FRONTIER COMMUNICATIONS PARENT, INC. Overview
Frontier Communications Corporation (Frontier) is a provider of communications services inthe United States , with approximately 4.1 million customers, 3.5 million broadband subscribers and 17,400 employees, operating in 29 states as ofMarch 31, 2020 . 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. OnMay 1, 2020 , Frontier completed the sale of its Northwest Operations for gross proceeds of$1,352 million , subject to certain closing adjustments. Net of funding certain pension and other retiree medical liabilities, funding certain escrows and other closing adjustments, we received$1,131 million in proceeds. Revenues for the Northwest Operations represented approximately 7% of consolidated revenue for the year endedDecember 31, 2019 . During the first quarter of 2020, Frontier reported operating income of$272 million and a net loss of$186 million . This compares to operating income of$339 million and a net loss of$87 million reported in the first quarter of 2019. We have continued to experience net losses in customers (1% in the first quarter of 2020 compared to 2% in the first quarter of 2019), which have contributed to lower revenues and lower profitability. Our results reflect a pension settlement charge of$103 million , compared to no charge during the first quarter of 2019, and,$48 million of restructuring and other charges (including$38 million of charges related to advisors and consultants associated with the restructuring of our balance sheet), compared to$28 million for the first quarter of 2019. Our operating results for the three months endedMarch 31, 2020 also include a$24 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 ofMarch 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 Form 10-Q, our ability to continue as a going concern is contingent upon, among other things, our ability to successfully emerge from the Chapter 11 Cases (as defined below) and generate sufficient liquidity from the Restructuring (as defined below) 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.
Recent Developments
Restructuring Support Agreement and Chapter 11 Cases
OnApril 14, 2020 ,Frontier Communications Corporation and its subsidiaries (collectively, the Company Parties) entered into a Restructuring Support Agreement (the Restructuring Support Agreement) with certain of its noteholders (the Consenting Noteholders). The Restructuring Support Agreement contemplates agreed-upon terms for a pre-arranged financial restructuring plan (the Plan) that leaves unimpaired all general unsecured creditors and holders of secured debt. Under the Restructuring Support Agreement, the Consenting Noteholders have agreed, subject to certain terms and conditions, to support a financial restructuring (the Restructuring) of the existing debt of, existing equity interests in, and certain other obligations of the Company Parties, pursuant to the Plan to be filed in cases commenced under chapter 11 (the Chapter 11 Cases) of the United States Bankruptcy Code (the Bankruptcy Code). To implement the Plan, onApril 14, 2020 (the Petition Date), the Company Parties filed the Chapter 11 Cases in theU.S. Bankruptcy Court for the Southern District of New York (theBankruptcy Court ).Each Company Party will continue to operate its business as a "debtor in possession" under the jurisdiction of theBankruptcy Court and in 40
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
accordance with the applicable provisions of the Bankruptcy Code and the orders
of the Bankruptcy Court . The Chapter 11 Cases are being jointly administered
under the caption In re Frontier Communications Corporation ., et al., Case No.
20-22476 (RDD).
See "-(b) Liquidity and Capital Resources- Subsequent Events Related to the
Restructuring Support Agreement and the Chapter 11 Cases" and Note 18 of the
Notes to Consolidated Financial Statements for more information on the
Restructuring. 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 quarter ended March 31, 2020 .
Going Concern
In connection with the preparation of our interim unaudited 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 Company's ability to continue as a going concern. As reflected in our interim unaudited consolidated financial statements, the Company had cash and cash equivalents of$941 million and an accumulated deficit of$8,759 million as ofMarch 31, 2020 . The Company also had operating income of$272 million and a net loss of$186 million for the three months endedMarch 31, 2020 .
As disclosed in "-Restructuring Support Agreement and Chapter 11 Cases," on
Our ability to continue as a going concern is contingent upon, among other things, our ability to, subject to theBankruptcy Court's approval, implement the Plan, successfully emerge from the Chapter 11 Cases and generate sufficient liquidity from the Restructuring to meet our obligations and operating needs. As a result of risks and uncertainties related to (i) the Company's ability to obtain requisite support for the Plan from various stakeholders, (ii) the effects of disruption from the Chapter 11 Cases making it more difficult to maintain business, financing and operational relationships, together with the Company's recurring losses from operations and accumulated deficit, substantial doubt exists regarding our ability to continue as a going concern. 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" and Note 18 of the Notes to Consolidated Financial Statements for more information on the Restructuring and our limited liquidity.
Impact of COVID-19 Pandemic
OnMarch 11, 2020 , theWorld Health Organization declared the highly contagious and lethal corona virus outbreak a global pandemic (COVID-19) and recommended containment and other mitigation measures worldwide to lessen the transmission of COVID-19. In the first quarter of 2020, governments from around the world, includingthe United States federal government as well as state and local governments have reacted to this public health crisis, imposing travel restrictions and restrictions on large gatherings of people, which includes school and non-essential business closures. The rapid spread of COVID-19 and the drastic responses being taken to curb its spread have resulted in a significant negative impact to the global and domestic economies, which will increase the longer these limitations are in place. In an effort to reduce the economic impacts of COVID-19,The United States federal government has responded with multiple stimulus bills, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the largest economic stimulus legislation in American history. Despite these efforts, the short-term and long-term impacts of COVID-19 cannot be determined. With more people staying at home and an increased reliance on broadband and telephone networks, theFCC issued the Keep Americans Connected Pledge onMarch 11, 2020 , which provides for telecommunication providers, including Frontier, to not terminate service and to waive any late payment fees for 60 days for certain customers due to economic circumstances they are facing related to COVID-19 as well as making WIFI hotspots available to all Americans who need them. In addition, we have seen a number of the states we operate in issue executive orders that impact our business, including 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. Given the unprecedented and evolving nature of the pandemic and the swift moving response of multiple levels of government 41 -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION (Continued) FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
as well as the uncertainty of funding available for services provided, the impact of these changes and potential changes on the Company are unknown at this time.
In addition to committing to the Keep Americans Connected Pledge, Frontier's response to COVID-19 includes limiting our product offerings to those that do not require a field service employee to enter a customer's home and directing most non-field service employees to work from home. Thus far only a few of Frontier's employees have tested positive for COVID-19. ThroughMarch 31, 2020 , we had not experienced any disruptions in our supply chain; however, some of our business partners, particularly those operating outside ofthe United States , have been more greatly impacted which has affected our service levels and distribution of work. While overall the operational and financial impact to Frontier of the COVID-19 pandemic for the three months endedMarch 31, 2020 were not significant, we continue to closely monitor the ongoing impact to our employees, our customers, our business and our results of operations. . For example, we have experienced a slowdown in service activations and an increase in deactivations for our SMB customers; however, these negative impacts have been partially offset, by higher residential activations and lower churn. While we haven't noticed any meaningful changes in our customers' payment behaviors, we continue to closely monitor as any changes could have a material financial impact to Frontier. With more people working from home, we have experienced higher demands on our network and higher sales activity for our residential broadband service offering. We have not experienced any significant disruptions in our service throughMarch 31, 2020 ; however, a sustained increase in network demand that we have experienced could lead to reduced network availability and potential outages, which may impair our ability to meet customer service level commitments, lead to higher costs, higher customer churn and potential increased regulatory actions. 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. ? 42
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
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 our
customers' communications needs.
The following section should be read in conjunction with the unaudited interim
consolidated financial statements and related notes appearing elsewhere in this
Quarterly Report on Form 10-Q and Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in our Annual Report
on Form 10-K for the year ended December 31, 2019 .
(a)Results of Operations
CUSTOMER RELATED METRICS
As of or for the three months ended
December 31, % Increase % Increase
March 31, 2020 2019 (Decrease) March 31, 2019 (Decrease)
Customers (in thousands) 4,063 4,118 (1) % 4,395 (8) %
Consumer customer metrics
Customers (in thousands) 3,703 3,747 (1) % 3,995 (7) %
Net customer additions
(losses) (44) (65) (32) % (65) (32) %
Average monthly consumer
revenue per customer $ 86.93 $ 88.40 (2) % $ 89.14 (2) %
Customer monthly churn 1.81% 1.93% (6) % 1.99% (9) %
Commercial customer
metrics
Customers (in thousands) 360 371 (3) % 400 (10) %
Broadband subscriber
metrics
(in thousands)
Broadband subscribers 3,480 3,513 (1) % 3,697 (6) %
Net subscriber additions
(losses) (33) (42) (21) % (38) (13) %
Video (excl. DISH)
subscriber metrics
(in thousands)
Video subscribers (in
thousands) 621 660 (6) % 784 (21) %
Net subscriber additions
(losses) (39) (38) 3 % (54) (28) %
DISH subscriber metrics
(in thousands)
DISH subscribers (in
thousands) 165 173 (5) % 198 (17) %
Net subscriber additions
(losses) (8) (8) - % (7) 14 %
Employees 17,437 18,317 (5) % 20,439 (15) %
Customer Trends and Revenue Performance
We provide service and product options in our consumer and commercial offerings in each of our markets.
Consumer Customers For the three months endedMarch 31, 2020 , Frontier lost 44,000, or 1%, of our consumer customers compared to 65,000, or 2% for the three months endedMarch 31, 2019 . As ofMarch 31, 2020 , 54% of our consumer broadband customers also subscribed to at least one other service offering. We lost 1% of our consumer broadband subscribers, primarily to competitors offering more attractive pricing or higher speeds. We experienced a 6% 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 the first quarter of 2020, we lost voice subscribers as a result of customers choosing alternative voice products and reduced attachment to broadband services. 43 -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION (Continued) FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES Our average monthly consumer customer churn was 1.81% for the three months endedMarch 31, 2020 compared to 1.99% for three months endedMarch 31, 2019 . The consolidated average monthly consumer revenue per customer (consumer ARPC) decreased by$2.21 or 2% to$86.93 during the first quarter of 2020 compared to the prior year period. The overall decrease in consumer ARPC is primarily a result of decreased FiOS/Vantage video services along with decreased consumer voice services, slightly offset by increased data equipment revenues. ? 44
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
REVENUE
For the three months ended
March 31, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Data and Internet services $ 932 $ 967 $ (35) (4) %
Voice services 572 650 (78) (12) %
Video services 222 268 (46) (17) %
Other 117 124 (7) (6) %Revenue from contracts with
customers (1) 1,843 2,009 (166) (8) % Subsidy revenue 90 92 (2) (2) % Total revenue$ 1,933 $ 2,101 $ (168) (8) % For the three months ended March 31, $ Increase % Increase ($ in millions) 2020 2019 (Decrease) (Decrease) Consumer$ 971 $ 1,077 $ (106) (10) % Commercial 872 932 (60) (6) %
Revenue from contracts with
customers (1) 1,843 2,009 (166) (8) % Subsidy revenue 90 92 (2) (2) % Total revenue$ 1,933 $ 2,101 $ (168) (8) %
(1)Includes
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 10% decrease in consumer customer revenue was primarily due to the 7% decline in consumer customers combined with decreased ARPC (as described above) resulting in reduced revenues for consumer voice services, video services, and to a lesser extent, data and internet services. The 6% decrease in commercial customer revenue was primarily driven by a 5% reduction in wholesale revenues which comprise approximately 52% 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 8% primarily as a result of a 10% decline in small business customers in the first quarter of 2020.
Subsidy revenue, which is primarily comprised of CAF Phase II subsidies,
decreased
We categorize our products, services, and other revenues into the following five categories:
Data and Internet Services Data and internet services revenue for the three months endedMarch 31, 2020 decreased 4% as compared with the first quarter of 2019. Broadband and data services revenues comprise 61% or$565 million of total Data and internet services revenue, while network access revenues comprise 39% or$367 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"). 45 -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION (Continued) FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES Broadband and data services revenue decreased by$20 million , or 3%, compared to the first quarter of 2019. The decrease was primarily driven by a loss of Consumer and SME customers combined with decreased other data services revenue. Network access revenues declined$15 million , or 4%, compared to the first quarter of 2019. This decrease was due to the migration of our carrier customers from legacy technology circuits to lower priced ethernet circuits.
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 12% for the three months endedMarch 31, 2020 in voice services revenue was primarily due to an 7% net loss in consumer customers and a 10% net loss in commercial customers compared to the prior year, 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 17% in video services revenue was primarily due to 21% net loss in FiOS and Vantage terrestrial video customers.
Other
Other customer revenue includes switched access revenue and sales of Customer
Premise Equipment (CPE) to our business customers and directory services.
Switched access revenue includes revenue 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 in other revenue for the three months ended March 31, 2020 was
primarily driven by a decrease in switched access revenue due to reduced rates
mandated by the Universal Service Fund /Intercarrier Compensation Report and
Order with a related decline in operating expenses and activation associated
fees.
Subsidy
Subsidy and other regulatory revenue includes revenue generated from cost
subsidies from state and federal authorities, including the Connect America Fund
Phase II.
OPERATING EXPENSES
NETWORK ACCESS EXPENSES
For the three months ended March 31, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Network access expenses $ 286 $ 338 $ (52) (15) %
Network access expenses include access charges and other third-party costs directly attributable to connecting customer locations to our network, video content costs and certain promotional costs. Such access charges and other third-party costs exclude network related expenses, depreciation and amortization, and employee related expenses.
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
The decrease in network access expenses for the three months ended March 31,
2020 was primarily driven by lower video content costs as a result of a decline
in video customers and decreased CPE costs.
NETWORK RELATED EXPENSES
For the three months ended March 31, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Network related expenses $ 444 $ 456 $ (12) (3) %
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 for the three months ended
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended March 31, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Selling, general and
administrative expenses $ 444 $ 456 $ (12) (3) %
Selling, general and administrative expenses (SG&A expenses) include the salaries, wages and related benefits and the related costs of corporate and sales personnel, travel, insurance, non-network related rent, advertising, and other administrative expenses.
The decrease in SG&A expenses for the three months ended
Pension and OPEB costs
Frontier allocates certain pension/OPEB expense to network related expenses and SG&A expenses. Total consolidated pension and OPEB service costs for the three months endedMarch 31, 2020 and 2019 were as follows: For the three months ended March 31, ($ in millions) 2020 2019 Total pension/OPEB service costs $ 30$ 26 Less: costs capitalized into capital expenditures (7) (6) Net pension/OPEB costs $ 23$ 20 47
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
DEPRECIATION AND AMORTIZATION EXPENSE
For the three months ended March 31, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Depreciation expense $ 316 $ 353 $ (37) (10) %
Amortization expense 99 131 (32) (24) %
Depreciation and
Amortization expense $ 415 $ 484 $ (69) (14) %
The decrease in depreciation expense for the three months ended March 31, 2020
was primarily driven by ceased depreciation 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 for the three months ended
LOSS ON PLANNED DISPOSAL OF NORTHWEST OPERATIONS
As a result of our ongoing evaluation of the recoverability of the carrying
value of the assets and liabilities held for sale as of March 31, 2020 relative
to the agreed upon sales price, adjusted for costs to sell, we recorded a loss
on planned disposal of $24 million during the three months ended March 31, 2020 .
RESTRUCTURING COSTS AND OTHER CHARGES
For the three months ended March 31, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Restructuring costs and
other charges $ 48 $ 28 $ 20 NM
NM - Not meaningful
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 $48 million in restructuring costs and other charges is comprised of $8
million in costs related to transformation initiatives, $2 million in severance
expense, and $38 million in consulting and advisory costs related to our balance
sheet restructuring activities.
?
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
OTHER NON-OPERATING INCOME AND EXPENSE
For the three months ended March 31, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Investment and other
income (loss), net $ 5 $ (9) $ 14 NM
Pension settlement $ 103 $ - $ 103 100 %
Loss on extinguishment of
debt $ - $ (20) $ 20 NM
Interest expense $ 383 $ 379 $ 4 1 %
Income tax (benefit)
expense $ (23) $ 18 $ (41) NM
NM - Not meaningful
Investment and other income (loss), net
Investment and other income (loss), net for the three months endedMarch 31, 2020 included$1 million of non-operating pension and OPEB income. Investment and other income (loss), net for the three months endedMarch 31, 2019 included$11 million of non-operating pension and OPEB expense.
Pension Settlement
During the three months endedMarch 31, 2020 , lump sum pension settlement payments to terminated or retired individuals amounted to$310 million , which exceeded the settlement threshold of$211 million , and as a result, Frontier recognized non-cash settlement charges totaling$103 million during the first quarter of 2020.
Loss on extinguishment of debt
Frontier recorded a loss on early extinguishment of debt of$20 million for the three months endedMarch 31, 2019 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.
Interest expense
Interest expense for the three months endedMarch 31, 2020 remained relatively flat as compared to the three months endedMarch 31, 2019 . Our composite average borrowing rate as ofMarch 31, 2020 and 2019 was 8.69% and 8.90%, respectively.
Income tax benefit (expense)
For the three months endedMarch 31, 2020 , Frontier recorded income tax benefit of$23 million on the pre-tax loss of$209 million . The effective tax rates on our pretax loss for the three months endedMarch 31, 2020 was 11.1% compared with (26.0)% for the pretax loss for the three months endedMarch 31, 2019 .
Basic and diluted net loss attributable to Frontier common shareholders
Basic and diluted net loss attributable to Frontier common shareholders for the first three months of 2020 was$186 million , or$(1.78) per share, as compared to a net loss of$87 million , or$(0.84) per share, in the first three months of 2019. For 2020, our net loss was driven by decreased profitability. ? 49
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES(b) Liquidity and Capital Resources
Historically, our principal liquidity requirements have been to maintain and expand our business, pay principal and interest obligations on our indebtedness, including our Term Loan B, Revolver, 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 ability to continue as a going concern is dependent upon our ability to, subject to theBankruptcy Court's approval, implement the Plan, successfully emerge from the Chapter 11 Cases and 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. Refer to "-Subsequent Events Related to the Restructuring Support Agreement and the Chapter 11 Cases" for more information on the terms of the Restructuring Support Agreement, the Chapter 11 Cases and the effects of both on our liquidity.
Analysis of Cash Flows
As ofMarch 31, 2020 , we had unrestricted cash and cash equivalents aggregating$941 million . For the three months endedMarch 31, 2020 , we used cash flow from operations, cash on hand, and cash from prior year borrowings to principally fund all of our cash investing and financing activities, which were primarily capital expenditures and debt repayments. AtMarch 31, 2020 , we had a working capital deficit of$16,027 million compared to surplus of$233 million atDecember 31, 2019 . The primary driver for the working capital deficit atMarch 31, 2020 , was the acceleration of the maturities of substantially all of our debt obligations following the filing of the Chapter 11 Cases. Cash Flows from Operating Activities Cash flows provided by operating activities increased$195 million to$477 million for the three months endedMarch 31, 2020 as compared to the corresponding period in 2019. The overall increase in operating cash flows was primarily attributable to favorable changes in working capital, including an increase of$393 million of accrued interest as compared toMarch 31, 2019 . This increase was due to the Company's decision to defer$322 million of interest payments dueMarch 15, 2020 on our unsecured senior notes.
We paid
Cash Flows from Investing Activities
Capital Expenditures
For the three months endedMarch 31, 2020 and 2019, our capital expenditures were$286 million and$305 million , respectively. Capital expenditures related to CAF Phase II are included in our reported amounts for capital expenditures. Cash Flows from Financing Activities
New Debt Issuances and Debt Reductions:
OnMarch 15, 2019 , we completed a private offering of$1,650 million aggregate principal amount of 8.00% First Lien Secured Notes due 2027 (the First Lien Notes). The First Lien Notes are guaranteed by each of the Company's subsidiaries that guarantees its senior secured credit facilities. The guarantees are unsecured obligations of the guarantors equal in right of payment to all of the guarantor's obligations under the Company's senior secured credit facilities and certain other permitted future senior indebtedness and senior in right of payment with all subordinated obligations of the guarantors. The First Lien Notes are secured on a first-priority basis by all the assets that secure Frontier's obligations under its senior secured credit facilities on a first-priority basis. Interest on the First Lien Notes 50 -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION (Continued) FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
is payable to holders of record semi-annually in arrears on
During the three months ended
During the three months endedMarch 31, 2019 , Frontier used cash on hand for the scheduled retirement of$348 million principal amount of senior indebtedness. In addition, Frontier used the proceeds from the offering of First Lien Notes, together with cash on hand, to (i) repay in full the outstanding borrowings under the senior secured term loan A facility under the JPM Credit Agreement, which otherwise would have matured inMarch 2021 , (ii) repay in full the outstanding borrowings under the 2016 CoBank Credit Agreement, which otherwise would have matured inOctober 2021 , and (iii) pay related interest, fees and expenses. Capital Resources We are highly leveraged, and a substantial portion of our liquidity needs 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. We completed the sale of the Northwest Operations onMay 1, 2020 . Net of pension funding, certain escrows, and other closing adjustments, we received$1,131 million in proceeds. In addition, we have obtained commitments, subject to the satisfaction of certain customary conditions, including the approval of theBankruptcy Court , for a senior secured superpriority debtor-in-possession revolving credit facility, or DIP Facility. However, our ability to continue as a going concern is dependent upon our ability to, subject to theBankruptcy Court's approval, implement the Plan, successfully emerge from the Chapter 11 Cases and generate sufficient liquidity from the Restructuring to meet our obligations and operating needs. Refer to "-Subsequent Events Related to the Restructuring Support Agreement and the Chapter 11 Cases" for a description of the potential DIP Facility and Exit Facility and for more information on the terms of the Restructuring Support Agreement, the Chapter 11 Cases and the effects of both on our liquidity.
Term Loan and Revolving Credit Facilities
JP Morgan Credit Facilities:
OnFebruary 27, 2017 , Frontier entered into a first amended and restated credit agreement withJPMorgan Chase Bank, N.A ., as administrative agent, and the lenders party thereto, pursuant to which Frontier combined its revolving credit agreement, dated as ofJune 2, 2014 , and its term loan credit agreement, dated as ofAugust 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 onJune 15, 2024 and an$850 million secured revolving credit facility maturing onFebruary 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 ofDecember 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. 51 -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION (Continued) FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES 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 ofMarch 31, 2020 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 ofMarch 31, 2020 , Frontier had borrowings of$749 million outstanding under the Revolver (with letters of credit issued under the Revolver totaling$101 million ). OnMarch 15, 2019 , Frontier used proceeds from the offering of First Lien Notes, together with cash on hand, to repay in full the outstanding borrowings under its$1,625 million senior secured Term Loan A facility, which otherwise would have matured inMarch 2021 , as described above under "New Debt Issuances and Debt Reductions." In addition onMarch 15, 2019 , Frontier amended the JPM Credit Agreement to, among other things, (i) extend the maturity date of the Revolver fromFebruary 27, 2022 toFebruary 27, 2024 (subject to springing maturity to any tranche of our existing debt with an aggregate outstanding principal amount in excess of$500 million ), (ii) increase the interest rate applicable to such revolving loans by 0.25% and (iii) make certain modifications to the debt and restricted payment covenants. CoBank Credit Facilities: Frontier had a$315 million senior term loan facility drawn inOctober 2016 (as amended to date, the 2016 CoBank Credit Agreement) with CoBank, ACB, as administrative agent, lead arranger and a lender, and the other lenders. OnMarch 15, 2019 , Frontier used proceeds from the offering of the First Lien Notes, together with cash on hand, to repay in full the outstanding borrowings under the 2016 CoBank Credit Agreement, which otherwise would have matured inOctober 2021 . 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 onJuly 3, 2018 , as described above under "New Debt Issuances and Debt Reductions."
Letters of Credit
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 ofMarch 31, 2020 ,$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. Covenants 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 endingJune 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 52 -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION (Continued) FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES 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 ofMarch 31, 2020 , we were in compliance with all of the covenants under our indentures and the JPM Credit Agreement. OnApril 14, 2020 , the Company Parties filed the Chapter 11 Cases in theBankruptcy Court . The filing of the Chapter 11 Cases constituted an Event of Default under our debt covenants.
Shareholder Rights Plan
OnJuly 1, 2019 , our Board of Directors adopted a shareholder rights plan designed to protect our net operating losses for tax purposes (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. 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 ofJuly 1, 2019 , by and between us andComputershare Trust Company, N.A. , as Rights Agent, filed as an exhibit to our Periodic Report on Form 8-K filed onJuly 1, 2019 .
Subsequent Events Related to the Restructuring Support Agreement and the Chapter 11 Cases
Restructuring Support Agreement
OnApril 14, 2020 , the Company Parties entered into the Restructuring Support Agreement with the Consenting Noteholders. The Restructuring Support Agreement contemplates agreed-upon terms for a pre-arranged financial restructuring Plan that leaves unimpaired all general unsecured creditors and holders of secured debt.
Under the Restructuring Support Agreement, the Consenting Noteholders have agreed, subject to certain terms and conditions, to support the Restructuring of the existing debt of, existing equity interests in, and certain other obligations of the Company Parties, pursuant to the Plan to be filed in the Chapter 11 Cases.
The Plan will be based on the restructuring term sheet attached to and incorporated into the Restructuring Support Agreement (the Term Sheet) (such transactions described in, and in accordance with the Restructuring Agreement and the Term Sheet, the Restructuring Transactions), which, among other things, contemplates:
?the Company Parties' obtaining confirmation of the Plan, which shall be on terms consistent with the Restructuring Support Agreement and the Term Sheet, no later than 120 calendar days after the Petition Date (as defined herein);
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
?the Company Parties using commercially reasonable efforts to obtain commitments
on the best available terms for a senior secured superpriority
debtor-in-possession financing facility (the DIP Facility), with an option for
conversion into an Exit Facility (as defined below) on the Plan effective date
(Plan Effective Date), on terms and conditions (including as to amount)
reasonably acceptable to the Company Parties and reasonably acceptable to the
Consenting Noteholders, as of the relevant date, holding greater than 50.1% of
the aggregate outstanding principal amount of the Frontier Communications
Corporation's senior unsecured notes and debentures (the Senior Notes) that are
subject to the Restructuring Support Agreement (the Required Consenting
Noteholders);
?one or more third-party debt facilities (Exit Facilities), to be entered into
on the Plan Effective Date, in an amount reasonably sufficient to facilitate
Plan distributions and ensure incremental liquidity on the Plan Effective Date,
and otherwise be on terms and conditions (including as to amount) reasonably
acceptable to the Company Parties and reasonably acceptable to the Required
Consenting Noteholders;
?to the extent not converted into an Exit Facility, full satisfaction in cash on the Plan Effective Date of all DIP Facility claims;
?issuance by one or more of the Company Parties of takeback debt (the Takeback Debt), in a principal amount of$750 million , subject to downward adjustment and certain other terms set forth in the Term Sheet, including, but not limited to: oan interest rate (a) no more than 250 basis points higher than the interest rate of the next more junior secured debt facility to be entered into on the Plan Effective Date if the Takeback Debt is secured on a third lien basis or (b) no more than 350 basis points higher than the interest rate of the most junior secured debt facility to be entered into on the Plan Effective Date if the Takeback Debt is unsecured; oa maturity no less than one year outside of the longest-dated debt facility to be entered into on the Plan Effective Date, subject to an outside maturity date of eight years from the Plan Effective Date; o(i) to the extent the Second Lien Notes are reinstated under the Plan, providing the Takeback Debt will be third lien debt, or (ii) to the extent the Second Lien Notes are paid in full in cash during the pendency of the Chapter 11 Cases or under the Plan, providing the Company Parties and the Required Consenting Noteholders will agree on whether the Takeback Debt will be secured or unsecured, subject to certain conditions; and oall other terms including, without limitation, covenants and governance, shall be reasonably acceptable to the Company Parties and the Required Consenting Noteholders; provided that such terms shall not be more restrictive than those in the indenture for the Second Lien Notes. ?subject to acceptance of the Plan by the holders of the Senior Notes, a cash payment (the Incremental Payments) on the Plan Effective Date to each holder of the Senior Notes (to the extent of the available amount of unrestricted balance sheet cash in excess of$150 million on the Plan Effective Date as projected 30 days prior to the anticipated Plan Effective Date, subject to adjustments set forth in the Term Sheet (Surplus Cash));
?cash interest payments for the Revolver and, to the extent not already satisfied in full during the Chapter 11 Cases from the proceeds of the DIP Facility, satisfaction in full on the Plan Effective Date of all Revolver claims;
?cash interest payments for (i) the Term Loan B maturing onJune 15, 2024 , and (ii) the$1,650 million aggregate principal amount of the First Lien Notes, as applicable, at non-default rate during the Chapter 11 Cases, which shall not include any make-whole payments, until repayment or reinstatement of such indebtedness; ?upon mutual agreement among the Company Parties and the Required Consenting Noteholders, for the$1,600 million aggregate principal amount of the Second Lien Notes (together with the First Lien Notes, the Secured Notes), (i) cash interest payment at non-default rate during the Chapter 11 Cases, which shall not include any make-whole payments, until repayment or reinstatement of the Second Lien Notes or (ii) payment of accrued non-default rate interest on the Plan Effective Date, which shall not include any make-whole payments, and no cash interest payment during the Chapter 11 Cases; 54 -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION (Continued) FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES ?to the extent not already satisfied in full during the Chapter 11 Cases from the proceeds of the DIP Facility, (i) satisfaction in full of all Term Loan B claims and all Secured Notes claims on the Plan Effective Date, or (ii) solely in the event the Company Parties cannot procure financing on terms acceptable to the Company Parties and the Required Consenting Noteholders to repay in full the Term Loan B or the Secured Notes, as applicable, reinstatement of all Term Loan B claims and all Secured Notes claims, as applicable, pursuant to section 1124 of the Bankruptcy Code on the Plan Effective Date; ?cash interest payments at non-default rate during the Chapter 11 Cases for the secured and unsecured notes of the Company's subsidiaries and, on or as soon as reasonably practicable following the Plan Effective Date, reinstatement of such notes pursuant to section 1124 of the Bankruptcy Code; ?cash payment of all general unsecured claims (other than Parent Litigation Claims (as defined below)), if applicable, that are not Senior Notes claims or subsidiary unsecured notes claims, reinstatement of such claims pursuant to section 1124 of the Bankruptcy Code or other such treatment rendering such claims unimpaired, in each case, as reasonably acceptable to the Company Parties and the Required Consenting Noteholders; ?litigation-related claims against the Company that would be subject to the automatic stay (except those subject to the police and regulatory exception) (the Parent Litigation Claims) will be unimpaired, provided that the Parent Litigation Claims will be allowed in an amount that does not exceed existing insurance coverage plus$25 million ; ?cash payment in full of all administrative expense claims, priority tax claims, other priority claims, and other secured claims or other such treatment rendering such claims unimpaired, including reinstatement pursuant to section 1124 of the Bankruptcy Code or delivery of the collateral securing any such secured claim and payment of any interest required under section 506(b) of the Bankruptcy Code; ?a motion, promptly after the commencement of the Chapter 11 Cases, filed by the Company Parties to assume the Purchase Agreement (the Purchase Agreement), dated as ofMay 28, 2019 , among the Company,Frontier Communications ILEC Holdings LLC , andNorthwest Fiber, LLC , as amended, restated, amended and restated, or otherwise modified from time to time, and close the sale of the Northwest Operations subject to certain terms and conditions in the Purchase Agreement, as soon as reasonably practicable; ?on or as soon as reasonably practicable following the Plan Effective Date, receipt by the holders of the Senior Notes, in full satisfaction of their claims, their pro rata share of (a) 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 stock of the Company as may be contemplated by the Restructuring (theReorganized Company ), subject to dilution by the Management Incentive Plan (as defined below), (b) the Takeback Debt and (c) any Surplus Cash remaining after payments of the Incremental Payments; ?on the Plan Effective Date, reservation of a pool (theManagement Incentive Plan Pool ) of 6% (on a fully diluted basis) of the New Common Stock for a post-emergence management incentive plan (the Management Incentive Plan) for management employees of theReorganized Company , which will contain terms and conditions as determined at the discretion of the board of directors of theReorganized Company after the Plan Effective Date; provided that up to 50% of theManagement Incentive Plan Pool may be allocated prior to the Plan Effective Date as emergence grants (Emergence Awards) to individuals selected to service in key senior management positions after the Plan Effective Date; provided, further, that the Emergence Awards will have terms and conditions that are acceptable to the Company Parties and the Required Consenting Noteholders;
?no distribution for existing equity interests; and
?in the event the Required Consenting Noteholders and the Company Parties determine that the New Common Stock should be listed on a recognizedU.S. stock exchange , commercially reasonable efforts by theReorganized Company to have the New Common Stock listed on a recognizedU.S. stock exchange as promptly as reasonably practicable on or after the Plan Effective Date, and prior to any such listing, commercially reasonable efforts to qualify its shares for trading in the pink sheets.
In accordance with the Restructuring Support Agreement, the Consenting Noteholders agreed, among other things, to: (i) support the Restructuring Transactions as contemplated by, and within the timeframes outlined in, the Restructuring Support Agreement and the definitive documents governing the Restructuring Transactions; (ii) not
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
take any action, directly or indirectly, that is reasonably likely to interfere
with acceptance, implementation, or consummation of the Restructuring
Transactions; (iii) vote each of its Senior Notes Claims to accept the Plan; and
(iv) not transfer Senior Notes Claims held by each Consenting Noteholders except
with respect to limited and customary exceptions, including requiring any
transferee to either already be bound or become bound by the terms of the
Restructuring Support Agreement.
In accordance with the Restructuring Support Agreement, the Company Parties
agreed, among other things, to: (i) support and take all steps reasonably
necessary and desirable to consummate the Restructuring Transactions in
accordance with the Restructuring Support Agreement; (ii) support and take all
steps reasonably necessary and desirable to obtain entry of (a) the final orders
of the Bankruptcy Court authorizing the relevant Company Parties' entry into the
DIP Facility documents (the DIP Orders), (b) the order of the Bankruptcy Court
approving the Plan disclosure statement pursuant to section 1125 of the
Bankruptcy Code and (c) the Bankruptcy Court's order confirming the Plan; (iii)
use commercially reasonable efforts to obtain any and all required governmental,
regulatory and/or third-party approvals for the Restructuring Transactions; (iv)
act in good faith and use commercially reasonable efforts to execute and deliver
certain required documents and agreements to effectuate and consummate the
Restructuring Transactions as contemplated by the Restructuring Support
Agreement; (v) operate their business in the ordinary course of business in a
manner consistent with the Restructuring Support Agreement and past practice and
use commercially reasonable efforts to preserve their business; and (vi) not,
directly or indirectly, object to, delay, impede, or take any other action to
interfere with acceptance, implementation, or consummation of the Restructuring
Transactions.
The Restructuring Support Agreement may be terminated upon the occurrence of
certain events, including the failure to meet specified milestones related to
the solicitation of votes to approve the Plan, commencement of the Chapter 11
Cases, confirmation of the Plan, consummation of the Plan, and the entry of
orders relating to the DIP Facility.
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.
Chapter 11 Cases
To implement the Plan, on the Petition Date, the Company Parties filed the Chapter 11 Cases under the Bankruptcy Code in theBankruptcy Court .Each Company Party will continue to operate its business as a "debtor in possession" under the jurisdiction of theBankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of theBankruptcy Court . The Chapter 11 Cases are being jointly administered under the caption In reFrontier Communications Corporation ., et al., Case No. 20-22476. Documents filed on the docket of and other information related to the Chapter 11 Cases are available at https://cases.primeclerk.com/ftr. Documents and other information available on such website are not part of this document and shall not be deemed incorporated by reference in this document. To ensure the Company Parties' ability to continue operating in the ordinary course of business and minimize the effect of the Restructuring on the Company Parties' customers and employees, the Company Parties filed with theBankruptcy Court motions seeking a variety of "first-day" relief, including authority to obtain the DIP Facility, pay employee wages and benefits, and pay vendors and suppliers in the ordinary course for all goods and services.
DIP Facility
OnApril 14, 2020 and prior to the commencement of the Chapter 11 Cases, the Company and certain of its subsidiaries (the DIP Loan Parties) entered into a commitment letter (the Commitment Letter) withGoldman Sachs Bank USA (GS Bank ), Deutsche Bank AG New York Branch (DBNY),Deutsche Bank Securities Inc. (DBSI and, collectively with DBNY, DB), Barclays Bank PLC (Barclays),Morgan Stanley Senior Funding, Inc. (MSSF), Credit Suisse AG,Cayman Islands Branch (CS) and Credit Suisse Loan Funding LLC (CSLF and, together with CS and their respective affiliates, Credit Suisse, and together withGS Bank , DB, Barclays and MSSF, the Commitment Parties), pursuant to which, and 56 -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION (Continued) FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES subject to the satisfaction of certain customary conditions, including the approval of theBankruptcy Court , the Commitment Parties have agreed to provide the DIP Loan Parties with a senior secured superpriority debtor-in-possession revolving credit facility (the DIP Revolving Facility) in an aggregate principal amount of$460 million which, upon satisfaction of certain conditions, including the effectiveness of the Plan, will become a longer term senior secured exit revolving facility (the Exit Revolving Facility). The terms and conditions of the DIP Revolving Facility are set forth in the form Senior Secured Superpriority Debtor-in-Possession Credit Agreement (the Form DIP Credit Agreement) attached to the Commitment Letter. The DIP Revolving Facility includes conditions precedent, representations and warranties, affirmative and negative covenants and events of default customary for financings of this type and size, including an event of default (the Prepayment Event of Default) that is triggered if the revolving loans outstanding under the JPM Credit Agreement are not repaid in full on or prior to the earlier to occur of (i) the 60th day following the Company's actual receipt of the net cash proceeds from the sale of the Northwest Operations, and (ii) the third business day following the first day on which the Company has received both (x) the net cash proceeds of the sale of the Northwest Operations and (y) an order of theBankruptcy Court approving the repayment in full of the outstanding revolving loans under the JPM Credit Agreement. The occurrence of the Prepayment Event of Default would cause the termination of the commitments with respect to the Exit Revolving Facility unless otherwise agreed by eachCommitment Party . The proceeds of all or a portion of the DIP Revolving Facility may be used for, among other things, general corporate purposes, including working capital and permitted acquisitions and letters of credit, administrative costs, premiums, expenses and fees of the transactions contemplated by the Chapter 11 Cases, for payment of court approved adequate protection obligations and other such purposes consistent with the DIP Revolving Facility. To the extent not converted into an Exit Revolving Facility, DIP Revolving Facility claims will be paid in cash on the Plan Effective Date. The terms and conditions of the Exit Revolving Facility are reflected in an exit facility term sheet attached as an exhibit to the Form DIP Credit Agreement (the Exit Facility Term Sheet). Upon of the satisfaction of certain conditions set forth in the Exit Facility Term Sheet, including compliance with a 1.55:1.00 gross first lien leverage ratio test and the repayment in full of the revolving loans outstanding under the JPM Credit Agreement, the DIP Revolving Facility commitments will become Exit Revolving Facility commitments. The Company has the option to increase the size of the Exit Revolving Facility up to an amount of$600.0 million by obtaining commitments from one or more lenders prior to the Plan Effective Date.
Effects of the Restructuring and the Chapter 11 Cases on Our Liquidity
The filing of the Chapter 11 Cases constituted an event of default that accelerated substantially all of our obligations under the documents governing the JPM Credit Facilities, the First Lien Notes, the Second Lien Notes, our unsecured notes and debentures and the secured and unsecured debentures of our subsidiaries. However, pursuant to the Bankruptcy Code and as described in "Part II. Other Information-Item 1. Legal Proceedings", the filing of the Bankruptcy Petitions automatically stayed most actions against the Company Parties, including most actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Company Parties' property. Accordingly, although the filing of the Bankruptcy Petitions triggered events of default under our existing debt obligations, creditors are stayed from taking action as a result of these defaults. Additionally, under Section 502(b)(2) of the Bankruptcy Code, and subject to the terms of the DIP Orders providing for adequate protection payments to certain of our prepetition lenders, we are no longer required to pay interest on our indentures and credit facilities accruing on or after the Petition Date. Additionally, in connection with the Chapter 11 Cases, we have incurred, and expect to continue to incur, significant professional fees and other costs in connection with the Chapter 11 Cases. There can be no assurance that our current liquidity is sufficient to allow us to satisfy our obligations related to the Chapter 11 Cases or to pursue confirmation of the Plan. Off-Balance Sheet Arrangements 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.
Contractual Obligations
Other than as disclosed elsewhere in this report with respect to the filing of
the Chapter 11 Cases and the acceleration of substantially all of our debt as a
result, there have been no material changes outside the ordinary course of
business to the information provided with respect to our contractual
obligations, including indebtedness
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
and purchase and lease obligations, as disclosed in our Annual Report on Form
10-K for the year ended
Future Commitments
InApril 2015 , theFCC 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. InJune 2015 , Frontier accepted the CAF Phase II offer, which provides for$332 million in annual support through 2020, including$19 million in annual support related to the Northwest Operations, to make available 10 Mbps downstream/1 Mbps upstream broadband service to approximately 774,000 households across some of the 29 states where we 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 or we are unable to satisfy otherFCC CAF Phase II requirements, Frontier would be required to return a portion of the funds previously received.
Critical Accounting Policies and Estimates
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.
These critical accounting estimates have been reviewed with the Audit Committee of our Board of Directors.
Except for the removal of goodwill impairment as a critical accounting policy due to full impairment during fiscal 2019, there have been no material changes to our critical accounting policies and estimates from the information provided in Item 7. "Management Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
Recent Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements included in Part I of this report for additional information related to recent accounting literature.
?
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIESRegulatory Developments
In 2015, Frontier accepted theFCC 's CAF Phase II offer in 29 states, which provides$332 million in annual support through 2020 (since extended to 2021 under the RDOF program, 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 toCAF II . OnJanuary 30, 2020 , theFCC adopted an order establishing the RDOF program, the next phase of the CAF program. With this order, theFCC plans to hold two auctions totaling$20.4 billion of support over ten years. In the first auction, theFCC 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 theFCC 's current maps. After theFCC updates its maps with more granular broadband availability information, theFCC 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 thatCAF II 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 establishingOctober 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 theFCC underCAF II as early as 2022. OnApril 20, 2017 , theFCC 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 theFCC , theFCC has reinstated the deregulation and theFCC 's decision to reaffirm its deregulation has not been appealed. OnSeptember 25, 2019 , theFCC released an order scheduling its CBRS (3.5 GHz) auction, in which theFCC will auction 7 blocks of 10 MHz TDD per county, or 22,631 licenses nationwide, to begin onJuly 23, 2020 . Short form applications to participate need to be filed byMay 7, 2020 . Frontier is evaluating whether to participate in this auction. InSeptember 2018 ,California network neutrality legislation was signed into law. TheCalifornia legislation aims to reimpose the provisions of theFCC 's 2015 Network Neutrality decision.The Department of Justice has filed a lawsuit againstCalifornia , stating that it attempts to govern interstate commerce, which is a federal matter outside the state's jurisdiction. Four Industry Associations representing Internet Service Providers (USTelecom, CTIA, NCTA and ACA) have also filed suit. TheCalifornia Attorney General has agreed to delay implementing theCalifornia law until the federal lawsuit is resolved. Frontier cannot predict the outcome of this litigation and, although Frontier's current practices comply with theCalifornia law, the extent to which regulatory changes associated with theCalifornia law could affect revenues at this time. A number of additional states are currently considering Network Neutrality legislation during their 2019 legislative sessions. OnOctober 1, 2019 , theD.C. Circuit Court largely upheld theFCC decision in its 2018 Restoring InternetFreedom Order to reclassify broadband as an "information service." However, the Court invalidated theFCC 's preemption of a state's ability to pass their own network neutrality rules and remanded back to theFCC 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. 59 -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION (Continued) FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES OnMarch 13, 2020 , in response to the COVID-19 pandemic, over 550 providers of critical communications services, including Frontier, took theFCC 's Keep Americans Connected pledge pursuant to which providers agreed 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 their 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.
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