including a changing regulatory environment that may affect our business and that of our competitors differently, new services that may be introduced, changes in consumer preferences, or habits, demographic trends, economic conditions and pricing strategies by competitors. Increasing competition may reduce our revenues and increase our marketing and other costs as well as require us to increase our capital expenditures and thereby decrease our cash flows.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

We may be unable to meet the technological needs or expectations of our customers and may lose customers as a result.

The communications industry is subject to significant changes in technology and replacing or upgrading our infrastructure to keep pace with such technological changes could result in significant capital expenditures. If we do not replace or upgrade technology and equipment and manage broadband speeds and capacity as necessary, we may be unable to compete effectively because we will not be able to meet the needs or expectations of our customers.

In addition, enhancements to product offerings may influence our customers to consider other service providers, such as cable operators or wireless providers. We may be unable to attract new or retain existing customers from cable companies due to their deployment of enhanced broadband and VoIP technology. In addition, new capacity services for wireless broadband technologies may permit our competitors to offer broadband data services to our customers throughout most or all of our service areas. Any resulting inability to attract new or retain existing customers could adversely impact our business and results of operations in a material manner.

Some of our competitors have superior resources, which may place us at a disadvantage.

Some of our competitors have market presence, engineering, technical, marketing and financial capabilities which are substantially greater than ours. In addition, some of these competitors have significantly less debt and are able to raise capital at a lower cost than we are able to. Consequently, some of these competitors may be able to develop and expand their communications and network infrastructures more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, including leading edge technologies such as artificial intelligence, machine learning and various types of data science, as well as take advantage of acquisition and other opportunities more readily and devote greater resources to the marketing and sale of their products and services than we will be able to. Additionally, the greater brand name recognition of some competitors may require us to price our services at lower levels in order to retain or obtain customers. Finally, the cost advantages and greater financial resources of some of these competitors may give them the ability to reduce their prices for an extended period of time if they so choose. Our business and results of operations may be materially adversely impacted if we are not able to effectively compete.

Weak economic conditions and disruptions in our industry may decrease demand for our services, necessitate increased discounts and have a material adverse effect on our business and financial performance.

We could be adversely impacted by weak economic conditions or their effects. The economy may be adversely impacted by unforeseen events beyond our control including incidents of actual or threatened terrorism, regional hostilities or instability, unusual weather patterns, natural disasters, political instability and health concerns (including epidemics or pandemics, such as the ongoing COVID-19 pandemic described below), defaults on government debt, significant increases in fuel and energy costs, tax increases and other matters that could reduce discretionary spending, tightening of credit markets and declines in consumer confidence. Downturns in the economy and competition in our markets have in the past, and could in the future, cause some of our customers to reduce or eliminate their purchases of our basic and enhanced voice services, broadband and video services and make it difficult for us to obtain new customers or retain existing customers. In addition, if economic conditions are depressed, our customers may delay or discontinue payment for our services or seek more competitive pricing from other service providers, or we may be required to offer increased discounts in order to retain our customers, which could have a material adverse effect on our business or results of operations.

In December 2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China. The World Health Organization has declared COVID-19 a pandemic and public health emergency of international concern. In March 2020, the President of the United States declared a State of National Emergency due to the COVID-19 outbreak. Other countries affected by the outbreak took similar measures. Many jurisdictions, particularly in North America (including the United States), Asia and Europe and several states in which we operate, including California, New York, Connecticut and others, have adopted or are considering laws, rules, regulations or decrees intended to address the COVID-19 outbreak, including implementing travel restrictions, closing non-essential businesses and/or restricting daily activities. In addition, many communities have limited, and are considering to further limit, social mobility and gathering. As the COVID-19 pandemic develops, governments, corporations and other authorities may continue to implement restrictions or policies that adversely impact consumer spending, the economy and our business, operations and stock price.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

The ultimate extent and long-term effects of epidemics and other public health crises, such as the ongoing COVID-19 pandemic, to the economy and the Company are difficult to assess or predict. This may include, risks to employee health and safety, risks for the deployment and maintenance of our services (including by limiting our customer support and domiciliary service repairs and installations, among other effects resulting from public health and government measures), reduced sales in impacted geographic locations, inability to meet increased customer demand for broadband services or bandwidth utilization, reduced ability of our suppliers and vendors to provide products and services to us, disruptions in payment processing services, a further decline in the market price of our common stock, a prolonged economic downturn and deterioration of the economy and/or consumer and commercial spending, any of which could adversely and materially affect our business, results of operations and/or financial condition. For example, certain of our existing customers, including SME customers as well as wholesale customers, are experiencing or will experience material disruptions to their income or businesses and may be unable to satisfy their obligations with us as a result. In addition, the broader impacts of the pandemic on the U.S. economy, including job losses and the impact on capital markets, may result in a decline in consumer spending and negatively impact the demand for our services. Furthermore, given the prevalence and severity of COVID-19 across communities where we have offices, network operations centers, data centers, call centers and retail stores, we have enabled certain of our employees to work from home or not report to a Company location, like many other companies. The extent to which our employees can effectively and efficiently perform their jobs under these circumstances is uncertain. Should this situation persist for a prolonged period of time, it may have an adverse impact on our employees’ ability to carry out their duties, which could negatively impact our operations. Certain jurisdictions have imposed or may impose further restrictions on the movement of people and/or goods, including the temporary closure of factories, businesses and public spaces. Any delay in production or delivery of our products or components made in such jurisdictions by our suppliers due to an extended closure of our supplier’s plants or other restrictions imposed to limit the spread of COVID-19 could adversely impact our business.

We rely on network and information systems and other technology, and a disruption or failure of such networks, systems or technology as a result of computer viruses, cyber-attacks, misappropriation of data or other malfeasance, as well as outages, accidental releases of information or similar events, may disrupt our business and materially impact our results of operations, financial condition and cash flows.

Our information technology networks and infrastructure may be subject to damage, disruptions or shutdowns due to computer viruses, cyber-attacks or breaches, employee or third-party error or malfeasance, power outages, communication or utility failures, systems failures, natural disasters or other catastrophic events.

Further, our network and information systems are subject to various risks related to third parties and other parties we may not fully control. We use encryption and authentication technology licensed from third parties to provide secure transmission of confidential information, including our business data and customer information. Similarly, we rely on employees in our network operations centers, data centers, call centers and retail stores to follow our procedures when handling sensitive information. While we select our third-party business partners and employees carefully, we do not always control their actions, which could expose us to cyber-security risks. In addition, our customers using our network to access the Internet may become victim to malicious and abusive Internet activities, such as unsolicited mass advertising (or spam), peer-to-peer file sharing, distribution of viruses, worms and other destructive or disruptive software; these activities could adversely affect our network, result in excessive call volume at our call centers and damage our or our customers’ equipment and data.

While we maintain security measures, disaster recovery plans and business continuity plans for our business and are continuously working to upgrade our existing technology systems and provide employee training around the cyber risks we face, these risks are constantly evolving and are challenging to mitigate. Like many companies, we are the subject of increasingly frequent cyber-attacks. Any unauthorized access, computer viruses, accidental or intentional release of confidential information or other disruptions could result in misappropriation of our or our customers’ sensitive information; financial loss; reputational harm; increased costs, such as those relating to remediation or future protection; customer dissatisfaction, which could lead to a decline in customers and revenue; and legal claims or proceedings, fines and other liabilities. There can be no assurance that the impact of such incidents would not be material to our results of operations, financial condition or cash flows.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Our business is sensitive to continued relationships with and the creditworthiness of our wholesale customers.

We have substantial business relationships with other communications carriers for which we provide service. We seek to maintain and grow our business with these customers, however we face competition for this wholesale business. While bankruptcies or insolvency of communications carriers have not had a material adverse effect on our business in recent years, future bankruptcies or insolvencies in the industry could result in the loss of significant customers, as well as cause more price competition and an increased allowance for doubtful accounts receivable. Such bankruptcies and insolvencies may be more likely in the future if economic conditions stagnate. Additionally, the Restructuring may make our business partners less willing to do business with us and could negatively impact our business. As a result, our revenues and results of operations could be materially and adversely affected.

A significant portion of our workforce is represented by labor unions.

Approximately 72% of our total employees were represented by unions and were subject to collective bargaining agreements. As of December 31, 2019, approximately 32% of the unionized workforce are covered by collective agreements that expire in 2020 and approximately 37% of the unionized workforce are covered by collective bargaining agreements that expire in 2021.

We cannot predict the outcome of negotiations of the collective bargaining agreements covering our employees. If we are unable to reach new agreements or renew existing agreements, employees subject to collective bargaining agreements may engage in strikes, work slowdowns or other labor actions, which could materially disrupt our ability to provide services. New labor agreements or the renewal of existing agreements may impose significant new costs on us, which could adversely affect our financial condition and results of operations in the future.

If we are unable to hire or retain key personnel, we may be unable to operate our business successfully.

Our success will depend in part upon the continued services of our management team. We cannot guarantee that our key personnel will not leave or compete with us. The loss, incapacity or unavailability for any reason of key members of our management team could have a material impact on our business. In addition, the Restructuring may make it more difficult for us to attract and retain management and other key personnel, which could impair our ability to execute our strategy and implement operational initiatives, thereby having a material adverse effect on our financial condition and results of operations.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Negotiations with the providers of content for our video systems may not be successful, potentially resulting in our inability to carry certain programming channels on our FiOS and Vantage brand video systems, which could result in the loss of subscribers. Alternatively, because of the power of some content providers, we may be forced to pay an increasing amount for some content, resulting in higher expenses and lower profitability.

We must negotiate with the content owners of the programming that we carry on our multichannel video systems (marketed as FiOS video and Vantage video brands). These content owners are the exclusive provider of the channels they offer. If we are unable to reach a mutually-agreed contract with a content owner, including pricing and carriage provisions, our existing agreements to carry this content may not be renewed, resulting in the blackout of these channels. The loss of content could result in our loss of customers who place a high value on the particular content that is lost. In addition, many content providers own multiple channels. As a result, we typically have to negotiate the pricing for multiple channels rather than one and carry and pay for content that customers do not value, in order to have access to other content that customers do value. Some of our competitors have materially larger scale than we do, and may, as a result, be better positioned than we are in such negotiations. As a result of these factors, the expense of content acquisition may continue to increase, and this could result in higher expenses and lower profitability.

We are subject to a significant amount of litigation, which could require us to pay significant damages or settlements.

We are party to various legal proceedings, including, from time to time, individual actions, class and putative class actions, and governmental investigations, covering a wide range of matters and types of claims including, but not limited to, general contract disputes, billing disputes, rights of access, taxes and surcharges, consumer protection, advertising, sales and the provision of services, trademark and patent infringement, employment, regulatory, tort, claims of competitors and disputes with carriers. Litigation is subject to uncertainty and the outcome if individual matters is not predictable. We may incur significant expenses in defending these lawsuits. In addition, we may be required to pay significant awards or enter into settlements with governmental or other entities which impose significant financial and business remediation measures.

We rely on a limited number of key suppliers and vendors.

We depend on a number of suppliers and vendors for equipment and services relating to our network infrastructure, including network elements such as digital and internet protocol switching and routing equipment, optical and copper transmission equipment, broadband connectivity equipment, various forms of customer premise equipment, optical fiber, wireless equipment, as well as the software that is used throughout our network to manage traffic, network elements, and other functions critical to our operations. If any of our major suppliers were to experience disruption, supply-chain interruptions, financial difficulties, or other unforeseen problems delivering, maintaining, or servicing these network components on a timely basis, our operations could suffer significantly. For example, the ongoing COVID-19 pandemic may affect the ability of our suppliers and vendors to provide products and services to us and may adversely impact our operations. In addition, due to changes in the communications industry, the suppliers of many of these products and services have been consolidating. In the event it were to become necessary to seek alternative suppliers and vendors, we may be unable to obtain satisfactory replacement supplies, services, or utilities on economically-attractive terms, on a timely basis, or at all, which could increase costs or cause disruptions in our services.

Risks Related to Regulation and Oversight

Changes in federal or state regulations may reduce the switched access charge revenues we receive.

A portion of Frontier’s total revenues ($102 million, or 1% in 2019 and $121 million, or 1%, in 2018) are derived from switched access charges paid by other carriers for services we provide in originating intrastate and interstate long-distance traffic. Frontier expects a portion of our revenues will continue to be derived from switched access charges paid by these carriers for these services. The rates Frontier can charge for switched access are regulated by the FCC and state regulatory agencies.

In 2011, the FCC adopted the 2011 Order regarding Intercarrier Compensation, which is the payment framework that governs how carriers compensate each other for the exchange of voice traffic between carriers. However, the 2011 Order did not resolve all questions on Intercarrier Compensation. The FCC continues to consider the possibility of transitioning originating access rates in the future. We cannot predict when or how the FCC would implement any changes originating access rates, and future reductions in these revenues may directly affect our profitability and cash flows.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

In April 2017, the FCC issued an order that resulted in substantial deregulation in a number of our markets for special access services where the market is determined to be competitive and the transport market nationwide. While some aspects of the 2017 Order were appealed by stakeholders the 8^th Circuit issued a decision that upheld the majority of the 2017 Order. The FCC has since reaffirmed the portions of the 2017 Order that were vacated and no party appealed the FCC’s second decision.

Certain states also have their own open proceedings to address reform to originating intrastate access charges, other intercarrier compensation, and state universal service funds. Although the FCC has pre-empted state jurisdiction on most access charges, many states could consider moving forward with their proceedings. We cannot predict when or how these matters will be decided or the effect on our subsidy or switched access revenues. However, future reductions in our subsidy or switched access revenues may directly affect our profitability and cash flows as those regulatory revenues do not have an equal level of associated variable expenses.

On January 30, 2020, the FCC adopted an order establishing RDOF, the next phase of the CAF program. With this order, the FCC plans to hold two auctions totaling $20.4 billion of support over ten years. In the first auction, the FCC plans to offer up to $16 billion in support over ten years ($1.6 billion annually) for an estimated 6 million locations that lack access to speeds of at least 25/3 Mbps based on the FCC’s current maps. After the FCC updates its maps with more granular broadband availability information, the FCC plans to hold a second auction for any remaining locations with the remaining funding, at least $4.4 billion. Recognizing that the RDOF auction is unlikely to conclude before the end of the sixth year of CAF Phase II support (year-end 2020), the order explains that CAF recipients are entitled to a seventh year of CAF Phase II support through 2021, whether or not they are successful in the RDOF auction. The Commission released a public notice tentatively establishing October 22, 2020, as the date for the RDOF auction and is still soliciting technical details on the mechanics of the auction. While the RDOF has not yet been completely finalized, it could result in a material change in the level of funding that Frontier receives from the FCC under CAF II as early as 2022.

Future reductions in these subsidies, the inability to replace a substantial portion of our CAF II funding, or our inability to recover USF contributions, could have a material adverse effect on our business or results of operations.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Frontier and our industry will likely remain highly regulated, and we could incur substantial compliance costs that could constrain our ability to compete in our target markets.

As an incumbent local exchange carrier, some of the services we offer are subject to significant regulation from federal, state and local authorities. This regulation could impact our ability to change our rates, especially on our basic voice services and our access rates and could impose substantial compliance costs on us. In some jurisdictions, regulation may restrict our ability to expand our service offerings. In addition, changes to the regulations that govern our business may have an adverse effect on our business by reducing the allowable fees that we may charge, imposing additional compliance costs, reducing the amount of subsidies or otherwise changing the nature of our operations and the competition in our industry. At this time, it is unknown how these regulations or changes to these regulations will affect Frontier’s operations or ability to compete in the future.

FCC rulemakings and state regulatory proceedings, including those relating to intercarrier compensation, universal service and broadband services, could have a substantial adverse impact on our operations.

Our Internet access offerings could become subject to additional laws and regulations as they are adopted or applied to the Internet. As the significance of the Internet expands, federal, state and local governments may pass laws and adopt rules and regulations, including those directed at privacy, or apply existing laws and regulations to the Internet (including Internet access services), and related matters are under consideration in both federal and state legislative and regulatory bodies. Although the FCC has pre-empted state jurisdiction on network neutrality and privacy, many states, including California, have considered or are moving forward with legislation on these or other Internet-related issues. Multiple states have taken executive or legislative action directed at reinstating aspects of the FCC’s 2015 Order. We cannot predict whether the outcome of expected or pending challenges to the FCC’s order or subsequent state actions will prove beneficial or detrimental to our competitive position.

We are subject to the oversight of certain federal and state agencies that have in the past, and may in the future, investigate or pursue enforcement actions against us relating to consumer protection matters.

Certain federal and state agencies, including state attorneys general, monitor and exercise oversight related to consumer protection matters, including those affecting the communications industry. Such agencies have in the past, and may in the future, choose to launch an inquiry or investigation of our business practices in response to customer complaints or other publicized customer service issues or disruptions. Such inquiries or investigations could result in reputational harm, enforcement actions, litigation, fines, settlements and/or operational and financial conditions being placed on the company, any of which could materially and adversely affect our business.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Tax legislation may adversely affect our business and financial condition.

Tax laws are dynamic and continually change as new laws are passed and new interpretations of the law are issued or applied. For example, on December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the TCJA. The TCJA makes broad and complex changes to the U.S. tax code and, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, and imposes limitations on the use of net operating losses arising in taxable years beginning after December 31, 2017. The reduction of the U.S. corporate tax rate results in a decreased valuation of our deferred tax asset and liabilities.

More recently, on March 18, 2020, the Families First Coronavirus Response Act (FFCR Act), and on March 27, 2020, the CARES Act were each enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses arising in taxable years beginning after December 31, 2017. The Company is currently evaluating the impact of this legislation on its consolidated financial position, results of operations, and cash flows. Future regulatory guidance under the FFCR Act and the CARES Act (as well as under the TCJA) remains forthcoming, and such guidance could ultimately increase or lessen their impact on our business and financial condition. It is also highly possible that Congress will enact additional legislation in connection with the COVID-19 pandemic, some of which could have an impact on the Company.

The determination of the benefit from (or provision for) income taxes requires complex estimations and significant judgments concerning the applicable tax laws. If in the future any element of tax legislation changes the related accounting guidance for income tax, it could affect our income tax position and we may need to adjust the benefit from (or provision for) income taxes accordingly.

Risks Related to Our Common Stock

If we fail to regain and maintain compliance with the continued listing standards of Nasdaq, or if we file for protection under the federal bankruptcy laws, our common stock may be delisted and have a material adverse effect on our business, results of operations, financial condition, liquidity and stock price.

 

On December 16, 2019, we were notified by Nasdaq that the Company is not in compliance with Nasdaq’s Listing Rule 5450(a)(1), as the minimum bid price of our common stock had been below $1.00 per share for 30 consecutive business days. Under Nasdaq’s rules, the notification of noncompliance had no immediate effect on the listing or trading of Frontier’s common stock on the Nasdaq Global Select Market under the symbol “FTR”. Under Nasdaq’s rules, we were given 180 days, or until June 15, 2020, to achieve compliance with the minimum bid price requirement. To regain compliance, the minimum bid price of Frontier’s common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days prior to the expiration of the 180-day grace period. Failure to regain compliance during this period could result in delisting. Since we received the notification, our share price has continued to consistently trade under $1.00. Additionally, Nasdaq’s Listing Rules provide that Nasdaq may use its discretionary authority to suspend or terminate the listing of a company that has filed for protection under any provision of the federal bankruptcy laws, even if the company’s securities otherwise meet all enumerated criteria for continued listing on Nasdaq. As such, we expect our common stock would be suspended upon the commencement of any Chapter 11 Cases and delisted thereafter. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—(b) Liquidity and Capital Resources—Subsequent Events Related to the Restructuring.”

 

If we are unable to cure any event of noncompliance with any continued listing standard of Nasdaq within the applicable timeframe and other parameters set forth by Nasdaq, if we fail to maintain compliance with certain continued listing standards that do not provide for a cure period, or if Nasdaq exercises its discretionary authority to delist our common stock if we file for protection under the federal bankruptcy laws, it will result in the delisting of our common stock from Nasdaq, which could negatively impact the trading price, trading volume, liquidity, availability of price quotations, news and analyst coverage of, and have other material adverse effects on, our common stock. Additionally, delisting may adversely impact the perception of the Company’s financial condition and cause reputational harm with investors and parties conducting business with the Company. The perceived decreased value of employee equity incentive awards may reduce their effectiveness in encouraging performance and retention. Each of these occurrences, individually or in the aggregate, could have a material adverse effect on our business.

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Continued volatility and declines in the price of our common stock may have a material adverse effect on our business and stockholders.

The closing price of our common stock decreased from $2.45 per share on January 2, 2019 to $0.37 per share on March 27, 2020, and it could decline further. Such volatility and decline could result from a variety of factors, including, among other things, substantial doubt about our ability to continue as a going concern, concerns about our future prospects, uncertainty associated with the Restructuring, which may include the filing of Chapter 11 Cases, our ability to restructure our debt to generate sufficient liquidity to meet our obligations and operating needs, actual or anticipated fluctuations in our operating results or financial condition, new laws or regulations or new interpretations of existing laws or regulations impacting our business, the on-going COVID-19 pandemic, broad market fluctuations and general economic conditions and any other factors described in this “Risk Factors” section of this Annual Report on Form 10-K.

 

See “—If we fail to regain and maintain compliance with the continued listing standards of Nasdaq, or if we file for protection under the federal bankruptcy laws, our common stock may be delisted and have a material adverse effect on our business, results of operations, financial condition, liquidity and stock price.”

 

Trading in our securities is highly speculative and poses substantial risks.

 

Any Plan will likely provide that certain holders of our debt will receive 100% of the common equity (the New Common Stock) of the Company or an entity formed to indirectly acquire substantially all of the assets and/or subsidiary stock of the Company as may be contemplated by the Restructuring (the Reorganized Company), subject to dilution by certain permitted management incentive plans. Any Plan will also likely provide that all equity interests of existing equity holders will be extinguished. Even if a Plan is confirmed, the value of any securities that are issued is highly speculative and may not have any value. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—(b) Liquidity and Capital Resources—Subsequent Events Related to the Restructuring.”

 

There is no assurance that an active public trading market will continue, or that there will be an active public trading market for the New Common Stock of the Reorganized Company.

 

There can be no assurance that an active public trading market for our common stock will be sustained, or that there will be an active public trading market for the New Common Stock of the Reorganized Company. If for any reason an active public trading market does not continue, or there is no active public trading market for the New Common Stock of the Reorganized Company, purchasers of the shares of our common stock or the New Common Stock may have difficulty in selling their securities should they desire to do so and the price of our common stock or the New Common Stock may decline.

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

None.

We own property, which consists primarily of land and buildings, office and warehouse facilities, central office equipment, software, outside plant and related equipment. Outside communications plant includes aerial and underground cable, conduit, poles and wires. Central office equipment includes digital switches and peripheral equipment. As such, our properties do not provide a basis for description by character or location of principal units. All of our property is considered to be in good working condition and suitable for its intended purpose.

Our gross investment in property, by category, as of December 31, 2019, was as follows:

See Note 22 of the Notes to Consolidated Financial Statements included in Part IV of this report.

We are party to various legal proceedings (including individual actions, class and putative class actions, and governmental investigations) arising in the normal course of our business covering a wide range of matters and types of claims including, but not limited to, general contract disputes, billing disputes, rights of access, taxes and surcharges, consumer protection, advertising, sales and the provision of services, trademark and patent infringement, employment, regulatory, tort, claims of competitors and disputes with other carriers. Litigation is subject to uncertainty and the outcome of individual matters is not predictable. However, we believe that the ultimate resolution of all such matters, after considering insurance coverage or other indemnities to which we are entitled, will not have a material adverse effect on our financial position, results of operations, or cash flows.

Not applicable.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Our common stock is currently traded on the NASDAQ Global Select Market under the symbol “FTR”. We suspended payment of quarterly cash dividends on our common stock during the first quarter of 2018 and, as a result, paid no cash dividends to common shareholders in each of 2019 and 2018. See “Business—Recent Developments—Noncompliance with Nasdaq’s Minimum Bid Price Requirement” and “Risk Factors—Risks Related to Our Common Stock—If we fail to regain and maintain compliance with the continued listing standards of Nasdaq, or if we file for protection under the federal bankruptcy laws, our common stock may be delisted and have a material adverse effect on our business, results of operations, financial condition, liquidity and stock price.” for information on the potential delisting of our common stock and the risks related thereto.

As of March 27, 2020, the number of security holders of record of our common stock was 218,804. This information was obtained from our transfer agent, Computershare Inc.

Holders of our 11.125% Mandatory Convertible Preferred Stock, Series A, par value $0.01 per share (the “Series A Preferred Stock") were entitled to receive cumulative dividends at an annual rate of 11.125% of the initial liquidation preference of $100 per share, or $11.125 per year per share, prior to the conversion of the Series A Preferred Stock to common stock on June 29, 2018. Series A Preferred Stock dividends of $107 million were paid in 2018.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

The following performance graph compares the cumulative total return of our common stock to the S&P 500 Stock Index and to the S&P Communication Services Index for the five-year period commencing December 31, 2014.

The graph assumes that $100 was invested on December 31, 2014 in each of our common stock, the S&P 500 Stock Index and the S&P Communication Services Index and that all dividends were reinvested.

The foregoing performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent we specifically incorporate it by reference into such filing.

There were no unregistered sales of equity securities during the fourth quarter of 2019.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

ISSUER PURCHASES OF EQUITY SECURITIES

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

The following tables present selected historical consolidated financial information of Frontier for the periods indicated. The selected historical consolidated financial information of Frontier as of and for each of the five fiscal years in the period ended December 31, 2019 has been derived from Frontier’s historical consolidated financial statements. The selected historical consolidated financial information as of December 31, 2019 and 2018 and for each of the years in the three-year period ended December 31, 2019, is derived from the audited historical consolidated financial statements of Frontier included elsewhere in this Annual Report. The selected historical consolidated financial information as of December 31, 2017, 2016 and 2015 and for each of the years ended December 31, 2016 and 2015 is derived from the audited historical consolidated financial statements of Frontier not included in this Annual Report.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Frontier Communications Corporation (Frontier) is a provider of communications services in the United States, with approximately 4.1 million customers, 3.5 million broadband subscribers and 18,300 employees, operating in 29 states. We offer a broad portfolio of communications services for consumer and commercial customers. These services which include data and internet services, video services, voice services, access services, and advanced hardware and network solutions, are offered on either a standalone basis or in a bundled package, depending on each customer’s needs.

In May 2019, we entered into a definitive agreement to sell our operations and associated assets in Washington, Oregon, Idaho, and Montana (Northwest Operations) for $1,352 million, subject to certain closing adjustments, including adjustments for working capital and certain pension and retiree medical liabilities. The sale is expected to close by the first half of 2020, subject to customary closing conditions. In connection with the sale we entered into a transition service agreement with the purchaser to provide various network and support services for a minimum of six months following the transaction closing. Revenues for the Northwest Operations represented approximately 7% of consolidated revenue for the year ended December 31, 2019.

During 2019, Frontier reported an operating loss of $4,873 million and a net loss of $5,911 million. This compares to operating income of $827 million and a net loss of $643 million reported in 2018. We have continued to experience net losses in customers (8% in 2019 compared to 10% in 2018), which have contributed to lower revenues and lower profitability. Our reduced profitability and lower outlook for the business resulted in $5,725 and $641 million of goodwill impairment charges during 2019 and 2018, respectively. Our results reflect $168 million of restructuring and other charges in 2019 (which included $41 million of charges related to advisors and consultants associated with the restructuring of our balance sheet, as well as $44 million associated with Pension and OPEB enhancements related to a voluntary separation plan implemented during the year), compared to $35 million for the preceding year. Our 2019 operating results also include a $446 million loss related to the planned sale our Northwest Operations described above.

We are highly leveraged, and a substantial portion of our liquidity needs will arise from debt service on our outstanding indebtedness and from funding the costs of operations, working capital and capital expenditures. As of March 31, 2020, we believe our operating cash flows, existing cash balances, and cash proceeds from the sale of our Northwest Operations will be adequate to finance our working capital requirements, fund capital expenditures, make required debt interest and principal payments, pay taxes and support our short-term and long-term operating strategies for the next twelve months. However, as discussed elsewhere in this Annual Report, our ability to continue as a going concern is dependent upon our ability to consummate the Restructuring (defined below) and to generate sufficient liquidity from the Restructuring to meet our obligations and operating needs. Our $850 million revolving credit facility is fully utilized as of the date of filing and our access to capital and debt markets may be limited. A number of factors, including but not limited to, losses of customers, pricing pressure from increased competition, lower subsidy and switched access revenues, and the impact of economic conditions may negatively affect our cash generated from operations. As of December 31, 2019, we had $245 million and $327 million of long-term debt maturing in 2020 and 2021, respectively, excluding interest obligations.

The sections below include tables that present customer counts, average monthly consumer revenue per customer (ARPC) and consumer customer churn. We define churn as the number of consumer customer deactivations during the month divided by the number of consumer customers at the beginning of the month and utilize the average of each monthly churn in the period.

Management believes that consumer customer counts and average monthly revenue per customer are important factors in evaluating our consumer customer trends. Among the key services we provide to consumer customers are voice service, data service and video service. We continue to explore the potential to provide additional services to our customer base, with the objective of meeting all of our customers’ communications needs.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Recent Developments

Restructuring

The Company engaged in discussions with certain holders of the Company’s unsecured notes that executed confidentiality agreements with the Company (the Unsecured Noteholders) with respect to potential deleveraging or restructuring transactions from January 2020 until the expiration of such agreements and corresponding release of certain confidential information on March 27, 2020. These discussions have included negotiations of the terms and conditions of a financial restructuring (the Restructuring) of the existing debt of, existing equity interests in, and certain other obligations of the Company and certain of its direct and indirect subsidiaries (the Company Parties). The Restructuring is currently expected to be effected pursuant to a plan of reorganization (Plan) to be filed in cases commenced under chapter 11 (Chapter 11 Cases) of the United States Bankruptcy Code (the Bankruptcy Code). Although the Company continues to be open to all discussions with the Unsecured Noteholders regarding a potential Restructuring, there can be no assurance we will reach an agreement with the Unsecured Noteholders in a timely manner, on terms that are attractive to us, or at all. The Company expects to continue to provide quality service to its customers without interruption and work with its business partners as usual during the course of these discussions and any potential transaction.

Our ability to continue as a going concern is dependent upon our ability to consummate the Restructuring and to generate sufficient liquidity from the Restructuring to meet our obligations and operating needs. These factors, among others, create substantial doubt about Frontier’s ability to continue as a going concern.

See “Risk Factors—Risks Related to the Restructuring, Our Indebtedness and Liquidity,” “—(b) Liquidity and Capital Resources—Subsequent Events Related to the Restructuring” and Note 23 of the Notes to Consolidated Financial Statements for more information on the Restructuring and the risks related thereto. Refer to “—Going Concern” and Note 1 of the Notes to Consolidated Financial Statements for further discussion of the Company’s ability to continue as a going concern and Note 9 for further detail of our debt obligations as of and for the year ended December 31, 2019.

Going Concern

In connection with the preparation of the Consolidated Financial Statements, we conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the entity’s ability to continue as a going concern within one year after the date of the issuance of the Consolidated Financial Statements. As reflected in the Consolidated Financial Statements, the Company had cash and cash equivalents of $760 million and an accumulated deficit of $8,573 million as of December 31, 2019. The Company also had an operating loss of $4,873 million and a net loss of $5,911 million for the year ended December 31, 2019.

As discussed above under “—Restructuring,” from January 2020 until March 27, 2020, the Company engaged in discussions with certain Unsecured Noteholders with respect to potential deleveraging or restructuring transactions.  Although the Company continues to be open to all discussions with the Unsecured Noteholders regarding a potential Restructuring, there can be no assurance we will reach an agreement with the Unsecured Noteholders in a timely manner, on terms that are attractive to us, or at all.

Furthermore, on March 16, 2020, we deferred making $322 million in scheduled interest payments due on certain of our senior notes and a 60-day grace period commenced under the indentures governing those notes. We elected to enter into the grace period in order to collaborate with our noteholders regarding the Restructuring. If we do not make these interest payments by May 15, 2020 or if we do not make any required principal payments required under the indentures governing our notes, an event of default would occur under the applicable indentures, which would give the trustee or the holders of at least 25% of principal amount the option to accelerate maturity of the principal, plus any accrued and unpaid interest on such notes. The Company has also elected to defer making scheduled interest payments due on April 1, 2020 with respect to certain of its debentures.

The Company evaluated the impact of undertaking the Restructuring and the payment deferral described above on its ability to continue as a going concern. As a result of risks and uncertainties related to (i) the Company’s ability to obtain requisite support for the Restructuring from various stakeholders, (ii) the effects of disruption from the Restructuring making it more difficult to maintain business, (iii) financing and operational relationships and (iv) the limited liquidity to pay the principal balance of the deferred payment senior notes and debentures upon an event of default, together with the Company’s recurring losses from operations and accumulated deficit, substantial doubt exists regarding our ability to continue as a going concern.

Our ability to continue as a going concern is dependent upon our ability to consummate the Restructuring and to generate sufficient liquidity from the Restructuring to meet our obligations and operating needs. There can be no assurance that the Restructuring will occur or be successful. Additionally, we continue to focus on our initiatives to drive operational performance, invest in our fiber network, add talent to our organization and become a stronger partner to our residential and enterprise customers as we operate our business. If the Restructuring is unsuccessful, our cash position may not be sufficient to support our daily operations or initiatives. Although we expect that the successful consummation of the Restructuring will generate sufficient revenue and reduce costs to sustain operations, there can be no assurance that it will.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

See Note 1 of the Notes to Consolidated Financial Statements for further discussion of the Company’s ability to continue as a going concern. See “—(b) Liquidity and Capital Resources,” “Risk Factors—Risks Related to the Restructuring, Our Indebtedness and Liquidity,” and Note 23 of the Notes to Consolidated Financial Statements for more information on the Restructuring, our limited liquidity and the risks related thereto. See “Risk Factors—Risks Related to the Restructuring, Our Indebtedness and Liquidity—We have elected to defer making interest payments in respect of certain of our senior notes and debentures, which may lead to default under our debt arrangements and which could materially adversely affect our business, operating results and financial condition.” and “Item 9B. Other Information" for more information on the deferral of certain interest payments and the risks related thereto.

2019 compared to 2018

We provide service and product options in our consumer and commercial offerings in each of our markets.

For the year ended December 31, 2019, Frontier lost 313,000, or 8% of our consumer customers compared to 337,000, or 8% in 2018. As of December 31, 2019, 56% of our consumer broadband customers also subscribed to at least one other service offering. We lost 5% of our consumer broadband subscribers, primarily to competitors offering more attractive pricing or higher speeds. We experienced a 20% decline in our video subscribers primarily as a result of customers increasingly opting for other video services including Over the Top, in lieu of traditional video services. We also shifted our focus away from the acquisition of higher cost video customers. During 2019, we lost voice subscribers as a result customers choosing alternative voice products and reduced attachment to broadband services.

Our average monthly consumer customer churn was 2.07% for the year ended December 31, 2019 compared to 1.97% for 2018. The consolidated average monthly consumer revenue per customer (consumer ARPC) increased by $2.44 or 3% to $88.70 during 2019 compared to the prior year. The overall increase in consumer ARPC is primarily a result of consumer, broadband, and video pricing initiatives that were implemented in 2018.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

For the year ended December 31, 2019, Frontier lost 40,000, or 10% of our commercial customers as compared to 42,000, or 9%, in 2018. Small business customers, whose characteristics are similar to our consumer customers, comprised 91% of the loss. Losses of our larger customers are driven by customer movement to our competitors who offer more established solutions and higher-speed services.

REVENUE

We generate revenues primarily through either a monthly recurring fee or a fee based on usage, and revenue recognition is not dependent upon significant judgments by management, with the exception of a determination of the provision for uncollectible amounts.

The 5% decrease in consumer customer revenue was primarily due to the 8% decline in consumer customers combined with decreased other data service revenue, and partially offset by higher consumer ARPC. Despite the customer losses, consumer broadband revenue has increased as compared to 2018.

The 7% decrease in commercial customer revenue was primarily driven by a 8% reduction in wholesale revenues which comprise approximately 51% of our commercial revenues. The decline in wholesale revenues is primarily a result of rate declines for our network access services. Our SME revenues that comprise the remaining commercial revenue decreased 6% primarily as a result of a 10% decline in small business customers in 2019.

Subsidy revenue, which is primarily comprised of CAF Phase II subsidies, decreased $14 million, or 4% during 2019. This decrease was the result of scheduled reductions in funding levels.

We categorize our products, services, and other revenues into the following five categories:

Data and Internet services

Data and internet services revenue for the year ended December 31, 2019 decreased 3% as compared with 2018. Broadband and data services revenues comprise 61% or $2,306 million of total Data and internet services revenue, while network access revenues comprise 39% or $1,450 million. Network access revenues include our data transmission services to high volume commercial customers and other carriers with dedicated high capacity circuits including services to wireless providers (“wireless backhaul”).

Broadband and data services revenue decreased by $24 million, or 1%, primarily driven by a loss of SME customers combined with decreased other data services revenue. The decline was partially offset by an increase in broadband revenues. Network access revenues declined $93 million, or 6%, due to the migration of our carrier customers from legacy technology circuits to lower priced ethernet circuits.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

We expect wireless data usage to continue to increase, which may drive the need for additional wireless backhaul capacity. Despite the need for additional capacity, in the near term, we anticipate that our overall wireless backhaul revenues (which comprise approximately 3% of consolidated total revenues) will continue to decline in 2020, as our carrier customers migrate to ethernet solutions at lower price points or migrate to our competitors.

Voice services

Voice services include traditional local and long-distance wireline services, data-based Voice over Internet Protocol (VoIP) services, as well as voice messaging services offered to our consumer and commercial customers. Voice services also include the long-distance voice origination and termination services that we provide to our commercial customers and other carriers.

The decrease of 8% in voice services revenue was primarily due to an 8% net loss in consumer customers and a 10% net loss in commercial customers, combined with a reduction in voice services being bundled with broadband services.

Video services

Video services include revenues generated from services provided directly to consumer customers through the FiOS video and Vantage video brands, and through Dish satellite TV services.

The decrease of 7% in video services revenue was primarily due to 21% net loss in FiOS and Vantage terrestrial video customers, partially offset by price increases.

Other

Other customer revenue includes switched access revenue and sales of CPE to our business customers as well as directory services. Switched access revenue includes revenues derived from allowing other carriers to use our network to originate and/or terminate their local and long-distance voice traffic (“switched access”). These services are primarily billed on a minutes-of-use basis applying tariffed rates filed with the FCC or state agencies.

The decrease of $67 million, or 12%, in other revenue was primarily driven by a decrease in switched access revenue due to the reduced rates mandated by the Universal Service Fund/Intercarrier Compensation Report and Order as well as a 17% reduction in minutes of use. Since we are a consumer of switched access services on other carriers, we also benefited from the lower mandated rates within network access expense. Lower CPE sales, lower service activation associated fees, and less directory revenue also contributed to the decline in other revenue. These declines were partially offset by lower provisions for uncollectibles and higher late payment fees.

Subsidy

Subsidy and other regulatory revenue includes revenues generated from cost subsidies from state and federal authorities, including the Connect America Fund Phase II.

The decrease of $14 million in Subsidy and other regulatory revenue was primarily due to CAF II Program frozen support phasedown funding reductions.

2019 OPERATING EXPENSES COMPARED TO 2018

NETWORK ACCESS EXPENSE

Network access expenses include access charges and other third-party costs directly attributable to connecting customer locations to our network, and video content costs. Such access charges and other third-party costs exclude network related expenses, depreciation and amortization, and employee related expenses.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

The decrease in network access expenses was primarily due to lower video content costs as a result of the decline in video customers and decreases in certain promotional costs.

NETWORK RELATED EXPENSES

Network related expenses include expenses associated with the delivery of services to customers and the operation and maintenance of our network, such as facility rent, utilities, maintenance and other costs, as well as salaries, wages and related benefits associated with personnel who are responsible for the delivery of services, and the operation and maintenance of our network.

The decrease in network related expenses was primarily due to reduced compensation and certain benefits costs, including pension and OPEB expense (as discussed below), decreased network services cost, and lower costs as a result of our transformation initiatives to improve performance and reduce costs.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses (SG&A expenses) include the salaries, wages and related benefits and costs of corporate and sales personnel, travel, insurance, non-network related rent, advertising and other administrative expenses.

The decrease in SG&A expenses was primarily driven by decreased outside services, warehousing and supplies cost, and lower compensation costs related to lower employee headcount, partially offset by increased facilities costs.

Pension and OPEB costs

Frontier allocates pension/OPEB expense, which includes only service costs, to network related expenses and SG&A expenses. Total consolidated pension and OPEB expense, excluding pension settlement costs and pension/OPEB special termination benefit enhancements, for the years ended December 31, 2019 and 2018 were as follows:

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense for the year ended December 31, 2019 decreased as compared to 2018. The decrease in depreciation expense was primarily driven by ceased depreciation (effective May 31, 2019) on property, plant, and equipment classified as assets held for sale in connection with the planned sale of our Northwest Operations. The decrease in amortization expense was primarily driven by the accelerated method of amortization related to customer bases acquired in 2010, 2014 and 2016.

GOODWILL IMPAIRMENT

We recorded goodwill impairments totaling $5,725 million for the year ended December 31, 2019. The impairment in the second and third quarters of 2019 reflected a lower enterprise valuation driven by lower profitability, as well as a reduction in the applicable market multiple from 5.3x EBITDA at December 31, 2018 to the 4.4x EBITDA utilized during our quantitative assessments in 2019. This reflected, among other things, pressures on our business resulting in the continued deterioration in revenue, challenges in achieving improvements in revenue and customer trends under our transformation initiative, the long-term sustainability of our capital structure, and the lower outlook of our industry as a whole.

We recorded goodwill impairments totaling $641 million for year ended December 31, 2018. The driver for the impairment in the third quarter of 2018 was a reduction in our profitability and utilized EBITDA estimate, which when applied to our market multiple resulted in a lower enterprise valuation. During the fourth quarter of 2018, the impairment was largely driven by a lower enterprise valuation resulting from a reduction in applicable market multiple from 5.5x to 5.3x reflecting the lower outlook for our industry as a whole.

LOSS ON PLANNED DISPOSAL OF NORTHWEST OPERATIONS

As a result of our evaluation of recoverability of the carrying value of the assets and liabilities held for sale relative to the agreed upon sales price, adjusted for costs to sell, we recorded a loss on planned disposal of our Northwest Operations of $446 million during the year ended December 31, 2019.

RESTRUCTURING COSTS AND OTHER CHARGES

Restructuring costs and other charges consist of expenses related to changes in the composition of our business, including workforce reductions, transformation initiatives, other restructuring expenses, and corresponding changes to retirement plans resulting from a voluntary severance program.

In 2018, Frontier launched a strategic transformation program with the aim of re-positioning the Company to be better able to react to current and future business and operational challenges and to create long-term sustainable value. This program was reduced in scope and largely completed during the first half of 2019.

The $168 million in restructuring costs and other charges is comprised of $44 million in pension/OPEB special termination benefit enhancements related to a voluntary severance program, $46 million in costs related to transformation initiatives, $38 million in severance expense, and $40 million in consulting and advisory costs related to our balance sheet restructuring activities.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

OTHER NON-OPERATING INCOME AND EXPENSE

Investment and other income, net

The decrease in Investment and other income, net was primarily driven by an increase in non-operating pension and OPEB costs of $42 million in 2019 compared to income of $10 million in 2018.

Pension settlement costs

Frontier recognized non-cash settlement charges of $57 million and $41 million during 2019 and 2018, respectively. The non-cash charge accelerated the recognition of a portion of the previously unrecognized actuarial losses in the pension plan.

Gain (Loss) on early extinguishment of debt and debt exchanges

In 2019, Frontier recorded a loss on the early extinguishment of debt primarily driven by the write-off of unamortized original issuance costs that were retired along with the Term Loan A and the 2016 CoBank Credit Agreement. In 2018, Frontier recorded a gain on the early extinguishment of debt primarily due to discounts received on the retirement of certain notes, slightly offset by premiums paid to retire certain notes and write-off of unamortized original issuance costs.

Interest expense

Interest expense remained relatively flat as compared to 2018. Our composite average borrowing rate as of December 31, 2019 and 2018 were 8.72% and 8.59%, respectively.

Income tax benefit

For the year ended December 31, 2019, Frontier recorded income tax benefit of $(611) million on the pretax loss of $(6,522) million. The tax benefit was primarily driven by the tax impact of the goodwill impairment partially offset by recording a valuation allowance on certain deferred tax assets. The effective tax rates on our pretax loss for the years ended December 31, 2019 and 2018 were 9.4% and 8.8%, respectively.

Basic and diluted net loss attributable to Frontier common shareholders

Net loss attributable to Frontier common shareholders for 2019 was a net loss of $(5,911) million, or $(56.80) per share, as compared to a net loss of $(750) million, or $(8.37) per share, in 2018. For 2019, the increase in net loss was primarily driven by the $5,725 million goodwill impairment charge, a decrease in revenues of $504 million, and a loss on disposal of $446 million, partially offset by decreased Network related, Selling, general, and administrative, and other operating expenses.

The comparison of our operating results and financial condition for the fiscal years ended 2018 and 2017 can be found in our Form 10-K for the fiscal year ended December 31, 2018 under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Historically, our principal liquidity requirements have been to maintain and expand our business, pay principal and interest obligations on the Term Loan B (as defined herein), Revolver (as defined herein), the notes and other expenses, and for capital expenditures to replace, upgrade, expand and improve our networks and infrastructure, to integrate acquired businesses and to separate assets and systems for sale.

Our Term Loan B and Revolver are scheduled to mature on June 15, 2024 and February 27, 2024, respectively, and our first lien notes and second lien notes are scheduled to mature on April 1, 2027 and April 1, 2026, respectively. Our senior notes and debentures are scheduled to mature on dates ranging from April 15, 2020 to October 1, 2046. However, pursuant to the likely terms of the Restructuring described in “—Subsequent Events Related to the Restructuring,” our ability to continue as a going concern is dependent upon our ability to consummate the Restructuring and to generate sufficient liquidity from the Restructuring to meet our obligations and operating needs. These factors, together with the Company’s recurring losses from operations and accumulated deficit, create substantial doubt about the Company’s ability to continue as a going concern.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

As of December 31, 2019, we had unrestricted cash and cash equivalents aggregating $760 million. Our primary source of funds during 2019 was cash on hand, cash generated from operations, cash received from issuance of our First Lien Notes, and borrowings on our Revolver. In 2019, we used cash flow from operations, cash on hand, and borrowings to principally fund all of our cash investing and financing activities, which were primarily capital expenditures and debt repayments.

At December 31, 2019, we had a working capital surplus of $233 million, as compared to a working capital deficit of $1,231 million at December 31, 2018. The primary driver for the working capital surplus as of year-end was the reclassification of certain assets and liabilities associated with our Northwest Operations from non-current to current as a result of held for sale designation.

Net cash provided from operating activities decreased $304 million, or 17%, to $1,508 million in 2019 as compared to 2018. The overall decrease in operating cash flows was primarily attributable to decreased profitability.

We paid $4 million net cash taxes in each of 2019 and 2018, compared to net cash refunds of $51 million in 2017.

In 2019, 2018 and 2017, our capital expenditures were, $1,226 million, $1,192 million and $1,188 million (including $34 million of integration-related capital expenditures in 2017 associated with the CTF Acquisition), respectively. During 2019, capital expenditures of $8 million related to the separation of assets and systems in preparation for the sale of assets related to the Northwest Operations.

During 2019, 2018 and 2017, proceeds from long-term debt borrowings were $1,650 million, $1,840 million and $1,500 million, respectively, consisting of senior secured debt. In addition, we had net borrowings of $474 million and $275 million, respectively, on our Revolver (as defined below) during 2019 and 2018. Refer to Note 9 for details of the specific transactions.

During 2019, 2018 and 2017, we retired an aggregate principal amount of $2,483 million, $2,578 million and $1,815 million, respectively, consisting of $348 million, $2,198 million and $1,655 million, respectively, of senior unsecured debt and $2,134 million, $380 million and $159 million, respectively, of secured debt (inclusive of periodic repayments of our revolver).

Subject to limitations contained in our indentures and credit facilities, we may from time to time make repurchases of our debt in the open market, through tender offers, by exercising rights to call or in privately negotiated transactions. We may also refinance or restructure existing debt or exchange existing debt for newly issued debt obligations or equity securities. The amount of debt that may be repurchased, restructured or otherwise retired, if any, would be decided upon at the sole discretion of our Board of Directors and will depend on market conditions, trading levels of the Company’s debt from time to time, the Company’s cash position and other considerations.

On June 29, 2018, pursuant to the provisions of Frontier’s Certificate of Designations governing our 11.25% Mandatory Convertible Preferred Stock, Series A, par value $0.01 per share (the “Series A Preferred Stock”), all outstanding shares of the Series A Preferred Stock converted at a rate of 1.3333 common shares per share of preferred stock into an aggregate of approximately 25,529,000 (net of fractional shares) of the Company’s common stock. We issued cash in lieu of fractional shares of common stock. These payments were recorded as a reduction to Additional paid-in capital. On July 2, 2018, we paid the final dividend of $54 million to holders of the Series A Preferred Stock. The Series A Preferred stock was issued in June 2015 when we completed a registered offering of 19.25 million preferred shares at an offering price of $100 per share.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

We are highly leveraged, and a substantial portion of our liquidity needs will arise from debt service on our outstanding indebtedness and from funding the costs of operations, working capital and capital expenditures. Our primary sources of cash are cash flows from operations, cash on hand and proceeds from debt borrowings, including issuances of long-term debt and our fully drawn $850 million of borrowing capacity under our Revolver (as reduced by any Standby Letters of Credit outstanding under the JPM Credit Agreement). As of our date of filing, we believe our operating cash flows and existing cash balances, including the full borrowing under our revolving credit facility, and cash proceeds from the sale of our Northwest Operations will be adequate to finance our working capital requirements, fund capital expenditures, make required debt interest and principal payments, pay taxes and support our short-term and long-term operating strategies for the next twelve months. A number of factors, including but not limited to, losses of customers, pricing pressure from increased competition, lower subsidy and switched access revenues, and the impact of economic conditions may negatively affect our cash generated from operations. As of December 31, 2019, we had $245 million and $327 million of long-term debt maturing in 2020 and 2021, respectively, excluding interest obligations. Gross proceeds from the sale of the Northwest Operations is expected to be approximately $1,352 million, subject to certain closing adjustments, including adjustments for working capital and certain pension and retiree medical liabilities.

On February 27, 2017, Frontier entered into a first amended and restated credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, pursuant to which Frontier combined its revolving credit agreement, dated as of June 2, 2014, and its term loan credit agreement, dated as of August 12, 2015. Under the JPM Credit Agreement (as amended to date, the JPM Credit Agreement), Frontier has a $1,740 million senior secured Term Loan B facility (the Term Loan B) maturing on June 15, 2024 and an $850 million secured revolving credit facility maturing on February 27, 2024 (the Revolver). The maturities of the Term Loan B and the Revolver, in each case if still outstanding, will be accelerated in the following circumstances: (i) if, 91 days before the maturity date of any series of Senior Notes maturing in 2020, 2023 and 2024, more than $500 million in principal amount remains outstanding on such series; or (ii) if, 91 days before the maturity date of the first series of Senior Notes maturing in 2021 or 2022, more than $500 million in principal amount remains outstanding, in the aggregate, on the two series of Senior Notes maturing in such year. As of December 31, 2019, approximately $227 million principal amount, in the aggregate, remains outstanding on the two series of Senior Notes maturing in 2020 and $309 million principal amount, in the aggregate, remains outstanding on the two series of Senior Notes maturing in 2021.

The determination of interest rates for the Term Loan B and Revolver under the JPM Credit Agreement is based on margins over the Base Rate (as defined in the JPM Credit Agreement) or over LIBOR, at the election of Frontier. Interest rate margins on the Revolver (ranging from 1.00% to 2.00% for Base Rate borrowings and 2.00% to 3.00% for LIBOR borrowings) are subject to adjustment based on Frontier’s Leverage Ratio (as defined in the JPM Credit Agreement). The interest rate on the Revolver as of December 31, 2019 was LIBOR plus 3.00%. Interest rate margins on the Term Loan B (2.75% for Base Rate borrowings and 3.75% for LIBOR borrowings) are not subject to adjustment. The security package under the JPM Credit Agreement includes pledges of the equity interests in certain Frontier subsidiaries and guarantees by certain Frontier subsidiaries.

As of December 31, 2019, Frontier had borrowings of $749 million outstanding under the Revolver (with letters of credit issued under the Revolver totaling an additional $101 million). In July 2019, a $20 million Letter of Credit issued under the Bank of Tokyo LC agreement was replaced by a Letter of Credit issued under the Revolver.

On March 15, 2019, Frontier amended the JPM Credit Agreement to, among other things, extend the maturity date of the Revolver from February 27, 2022 to February 27, 2024 (subject to springing maturity to any tranche of our existing debt with an aggregate outstanding principal amount in excess of $500 million), increase the interest rate applicable to loans under the Revolver by 0.25% and make certain modifications to the debt and restricted payment covenants.

Frontier also had a $1,625 million senior secured Term Loan A facility (the Term Loan A) under the JPM Credit Agreement which was fully repaid on March 15, 2019, as described below under “New Debt Issuances and Debt Reductions.”

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

On January 25, 2018, Frontier amended the JPM Credit Agreement to, among other things, expand the security package to include the interests of certain subsidiaries previously not pledged and replace the leverage ratio maintenance test with a first lien leverage ratio maintenance test. On July 3, 2018, Frontier further amended the JPM Credit Agreement to, among other things, replace certain operating subsidiary equity pledges with pledges of the equity interest of certain direct subsidiaries of Frontier.

Frontier had a $315 million senior term loan facility drawn in October 2016 (the 2016 CoBank Credit Agreement) with CoBank, ACB, as administrative agent, lead arranger and a lender, and the other lenders party thereto, which was repaid in full on March 15, 2019. Frontier had a separate $350 million senior term loan facility drawn in 2014 (the 2014 CoBank Credit Agreement) with CoBank which was repaid in full on July 3, 2018. Details of both transactions are described in Note 9 under “New Debt Issuances and Debt Reductions.” We refer to the 2014 CoBank Credit Agreement and the 2016 CoBank Credit Agreement collectively as the CoBank Credit Agreements.

Frontier has a Continuing Agreement for Standby Letters of Credit with Deutsche Bank AG New York Branch (the LC Agreement). Frontier can also issue letters of credit under the Revolver up to a maximum of $134 million. As of December 31, 2019, $50 million and $101 million of undrawn Standby Letters of Credit had been issued under the LC Agreement and Revolver respectively. Letters of credit under the LC Agreement are secured by a security package identical to those contained in the JPM Credit Amendment.

The terms and conditions contained in our indentures and the JPM Credit Agreement include the timely payment of principal and interest when due, the maintenance of our corporate existence, keeping proper books and records in accordance with GAAP, restrictions on the incurrence of liens on our assets securing indebtedness and our subsidiaries’ assets, restrictions on the incurrence of indebtedness by our subsidiaries and restrictions on asset sales and transfers, mergers and other changes in corporate control subject to important qualifications and exceptions.

Under the JPM Credit Agreement, Frontier is subject to a first lien net leverage ratio maintenance test which provides for a maximum first lien net leverage ratio of 1.50 to 1.00 as of the last day of any fiscal quarter, stepping down to 1.35 to 1.00 for the fiscal quarters ending June 30, 2020 and thereafter. The covenants provide for junior lien capacity on any indebtedness permitted under the credit agreements, while limiting the incurrence of first lien debt. Additionally, the credit agreement prohibits us from using proceeds from our revolving credit facility to fund dividend payments if the undrawn amount under the Revolver is less than $250 million, and we may not pay dividends on our common stock in excess of $2.40 per share in any fiscal year.

The indentures governing our secured notes and senior notes and debentures limit our ability to create liens on our assets securing indebtedness and our subsidiaries’ assets or merge or consolidate with other companies, our subsidiaries’ ability to borrow funds and to engage in change of control transactions, subject to important exceptions and qualifications. Our secured notes are guaranteed by each of our subsidiaries that guarantees the JPM Credit Agreement. In addition, the secured notes are secured on a first-priority basis and a second-priority basis, as applicable, by all the assets that secure our obligations under the JP Credit Agreement on a first-priority basis.

As of December 31, 2019, we were in compliance with all of the covenants under our indentures and the JPM Credit Agreement.

On July 1, 2019, our Board of Directors adopted a shareholder rights plan designed to protect our NOLs from the effect of limitations imposed by federal and state tax rules following a change in the ownership of our stock. This plan was designed to deter an “ownership change” (as defined in IRC Section 382) from occurring, and therefore protect our ability to utilize our federal and state net operating loss carryforwards in the future. Pursuant to the shareholder rights plan, if a shareholder (or group of affiliated or associated persons) acquires beneficial ownership of 4.9 percent or more of the outstanding shares of Frontier’s common stock without prior approval of our Board of Directors or without meeting certain customary exceptions (such as a result of repurchases of stock by Frontier, dividends or distributions by Frontier or certain inadvertent actions by our stockholders), the rights would become exercisable and entitle shareholders (other than the acquiring shareholder or group) to purchase additional shares of Frontier at a significant discount and result in significant dilution in the economic interest and voting power of acquiring shareholder or group. For purposes of calculating percentage ownership under the plan, “outstanding shares” of common stock include all of the shares of common stock actually issued and outstanding. Beneficial ownership is determined as provided in the rights plan and generally includes, without limitation, any ownership of securities a person would be deemed to actually or constructively own for purposes of Section 382 of the IRC or the regulations promulgated thereunder.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

The plan is not meant to be an anti-takeover measure and our Board of Directors has established a procedure to consider requests to exempt the acquisition of our common stock from the rights plan, if such acquisition would not limit or impair the availability of our NOLs. Such determination will be made in the sole and absolute discretion of our Board of Directors, upon request by any person prior to the date upon which such person would otherwise become the beneficial owner of 4.9 percent or more of the outstanding shares of our common stock. In addition, if our Board of Directors determines in good faith that a person has inadvertently become the beneficial owner of 4.9 percent or more of the outstanding shares of our common stock, and such person divests as promptly as practicable a sufficient number of shares of common stock so that such person beneficially owns less than 4.9 percent, then such person will not cause the rights under the plan to become exercisable.

This summary description of the rights plan does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, dated as of July 1, 2019, by and between us and Computershare Trust Company, N.A., as Rights Agent, filed as an exhibit to our Periodic Report on Form 8-K filed on July 1, 2019.

Holders of our Series A Preferred Stock were entitled to receive cumulative dividends at an annual rate of 11.125% of the initial liquidation preference of $100 per share, or $11.125 per year per share. Series A Preferred Stock dividends of $107 million were paid during 2018. Each share of Series A Preferred Stock automatically converted into 1.3333 shares of our common stock on June 29, 2018.

The Company engaged in discussions with the Unsecured Noteholders with respect to potential deleveraging or restructuring transactions from January 2020 until the expiration of such agreements and corresponding release of certain confidential information on March 27, 2020. These discussions have included negotiations of the terms and conditions of the Restructuring of the existing debt of, existing equity interests in, and certain other obligations of the Company Parties. The Restructuring is currently expected to be effected pursuant to a Plan to be filed in Chapter 11 Cases under the Bankruptcy Code. Although the Company continues to be open to all discussions with the Unsecured Noteholders regarding a potential Restructuring, there can be no assurance we will reach an agreement with the Unsecured Noteholders in a timely manner, on terms that are attractive to us, or at all.

We have significant deferred tax assets, including NOLs, The impact of the Restructuring on the Company’s NOLs will depend on whether the Restructuring is structured as (i) a taxable disposition of substantially all of the assets and/or subsidiary stock of the Company, (ii) as a recapitalization of the Company, or (iii) some other alternative structure. If structured as a taxable disposition, we anticipate that NOLs of the Company (if any) remaining after the Restructuring will not be available to the Company after consummating the Restructuring. If structured as a recapitalization, we anticipate that the Company will experience an ownership change, and thus NOLs of the Company (if any) remaining after the Restructuring will be subject to limitation, such that the Company may not derive all of the benefits of any such remaining NOLs after consummating the Restructuring.

 

See “Risk Factors—Risks Related to the Restructuring, Our Indebtedness and Liquidity,” and Note 23 of the Notes to Consolidated Financial Statements for more information on the Restructuring and the risks related thereto. See “—Shareholder Rights Plan” for a description of the shareholder rights plan our Board of Directors adopted to protect our NOLs from the effect of limitations imposed by federal and state tax rules following a change in the ownership of our stock. Refer to Note 1 of the Notes to Consolidated Financial Statements for further discussion of the Company’s ability to continue as a going concern and Note 9 for further detail of our debt obligations as of and for the year ended December 31, 2019.

 

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial statements.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

A summary of our future contractual obligations and commercial commitments as of December 31, 2019 is as follows:

Our outstanding performance letters of credit increased from $145 million to $151 million during the year ended December 31, 2019.

On April 29, 2015, the FCC released its right of first refusal offer of support to price cap carriers under the CAF Phase II program, which is intended to provide long-term support for broadband in high-cost unserved or underserved areas. In June 2015, Frontier accepted the CAF Phase II offer, which provides for $332 million in annual support, including approximately $19 million in the four states of the Northwest Operations, through 2020 (since extended to 2021 under RDOF) to make available 10 Mbps downstream/1 Mbps upstream broadband service to approximately 774,000 households across certain of the 29 states where we now operate.

To the extent we do not enable the required number of households with 10 Mbps downstream/1 Mbps upstream broadband service by the end of the CAF Phase II term, we will be required to return a portion of the funds previously received.

The preparation of our financial statements requires management to make estimates and assumptions. There are inherent uncertainties with respect to such estimates and assumptions; accordingly, it is possible that actual results could differ from those estimates and changes to estimates could occur in the near term. The estimates which require the most significant judgment are listed below.

These critical accounting estimates have been reviewed with the Audit Committee of our Board of Directors. For a discussion of these and other accounting policies, see Note 1 of the Notes to Consolidated Financial Statements.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts based on our estimate of our ability to collect accounts receivable. Our estimates are based on assumptions and other considerations, including payment history, customer financial performance, carrier billing disputes and aging analysis. Our estimation process includes general and specific reserves and varies by customer category. In 2019 and 2018, we had no “critical estimates” related to bankruptcies of communications companies or any other significant customers. See Notes 1 and 5 of the Notes to Consolidated Financial Statements for additional discussion.

Indefinite-lived Intangibles

Our indefinite-lived intangibles consist primarily of our trade name and goodwill, which were generated as a result of business combinations. We test for impairment of these assets annually as of December 31 or more frequently, whenever events occur, or facts and circumstances change that make it more likely than not that the fair value of a reporting unit has been reduced below its carrying amount. For this purpose, we have identified two reporting units, the first representing the Northwest Operations and the second representing the remaining Frontier Operations. Events that might indicate impairment include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, material negative changes in relationships with significant customers, and/or a significant decline in our stock price for a sustained period.

In connection with the planned sale of our Northwest Operations, allocated goodwill of $658 million has been reclassified to assets held for sale as of December 31, 2019. Due to recent events and conditions, as discussed below, interim goodwill impairment testing was performed during 2019, which resulted in the full impairment of the remaining $5,725 million of goodwill.

We adopted ASU 2017-04 “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”) during the second quarter of 2017. In accordance with ASU 2017-04, our annual goodwill impairment test (and interim test if determined to be necessary) will consist of comparing the fair value of our reporting unit to its carrying value. To the extent that the carrying value exceeds fair value, an impairment will be recognized.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

For the purpose of our goodwill impairment test, we first assess qualitative factors to determine if it is more likely than not that fair value of the reporting unit is less than the carrying amount. If it is less, an additional quantitative evaluation must be performed. Our quantitative assessment consists of using a market multiples approach to determine fair value. Marketplace company comparisons and analyst reports within the wireline communications industry have historically supported a range of fair values of multiples between 4.4x and 6.5x annualized EBITDA (defined as operating income, net of acquisition and integration costs, pension/OPEB expense, pension settlement costs, stock-based compensation expense, goodwill impairment, storm-related costs, work stoppage costs, and restructuring costs and other charges, as well as depreciation and amortization).

The decline in our stock price, our profitability, and the outlook of our business during the second and third quarter of 2019 were collectively a triggering event that required an impairment assessment in each of the second and third quarter of 2019. We recorded goodwill impairments totaling $5,725 million for the year ended December 31, 2019. The impairments in the second and third quarter of 2019 reflected lower enterprise valuation driven by lower profitability, as well as a reduction in the applicable market multiple from 5.3x EBITDA at December 31, 2018 to the 4.4x EBITDA utilized during our quantitative assessments in 2019. This reflects, among other things, pressures on our business resulting in the continued deterioration in revenue, challenges in achieving improvements in revenue and customer trends, the long-term sustainability of our capital structure, and the lower outlook of our industry as a whole.

The market multiples approach that we use incorporates significant estimates and assumptions related to the forecasted results for the remainder of the year, including revenues, expenses, and the achievement of other cost synergies. Our assessment includes many qualitative factors that require significant judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding the need for, or size of, an impairment.

Our indefinite lived trade name assets are evaluated for impairment annually similarly to goodwill. The annual process for assessing the carrying value of our trade name begins with a qualitative assessment of events and conditions similar to the assessment performed for goodwill. When events are identified, we evaluate the assets for impairment through comparison of the fair value of the trade name to the carrying value. The fair value of the trade name is determined using the relief from royalty method, which is a form of the income approach. As of December 31, 2019, no impairment was present for our trade name.

Depreciation

The calculation of depreciation expense is based upon the estimated useful lives of the underlying property, plant and equipment and identifiable finite-lived intangible assets. Depreciation expense is principally based on the composite group method for substantially all of our property, plant and equipment assets. The estimates for remaining lives of the various asset categories are determined annually, based on an independent study. Among other considerations, these studies include models that consider actual usage, replacement history and assumptions about technology evolution for each category of asset. The latest study was completed in the fourth quarter of 2019 and did not result in any significant changes in remaining lives for any of our asset categories. A one-year decrease in the estimated useful lives of our property, plant and equipment would result in an increase of approximately $155 million to depreciation expense.

See Notes 6 and 7 of the Notes to Consolidated Financial Statements for additional discussion.

Asset Impairments

We review long-lived assets to be held and used, including customer lists and long-lived assets to be disposed of for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. When triggering events are identified, recoverability of assets to be held and used is measured by comparing the carrying amount of the asset to the future undiscounted net cash flows expected to be generated by the asset. Recoverability of assets held for sale is measured by comparing the carrying amount of the assets to their estimated fair market value. If any assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value. Also, we periodically reassess the useful lives of our tangible and intangible assets to determine whether any changes are required.

We considered whether the carrying values of finite-lived intangible assets and property plant and equipment may not be recoverable or whether the carrying value of certain finite-lived intangible assets were impaired, noting no impairment was present as of or for the year ended December 31, 2019.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Pension and Other Postretirement Benefits

We sponsor a defined benefit pension plan covering a significant number of our current and former employees as well as other postretirement benefit plans that provide medical, dental, life insurance and other benefits for covered retired employees and their beneficiaries and covered dependents. As of December 31, 2019, the unfunded benefit obligation for these plans recorded on our consolidated balance sheet was $1,968 million, including $30 million classified as “Held for Sale”. During 2019, we contributed $166 million to these plans in cash and recorded $146 million of operating expense before capitalization, including $44 million of pension/OPEB special termination benefit enhancements, and $99 million of net non-operating expense, including $57 million of pension settlement costs. Pension and other postretirement benefit costs and obligations are dependent upon various actuarial assumptions, the most significant of which are the discount rate and the expected long-term rate of return on plan assets.

Our discount rate assumption is determined annually with assistance from our actuaries based on the pattern of expected future benefit payments and the prevailing rates available on long-term, high quality corporate bonds with durations approximate to that of our benefit obligation. As of December 31, 2019, and 2018, we utilized an estimation technique that is based upon a settlement model (Bond:Link) that permits us to closely match cash flows to the expected payments to participants. This rate can change from year-to-year based on market conditions that affect corporate bond yields.

We are utilizing a discount rate of 3.40% as of December 31, 2019 for our qualified pension plan, compared to rates of 4.30% and 3.70% in 2018 and 2017, respectively. The discount rate for postretirement plans as of December 31, 2019 was a range of 3.40% to 3.50% compared to a range of 4.30% to 4.40% in 2018 and 3.70% to 3.80% in 2017.

In the following table, we show the estimated sensitivity of our pension and other postretirement benefit plan liabilities to a 25 basis point change in the discount rate as of December 31, 2019:

In developing the expected long-term rate of return assumption, we considered published surveys of expected market returns, 10 and 20 year actual returns of various major indices, and our own historical 5 year, 10 year and 20 year investment returns. The expected long-term rate of return on plan assets is based on an asset allocation assumption of 40% in long-duration fixed income securities, and 60% in equity securities and other investments. We review our asset allocation at least annually and make changes when considered appropriate. Our asset return assumption is made at the beginning of our fiscal year. In 2019, 2018 and 2017, our expected long-term rate of return on plan assets was 7.50%. Our actual return on plan assets in 2019 was 23.34%. For 2020, we will assume a rate of return of 7.50%. Our pension plan assets are valued at fair value as of the measurement date.

For additional information regarding our pension and other postretirement benefits (see Note 20 to the Notes to Consolidated Financial Statements).

Income Taxes

We file a consolidated federal income tax return. We utilize the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recorded for the tax effect of temporary differences between the financial statement basis and the tax basis of assets and liabilities using tax rates expected to be in effect when the temporary differences are expected to reverse. Actual income taxes could vary from these estimates due to future changes in governing law or review by taxing authorities.

We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we are not able to realize a portion of our net deferred tax assets in the future, we would make an adjustment to the deferred tax asset valuation allowance, which would increase the provision for income taxes.

Recent Accounting Pronouncements

See Note 2 of the Notes to Consolidated Financial Statements included in Part IV of this report for additional information related to recent accounting pronouncements.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

We are exposed to market risk in the normal course of our business operations due to ongoing investing and funding activities, including those associated with our pension plan assets. Market risk refers to the potential change in fair value of a financial instrument as a result of fluctuations in interest rates and equity prices. We do not hold or issue derivative instruments, derivative commodity instruments or other financial instruments for trading purposes. As a result, we do not undertake any specific actions to cover our exposure to market risks, and we are not party to any market risk management agreements other than in the normal course of business. Our primary market risk exposures from interest rate risk and equity price risk are as follows:

Interest Rate Exposure

Our exposure to market risk for changes in interest rates relates primarily to the interest-bearing portion of our pension investment portfolio and the related actuarial liability for pension obligations, as well as our floating rate indebtedness. As of December 31, 2019, 86% of our total debt had fixed interest rates. We had no interest rate swap agreements in effect at December 31, 2019. We believe that our currently outstanding obligation exposure to interest rate changes is minimal.

Our objectives in managing our interest rate risk are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, 14% of our outstanding borrowings at December 31, 2019 have floating interest rates. The annual impact of 100 basis points change in the LIBOR would result in approximately $24 million of additional interest expense. An adverse change in interest rates would increase the amount that we pay on our variable rate obligations and could result in fluctuations in the fair value of our fixed rate obligations. Based upon our overall interest rate exposure, a near-term change in interest rates would not materially affect our consolidated financial position, results of operations or cash flows.

At December 31, 2019, the fair value of our debt was estimated to be approximately $12.0 billion, based on quoted market prices, our overall weighted average borrowing rate was 8.72% and our overall weighted average maturity was approximately six years. As of December 31, 2019, there has been no significant change in the weighted average maturity applicable to our obligations since December 31, 2018.

Equity Price Exposure

Our exposure to market risks for changes in equity security prices as of December 31, 2019 is primarily limited to our pension plan assets. We have no other security investments of any significant amount.

Our pension plan assets increased from $2,348 million at December 31, 2018 to $2,730 million at December 31, 2019, an increase of $382 million, or 16%. This increase was a result of contributions of $166 million and positive investment returns (net of investment management and administrative fees) of $516 million, partially offset by benefit payments of $300 million.

The following documents are filed as part of this Report:

1. Financial Statements - See Index on page F-1.

2. Supplementary Data - Quarterly Financial Data is included in the Financial Statements (see 1 above).

3. Schedule of Pledged Subsidiary Financial Data.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

None.

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, regarding the effectiveness of our disclosure controls and procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934, as amended). Based upon this evaluation, our principal executive officer and principal financial officer concluded, as of the end of the period covered by this report, December 31, 2019, that our disclosure controls and procedures were effective.

(a)	Management’s annual report on internal control over financial reporting

Our management report on internal control over financial reporting appears on page F-2.

(b)	Report of registered public accounting firm

The report of KPMG LLP, our independent registered public accounting firm, on internal control over financial reporting appears on page F-4.

(c)	Changes in internal control over financial reporting

The adoption of ASC 842 required the implementation of new accounting policies and processes, including enhancements to our information systems, which changed the Company’s internal controls over financial reporting for lease standard and related disclosures. Other than the change noted above, there have been no changes to our internal control over financial reporting identified in an evaluation thereof that occurred during the fiscal year of 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The Company has elected to defer making the interest payments of approximately $6.8 million due on April 1, 2020 with respect to its outstanding (a) 7.68% debentures due 2034 and (b) 7.05% debentures due 2046 (collectively, the deferred payment debentures). The indentures governing the deferred payment debentures allow the Company a 60-day grace period to make the interest payments. The Company has elected to enter into the grace period in order to continue collaborative discussions with certain Unsecured Noteholders regarding the Restructuring.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Certain of the information required by this Item is incorporated by reference from a Form 10-K/A to be filed with the SEC within 120 days after December 31, 2019.

Executive Officers of the Registrant

Our Executive Officers as of March 31, 2020 were:

There is no family relationship between the directors or executive officers. The term of office of each of the foregoing officers of Frontier is annual and will continue until a successor (if any) has been elected and qualified.

KENNETH W. ARNDT has been with Frontier since 2003 and was appointed Executive Vice President and Chief Operations Officer in 2018. Previously he was EVP of Commercial Sales Operations. Mr. Arndt also had oversight of Frontier’s operations in Connecticut, New York, Ohio, Pennsylvania and West Virginia. Before joining Frontier, Mr. Arndt served as Vice President of Marketing for Lucent Technologies and Vice President of Sales and Marketing for Commonwealth Telephone Company in Pennsylvania.

ELISA BANNON-JONES has been with Frontier since 2016 and was appointed Executive Vice President and Chief Human Resources Officer in 2018. Previously she was the Senior Vice President, Talent and Culture. Prior to joining Frontier, Ms. Bannon-Jones served in human resources, sales and operations leadership roles at The Budget Group, T-Mobile, U.S. Cellular, and Brightstar Corp.

SHELDON BRUHA was appointed Executive Vice President and Chief Financial Officer in 2019. He joined Frontier in February 2018 as Senior Vice President and Treasurer, responsible for Treasury, Investor Relations, Mergers & Acquisitions, and Risk & Insurance. Prior to joining Frontier, Mr. Bruha’s career in global finance included positions at CDI Corp. and senior financial positions heading corporate finance, treasury, tax, and investor relations for Cable & Wireless Communications in Miami and London. He started his financial career at Lehman Brothers, the global investment bank, and held senior investment banking positions in its New York and London offices, focusing on the telecommunications industry.

DONALD DANIELS joined Frontier in July 2014 and was appointed Senior Vice President and Chief Accounting Officer in 2018. Mr. Daniels was previously the Senior Vice President and Controller for Frontier. From October 2002 to July 2014 he held various positions with JetBlue Airways Corporation, including Corporate Controller, Chief Accounting Officer, Vice President and Controller, Assistant Controller, and Director of Financial Reporting. Prior to that Mr. Daniels held various positions of increasing responsibility at Delta Air Lines and Deloitte and Touche, LLP. Mr. Daniels is a veteran of the United States Army and a certified public accountant.

STEVE GABLE has been with Frontier since November 2012 and has been Executive Vice President and Chief Technology Officer since April 2015. Previously he served as Senior Vice President and Chief Information Officer. Prior to Frontier, Mr. Gable was Executive Vice President/CTO of Tribune Company while also serving as President of Tribune Digital. Before Tribune, Mr. Gable served as Vice President of Technology for Clear Channel Radio.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

BERNARD L. HAN was appointed President and Chief Executive Officer in December 2019 after serving as an advisor to the Finance Committee of the Board from October 2019. He previously served as Executive Vice President of Strategic Planning at Dish Network Corp., a broadcast satellite service provider, a role he held from December 2015. Prior to that, Mr. Han served as the Chief Operating Officer of Dish Network Corp. from April 2009 to December 2015 and as the Chief Financial Officer of EchoStar Corporation, a global satellite services provider, from September 2006 to April 2009. From 2002 to 2005, Mr. Han served as the Chief Financial Officer and Executive Vice President of Northwest Airlines Corp. From 1996 to 2002, Mr. Han held several executive positions at America West Airlines, Inc., including Executive Vice President and Chief Financial Officer and Senior Vice President of Marketing and Planning. From 1988 to 1995, Mr. Han held various finance and marketing positions at Northwest Airlines Corp. and American Airlines. Mr. Han is a member of the Board of Directors and Audit Committee of Frontier Airlines and previously served on the Board of Directors of ON Semiconductor Corporation. Mr. Han holds a B.S., M.S. and M.B.A. from Cornell University.

JOHN LASS has been with Frontier since 1994 and was appointed Executive Vice President and Chief Transformation Officer in 2018. Previously, he led Frontier’s Field Operations team. Before this, Mr. Lass was President of Frontier’s Central Region, comprising Illinois, Indiana, Iowa, Michigan, Minnesota and Nebraska. Mr. Lass’ tenure with Frontier includes a variety of operating roles as well as leadership of integration activities related to significant mergers and acquisitions. He served as Vice President of Revenue Assurance and as Regional Operations Vice President, Vice President and General Manager of Citizens Utilities Vermont Electric Division and held operations positions in New York and the Midwest with Frontier, GTE and Contel.

JOHN MADURI has been with Frontier since 2017 and was appointed Executive Vice President and Chief Customer Officer in 2018. Previously he was the Executive Vice President, Consumer Sales, Marketing & Product. He has more than 30 years of experience in the telecommunications industry. From January 2014 to December 2016, Mr. Maduri was President of Cable & Wireless Communications’ Commercial Business Unit, responsible for the strategy and growth of the B2B segment in the Caribbean and Latin America. From 2005 to 2013, Mr. Maduri was CEO of Xplornet Communications Inc. Prior to that, Mr. Maduri served as President, TELUS Business Solutions, a telecommunications company, from 2000 to 2004. Prior to joining Telus, Mr. Maduri held positions of increasing responsibility with Rogers Communications, including Executive Vice President, Finance and Planning, and Chief Financial Officer. He began his career as a Senior Auditor at the Toronto office of Price Waterhouse.

MARK D. NIELSEN has been with Frontier since 2014 and is Executive Vice President, Chief Legal Officer and Chief (Restructuring) Transaction Officer. Prior to joining Frontier, he was Associate General Counsel and Chief Compliance Officer for Praxair Inc. and Vice President and Assistant General Counsel of Raytheon Company. Before that, Mr. Nielsen served as Chief Legal Counsel, and then Chief of Staff, to Massachusetts Governor Mitt Romney from 2004 to 2007.

In accordance with General Instruction G(3) to Form 10-K, Frontier intends to file with the SEC the information required by this Item within 120 days after December 31, 2019.

In accordance with General Instruction G(3) to Form 10-K, Frontier intends to file with the SEC the information required by this Item within 120 days after December 31, 2019.

In accordance with General Instruction G(3) to Form 10-K, Frontier intends to file with the SEC the information required by this Item within 120 days after December 31, 2019.

In accordance with General Instruction G(3) to Form 10-K, Frontier intends to file with the SEC the information required by this Item within 120 days after December 31, 2019.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

List of Documents Filed as a Part of This Report:

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2019 and 2018

Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Comprehensive Loss for the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Equity (Deficit) for the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017

Notes to Consolidated Financial Statements

Pledged Subsidiaries Financial Data

All other schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto or is not applicable or not required.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Exhibits 10.13 through 10.39 are management contracts or compensatory plans or arrangements.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 31^st day of March 2020.

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

Index to Consolidated Financial Statements