FRONTIER COMMUNICATIONS PARENT, INC. Overview
Frontier Communications Corporation (Frontier) is a provider of communications services inthe United States , with approximately 3.7 million customers, 3.1 million broadband subscribers and 16,400 employees, operating in 25 states as ofJune 30, 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. OnApril 14, 2020 , Frontier filed for Chapter 11 bankruptcy with theU.S. Bankruptcy Court for the Southern District of New York . Frontier is working on a restructuring plan to reduce its debt by more than$10 billion . During this Chapter 11 filing, Frontier is allowed to reorganize its finances while the business operations continue. The Company Parties continue to operate their businesses and manage their properties as "debtors-in-possession" under the jurisdiction of theBankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of theBankruptcy Court . 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 pay employee wages and benefits, and pay vendors and suppliers for goods and services provided both before and after the filing date. For further developments on this topic see "Recent Developments" discussion below. 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 second quarter of 2020, Frontier reported operating income of$140 million and a net loss of$181 million . This compares to an operating loss of$5,459 million and a net loss of$5,317 million reported in the second quarter of 2019. We have continued to experience net losses in customers, which have contributed to lower revenues and lower profitability. Our results in the second quarter of 2020 reflect a$136 million loss on the sale of our Northwest Operations, a pension settlement charge of$56 million ,$36 million of restructuring and other charges, and$142 million of reorganization charges. Contractual interest attributable to our unsecured noteholders of$218 million was not recorded, as we do not expect those amounts to be paid. Our results for the second quarter of 2019 included a$5,449 million goodwill impairment, a loss on disposal of$384 million , and$31 million of restructuring costs and other charges. 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. Recent Developments 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 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). 43 --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
To implement the Plan, on April 14, 2020 (the Petition Date), the Company
Parties filed the Chapter 11 Cases in the U.S. Bankruptcy Court for the Southern
District of New York (the Bankruptcy Court ). Each Company Party continues to
operate its business as a "debtor in possession" under the jurisdiction of the
Bankruptcy Court and in 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).
On May 15, 2020 , the Company Parties filed the Plan and related Disclosure
Statement describing the Plan and the solicitation and voting procedures to
approve the same, each of which were amended on June 26, 2020 , June 29, 2020 and
June 30, 2020 . On June 30, 2020 , the Bankruptcy Court entered an order approving
the adequacy of the Disclosure Statement, the solicitation and notice procedures
and the forms of voting ballots and notices in connection therewith. The order
established June 29, 2020 as the voting record date, July 2, 2020 as the
solicitation launch date and July 31, 2020 as the voting deadline. The hearing
to consider confirmation of the Plan is scheduled for August 21, 2020 . The Plan
will be subject to usual and customary conditions to plan confirmation,
including obtaining the requisite vote of an unimpaired class of creditors and
approval of the Bankruptcy Court .
See "-(b) Liquidity and Capital Resources-Chapter 11 Filing and Other Related
Matters" and Note 3 of the Notes to Consolidated Financial Statements for more
information on the Restructuring and the Chapter 11 Cases. 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 June 30, 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 unrestricted cash and cash equivalents of$2,290 million and an accumulated deficit of$8,940 million as ofJune 30, 2020 . The Company also had operating income of$412 million and a net loss of$367 million for the six months endedJune 30, 2020 .
As disclosed in "-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 3 of the Notes to Consolidated Financial Statements for more information on the Restructuring and our limited liquidity. ? 44
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
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 half 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 provided 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 Americanswho need them. In addition, some of the states we operate in have issued executive orders as a result of COVID-19 that further impact our business, including prohibiting the disconnection of services for customers for the length of the state of emergency. While the initial 60-day period of the Keep Americans Connected Pledge has expired, state and federal governments continue to ask companies to aid in pandemic response. While certain customers have taken advantage of our COVID-19 related relief programs, as ofJune 30, 2020 , very few had past due balances beyond the point of normal disconnection. In addition to committing to the Keep Americans Connected Pledge, Frontier's response to COVID-19 has included several operational safety precautions such as limiting our product offerings in certain markets for certain periods, including not allowing our field service employees to enter a customer's home for a period of time, a limitation which is no longer in effect. We are continuing to require personal protective equipment on any employees entering a customer location. Currently, approximately 1% of Frontier's employees have reported testing positive for COVID-19. ThroughJune 30, 2020 , we had not experienced any significant disruptions in our supply chain; however, some of our business partners, particularly those vendors operating outside ofthe United States , have been more greatly impacted which has affected our service levels and distribution of work. Given the unprecedented and evolving nature of the pandemic and the swift moving response of multiple levels of government as well as the uncertainty of funding available for services provided, the full impact of these changes and potential changes on the Company are unknown at this time. While overall the operational and financial impacts to Frontier of the COVID-19 pandemic for the three and six months endedJune 30, 2020 were not significant, we continue to closely monitor the ongoing impact to our employees, our customers, our business and our results of operations. We have experienced a slowdown in service activations and an increase in deactivations for our SMB customers; to date, these negative impacts have been partially offset by higher residential activations and lower churn. We also continue to closely track our customers' payment activity as well as external factors, including the future expiration of federal wage subsidies for individuals and small businesses which could materially impact payment trends. With more people working from home, we have experienced higher demands on our network and higher sales activity for our residential broadband service offering. This sustained increase in network demand 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. These potential changes, among others, could have a material financial impact to Frontier.
Presentation of Results of Operations
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.
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
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 .
The following charts present key customer metrics, disaggregation of revenue,
and the results of operations of the consolidated company including the
Northwest Operations ("Northwest Ops") through the date of sale. The results of
operations for the Northwest Operations are shown separate from the total for
our operations located in the remaining 25 states ("Remaining Properties").
(a)Results of Operations
Unless otherwise indicated, the discussion of the customer metrics and
components of operating income that follows relates only to those the changes in
the
Customer counts, ARPC, and Consumer Customer Churn
As of or for the three months ended
June 30, 2020 June 30, 2019 %
Consolidated Northwest Remaining Consolidated Northwest Remaining Remaining
Frontier Ops Properties Frontier Ops Properties Properties
Customers (in thousands) 3,664 N/A N/A 4,292 N/A N/A N/A
Consumer customer metrics
Customers (in thousands) 3,341 - 3,341 3,902 348 3,554 -6%
Net customer additions
(losses) (362) (330) (32) (93) (6) (87) -63%
Average monthly consumer
revenue per customer $ 85.01 $ 76.74 $ 86.68 $ 88.68 $ 77.02 $ 89.82 -3%
Customer monthly churn 1.63% 1.51% 1.63% 2.14% 1.77% 2.18% -25%
Commercial customer metrics
Customers (in thousands) 323 N/A N/A 390 N/A N/A N/A
Broadband subscriber
metrics
Broadband subscribers (in
thousands) 3,142 - 3,142 3,626 311 3,315 -5%
Net subscriber additions
(losses) (338) (297) (41) (71) (4) (67) -39%
Video (excl. DISH)
subscriber metrics
Video subscribers - in
thousands) 560 - 560 738 33 705 -21%
Net subscriber additions
(losses) (61) (27) (34) (46) (2) (44) -23%
DISH subscriber metrics
DISH subscribers (in
thousands) 144 - 144 190 18 172 -16%
Net subscriber additions
(losses) (21) (16) (5) (8) (1) (7) -29%
Employees 16,420 - 16,420 19,872 950 18,922 -13%
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
For the six months ended
June 30, 2020 June 30, 2019 %
Consolidated Northwest Remaining Consolidated Northwest Remaining Remaining
Frontier Ops Properties Frontier Ops Properties Properties
Consumer customer metrics
Net customer additions
(losses) (406) (335) (71) (158) (10) (148) -52%
Average monthly consumer
revenue per customer $ 86.70 $ 76.74 $ 87.33 $ 88.94 $ 76.44 $ 90.16 -3%
Customer monthly churn 1.72% 1.51% 1.74% 2.07% 1.67% 2.10% -17%
Broadband subscriber
metrics
Net subscriber additions
(losses) (371) (302) (69) (110) (7) (103) -33%
Video (excl. DISH)
subscriber metrics
Net subscriber additions
(losses) (100) (29) (71) (99) (4) (95) -25%
DISH subscriber metrics
Net subscriber additions
(losses) (29) (17) (12) (16) (2) (14) -14%
Consumer Customers
For the three and six months ended June 30, 2020 , Frontier lost 32,000, or 1%,
and 71,000, or 2% of our consumer customers compared to 87,000, or 2% and
148,000, or 4% for the three and six months ended June 30, 2019 . As of June 30,
2020 , 53% of our consumer broadband customers also subscribed to at least one
other service offering. For the six months ended June 30, 2020 , we lost 1% of
our consumer broadband subscribers, primarily to competitors offering more
attractive pricing or higher speeds. During the three months ended June 30,
2020 , net additions for our broadband subscribers were relatively flat as
compared to the second quarter of 2019. For the three and six months ended June
30, 2020 we experienced a 5% and 11% decline, respectively, in our video
subscribers as a result of shifting our focus away from the acquisition of high
cost video customers and existing customers opting for other video services
including Over the Top, in lieu of traditional video services. During the second
quarter of 2020, we also lost voice subscribers as a result of customers
choosing alternative voice products and as well as from reduced attachment to
broadband services.
Our average monthly consumer customer churn was 1.63% and 1.74% for the three
and six months ended June 30, 2020 compared to 2.18% and 2.10% for three and six
months ended June 30, 2019 . The average monthly consumer revenue per customer
(consumer ARPC) decreased by $3.14 or 4% to $86.68 and $2.82 or 3% to $87.33 ,
respectively, during the three and six months ended June 30, 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.
47
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Financial Results
For the three months ended June 30,
2020 2019 % Change
Consolidated Northwest Remaining Consolidated Northwest Remaining Consolidated Remaining
Frontier Ops (1) Properties Frontier Ops (2) Properties Frontier Properties
Data and Internet
services $ 874 $ 25 $ 849 $ 963 $ 78 $ 885 -9% -4%
Voice services 523 14 509 629 47 582 -17% -13%
Video services 200 3 197 260 12 248 -23% -21%
Other 108 3 105 120 9 111 -10% -5%
Revenue from
contracts
with customers 1,705 45 1,660 1,972 146 1,826 -14% -9%
Subsidy and other
revenue 96 2 94 95 6 89 1% 6%
Revenue 1,801 47 1,754 2,067 152 1,915 -13% -8%
Operating expenses
(3):
Network access
expenses 255 4 251 318 13 305 -20% -18%
Network related
expenses 430 7 423 445 20 425 -3% 0%
Selling, general
and
administrative
expenses 407 7 400 445 18 427 -9% -6%
Depreciation and
amortization 397 - 397 454 25 429 -13% -7%
Goodwill impairment - - - 5,449 - 5,449 -100% -100%
Loss on disposal of
Northwest
Operations 136 - 136 384 - 384 -65% -65%
Restructuring costs
and
other charges 36 - 36 31 1 30 16% 20%
Total operating
expenses $ 1,661 $ 18 $ 1,643 $ 7,526 $ 77 $ 7,449 -78% -78%
Operating income 140 29 111 (5,459) 75 (5,534) -103% -102%
Consumer 899 25 874 1,050 81 969 -14% -10%
Commercial 806 20 786 922 65 857 -13% -8%
Revenue from
contracts
with customers 1,705 45 1,660 1,972 146 1,826 -14% -9%
Subsidy and other
revenue 96 2 94 95 6 89 1% 6%
Total revenue $ 1,801 $ 47 $ 1,754 $ 2,067 $ 152 $ 1,915 -13% -8%
(1)Amounts represent the financial results of our Northwest Operations for the
one month ended
(2)Amounts represent the financial results of our Northwest Operations for the
three months ended
(3)Operating expenses for Northwest Ops do not include allocated expenses which
are included in operating expenses for our
48
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
For the six months ended June 30,
2020 2019 % Change
Consolidated Northwest Remaining Consolidated Northwest Remaining Consolidated Remaining
Frontier Ops (1) Properties Frontier Ops (2) Properties Frontier Properties
Data and Internet
services $ 1,806 $ 102 $ 1,704 $ 1,930 $ 157 $ 1,773 -6% -4%
Voice services 1,095 57 1,038 1,279 93 1,186 -14% -12%
Video services 422 13 409 528 24 504 -20% -19%
Other 225 12 213 244 20 224 -8% -5%
Revenue from
contracts
with customers 3,548 184 3,364 3,981 294 3,687 -11% -9%
Subsidy and other
revenue 186 8 178 187 13 174 -1% 2%
Revenue 3,734 192 3,542 4,168 307 3,861 -10% -8%
Operating expenses
(3):
Network access
expenses 541 14 527 656 28 628 -18% -16%
Network related
expenses 874 26 848 901 39 862 -3% -2%
Selling, general
and
administrative
expenses 851 26 825 901 37 864 -6% -5%
Depreciation and
amortization 812 - 812 938 60 878 -13% -8%
Goodwill impairment - - - 5,449 - 5,449 -100% -100%
Loss on disposal of
Northwest
Operations 160 - 160 384 - 384 -58% -58%
Restructuring costs
and
other charges 84 - 84 59 2 57 42% 47%
Total operating
expenses $ 3,322 $ 66 $ 3,256 $ 9,288 $ 166 $ 9,122 -64% -64%
Operating income 412 126 286 (5,120) 141 (5,261) -108% -105%
Consumer 1,870 102 1,768 2,127 162 1,965 -12% -10%
Commercial 1,678 82 1,596 1,854 132 1,722 -9% -7%
Revenue from
contracts
with customers 3,548 184 3,364 3,981 294 3,687 -11% -9%
Subsidy and other
revenue 186 8 178 187 13 174 -1% 2%
Total revenue $ 3,734 $ 192 $ 3,542 $ 4,168 $ 307 $ 3,861 -10% -8%
(1)Amounts represent the financial results of our Northwest Operations for the
four months ended
(2)Amounts represent the financial results of our Northwest Operations for the
six months ended
(3)Operating expenses for Northwest Ops do not include allocated expenses which
are included in operating expenses for our
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
REVENUE
Revenue for our consumer and commercial customers was as follows:
For the three months ended
June 30, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Consumer $ 874 $ 969 $ (95) (10) %
Commercial 786 857 (71) (8) %
Revenue from contracts with
customers (1) 1,660 1,826 (166) (9) %
Subsidy and other revenue 94 89 5 6 %
Total revenue $ 1,754 $ 1,915 $ (161) (8) %
For the six months ended
June 30, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Consumer $ 1,768 $ 1,965 $ (197) (10) %
Commercial 1,596 1,722 (126) (7) %
Revenue from contracts with
customers (1) 3,364 3,687 (323) (9) %
Subsidy and other revenue 178 174 4 2 %
Total revenue $ 3,542 $ 3,861 $ (319) (8) %
(1)Amounts include approximately
We provide service and product options in our consumer and commercial offerings in each of our markets.
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. For each of the three and six months endedJune 30, 2020 , revenues decreased 8% as compared to the same period in 2019. Decreases in consumer revenues were primarily driven by the 6% decline in consumer customers when compared toJune 30, 2019 , 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. Decreases in commercial revenues for the three and six months endedJune 30, 2020 were primarily driven by reductions in wholesale revenues, 6% and 5%, respectively, which comprised approximately 53% of our commercial revenues. The decline in wholesale revenues were primarily a result of rate declines for our network access services. Decreases in our SME revenues, 11% and 10%, respectively, decreased primarily as a result of a decline in small business customers as compared toJune 30, 2019 .
The increases in subsidy and other revenue, were driven primarily by transition services provided in connection with the divestiture of our Northwest Operations. This increase was partially offset by scheduled reductions in subsidy funding levels, primarily funding related to CAF Phase II subsidies.
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
REVENUE
For the three months ended
June 30, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Data and Internet services $ 849 $ 885 $ (36) (4) %
Voice services 509 582 (73) (13) %
Video services 197 248 (51) (21) %
Other 105 111 (6) (5) %
Revenue from contracts with
customers (1) 1,660 1,826 (166) (9) %
Subsidy and other revenue 94 89 5 6 %
Total revenue $ 1,754 $ 1,915 $ (161) (8) %
For the six months ended June 30, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Data and Internet services $ 1,704 $ 1,773 $ (69) (4) %
Voice services 1,038 1,186 (148) (12) %
Video services 409 504 (95) (19) %
Other 213 224 (11) (5) %
Revenue from contracts with
customers (1) 3,364 3,687 (323) (9) %
Subsidy and other revenue 178 174 4 2 %
Total revenue $ 3,542 $ 3,861 $ (319) (8) %
(1)Amounts include approximately
We categorize our products, services, and other revenues into the following five categories:
Data and Internet Services Data and internet services revenue for each of the three and six months endedJune 30, 2020 decreased 4% as compared with the comparative periods in 2019. Broadband and data services revenues comprised 61% or$514 million , and 60% or$1,028 million , respectively of total Data and internet services revenue, while network access revenues comprised 39% or$335 million , and 40% or$676 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"). For each of the three and six months endedJune 30, 2020 , broadband and data services revenue decreased by 3% compared to the corresponding periods in 2019. The decreases were primarily driven by a loss of Consumer and SME customers combined with decreased other data services revenue. For the three and six months endedJune 30, 2020 , Network access revenues declined 6% and 5%, respectively, compared to the same periods in 2019. This decrease was due to the migration of our carrier customers from legacy technology circuits to lower priced ethernet circuits. 51 --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
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 13% and 12%, respectively for the three and six months ended
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 21% and 19%, respectively for the three and six months endedJune 30, 2020 in video services revenue was primarily due to net losses 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 and six months ended June 30, 2020
was primarily driven by decreases 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 and other revenue
Subsidy and other revenue includes revenue generated from cost subsidies from
state and federal authorities, including the Connect America Fund Phase II as
well as revenue generated from the transition services provided in connection
with our divestiture of our Northwest Operations.
The increases in subsidy and other revenue, were driven primarily by $10 million
in transition services provided to the purchaser of the Northwest Operations
since May 1, 2020 sale date. This increase was partially offset by scheduled
reductions in subsidy funding levels, primarily funding related to CAF Phase II
subsidies.
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
OPERATING EXPENSES
NETWORK ACCESS EXPENSES
For the three months ended June 30, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Network access expenses $ 251 $ 305 $ (54) (18) %
For the six months ended June 30, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Network access expenses $ 527 $ 628 $ (101) (16) %
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. For the three and six months ended
June 30, 2020 , Network access expense decreased 18% and 16%, respectively. The
decreases in network access expenses were 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 June 30, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Network related expenses $ 423 $ 425 $ (2) (0) %
For the six months ended June 30, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Network related expenses $ 848 $ 862 $ (14) (2) %
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. Network
related expenses decreased 2% during the six months ended June 30, 2020 and were
relatively flat during the three months ended June 30, 2020 . This decrease was
driven by decreased compensation costs related to lower employee headcount,
slightly offset by the abandonment of certain in-progress capital projects
during the quarter.
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended June 30, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Selling, general and
administrative expenses $ 400 $ 427 $ (27) (6) %
For the six months ended June 30, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Selling, general and
administrative expenses $ 825 $ 864 $ (39) (5) %
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. SG&A expenses decreased 6% and 4% the three and
six months ended June 30, 2020 , respectively. The decreases in SG&A expenses
were primarily driven by decreased compensation costs related to lower employee
headcount and reduced property taxes.
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 and six months endedJune 30, 2020 and 2019 were as follows: For the three months ended June 30, For the six months ended June 30, ($ in millions) 2020 2019 2020 2019 Total pension/OPEB service costs $ 29$ 26 $ 59$ 52 Less: costs capitalized into capital expenditures (6) (7) (13) (13) Net pension/OPEB costs $ 23$ 19 $ 46$ 39 54
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
DEPRECIATION AND AMORTIZATION EXPENSE
For the three months ended June 30, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Depreciation expense $ 314 $ 322 $ (8) (2) %
Amortization expense 83 107 (24) (22) %
Depreciation and
Amortization expense $ 397 $ 429 $ (32) (7) %
For the six months ended June 30, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Depreciation expense $ 630 $ 647 $ (17) (3) %
Amortization expense 182 231 (49) (21) %
Depreciation and
Amortization expense $ 812 $ 878 $ (66) (8) %
The decreases in depreciation expense for the three and six months ended
The decreases in amortization expense for the three and six months endedJune 30, 2020 were primarily driven by the accelerated method of amortization related to customer bases acquired in 2010, 2014, and 2016. LOSS ON DISPOSAL OF NORTHWEST OPERATIONS
We recorded a loss on disposal of
55
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
RESTRUCTURING COSTS AND OTHER CHARGES
For the three months ended June 30, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Restructuring costs and
other charges $ 36 $ 30 $ 6 20 %
For the six months ended June 30, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Restructuring costs and
other charges $ 84 $ 57 $ 27 47 %
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.
For the three months ended June 30, 2020 , the $36 million of restructuring costs
and other charges were comprised of $2 million in severance expense, and $34
million in consulting and advisory costs related to our balance sheet
restructuring activities, respectively.
For the six months ended June 30, 2020 , the $84 million of restructuring costs
and other charges were comprised of $8 million in costs related to
transformation initiatives, $4 million in severance expense, and $72 million in
consulting and advisory costs related to our balance sheet restructuring
activities, respectively.
Following the filing of the Chapter 11 Cases, Frontier recorded all consulting
and advisory costs related to our balance sheet restructuring activities outside
of operating income in "Reorganization Items, net".
?
56
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
OTHER NON-OPERATING INCOME AND EXPENSE
For the three months ended June 30, $ Increase % Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Investment and other loss, net $ (20) $ (9) Pension settlement $ 56 $ -
Loss on extinguishment of debt $ - $ -
$ - 100 %
Reorganization items, net $ (142) $ -$ (142) 100 % Interest expense $ 160$ 383 $ (223) (58) % Income tax benefit $ (57)$ (534) $ 477 (89) % For the six months ended June 30, $ Increase % Increase ($ in millions) 2020 2019 (Decrease) (Decrease)
Investment and other loss, net $ (15)$ (18) $ 3 (17) % Pension settlement $ 159 $ -$ 159 100 % Loss on extinguishment of debt $ -$ (20) $ 20 NM Reorganization items, net $ (142) $ -$ (142) 100 % Interest expense $ 543$ 762 $ (219) (29) % Income tax benefit $ (80)$ (516) $ 436 NM NM - Not meaningful
Investment and other loss, net
Investment and other loss, net for the six months endedJune 30, 2020 and 2019 included$19 million and$22 million , respectively, of non-operating pension and OPEB expense. Pension settlement During the six months endedJune 30, 2020 , lump sum pension settlement payments to terminated or retired individuals amounted to$464 million , which exceeded the settlement threshold of$211 million , and as a result, Frontier recognized non-cash settlement charges totaling$56 million and$159 million for the three and six months endedJune 30, 2020 , respectively.
Loss on extinguishment of debt
Frontier recorded a loss on early extinguishment of debt of$20 million for the six months endedJune 30, 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. Reorganization items, net The Company has incurred and will continue to incur significant costs associated with the reorganization, primarily the write-off of certain debt issuance costs and net discounts, financing costs, and legal and professional fees. Subsequent to the Petition Date, these costs are being expensed as incurred and are expected to significantly affect our consolidated results of operations. During the three and six months endedJune 30, 2020 , Frontier incurred$142 million in reorganization costs associated with the restructuring of our balance sheet.
Interest expense
For the six months endedJune 30, 2020 interest expense decreased$219 million , or 29%, as compared to the same period in 2019. Beginning on the Petition Date, we ceased recording interest expense for our unsecured debt. The contractual interest is$218 million higher than what we have recorded for our debt obligations for the six months endedJune 30, 2020 . 57 --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Income tax benefit
For the three and six months endedJune 30, 2020 , Frontier recorded income tax benefits of$57 million and$80 million , respectively on the pre-tax loss of$238 million and$447 million , respectively. The effective tax rates on our pretax loss for the three and six months endedJune 30, 2020 were 23.9% and 17.9%, respectively, compared with 9.1% and 8.7%, respectively, for the pretax loss for the three and six months endedJune 30, 2019 .
Basic and diluted net loss attributable to Frontier common shareholders
Basic and diluted net loss attributable to Frontier common shareholders for the first six months of 2020 was$(367) million , or$(3.51) per share, as compared to a net loss of$(5,404) million , or$(51.97) per share, in the first six months of 2019. For 2020, our net loss was driven by non-cash pension settlement charges of$159 million , interest expense of$543 million , and$142 million of net reorganization items. ? 58
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
(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 "-Chapter 11 Filing and Other Related Matters" 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 ofJune 30, 2020 , we had unrestricted cash and cash equivalents aggregating$2,290 million . For the six months endedJune 30, 2020 , we used cash flow from operations, cash on hand, proceeds from the sale of our Northwest Operations, and cash from prior year borrowings to principally fund all of our cash investing and financing activities, which were primarily capital expenditures. 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 . As ofJune 30, 2020 , we had a working capital deficit of$4,593 million compared to surplus of$233 million atDecember 31, 2019 . The primary driver for the working capital deficit atJune 30, 2020 , was the acceleration of the maturities of our long-term debt that resulted from our filing of the Chapter 11 Cases. Cash Flows from Operating Activities Cash flows provided by operating activities increased$93 million to$950 million for the six months endedJune 30, 2020 as compared to the corresponding period in 2019. The overall increase in operating cash flows was the result of favorable changes in working capital, primarily attributable to withholding payment of pre-petition trade accounts payable subsequent to the filing of the Chapter 11 Cases as well as a reduction in cash payments for interest as compared to the comparative period in 2019.
We paid
Cash Flows from Investing Activities
Cash flows provided by investing activities increased $1,133 million to $628
million for the six months ended June 30, 2020 as compared to the corresponding
period in 2019. The primary driver of this increase were cash proceeds of $1,131
million received for the sale of the Northwest Operations.
Capital Expenditures
For the six months endedJune 30, 2020 and 2019, our capital expenditures were$511 million and$580 million , respectively. Capital expenditures related to CAF Phase II are included in our reported amounts for capital expenditures. This reduction in capital expenditures was primarily driven by delays in payments for certain prepetition capital expenditures following the filing of the Chapter 11 Cases. 59
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Cash Flows from Financing Activities
DIP Financing Costs:
In connection with the filing of the Chapter 11 Cases, Frontier recorded
approximately
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 is payable to holders of record semi-annually in arrears onApril 1 andOctober 1 of each year, commencingOctober 1, 2019 .
During the six months ended
During the six months endedJune 30, 2019 , Frontier used cash on hand for the scheduled retirement of$358 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 "-Chapter 11 Filing and Other Related Matters" 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 60
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
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 June 30, 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 of June 30,
2020 , Frontier had borrowings of $749 million outstanding under the Revolver
(with letters of credit issued under the Revolver totaling $90 million ).
On March 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 in March 2021 , as described above under "New Debt Issuances and
Debt Reductions."
In addition on March 15, 2019 , Frontier amended the JPM Credit Agreement to,
among other things, (i) 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 ), (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 in October 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. On
March 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 in
October 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 on July
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). After the filing of the Chapter 11 Cases, Frontier can no longer issue new letters of credit under the Revolver. As ofJune 30, 2020 ,$49 million and$90 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.
61
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
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.
On
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 .
Chapter 11 Filing and Other Related Matters
Restructuring Support Agreement
On
62
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
support the Restructuring of the existing debt of, existing equity interests in,
and certain other obligations of the Company Parties, pursuant to a pre-arranged
Plan to be filed in the Chapter 11 Cases.
In accordance with the Restructuring Support Agreement, the Consenting Noteholders agreed, among other things, to:
(i) support the transactions (the Restructuring Transactions) described in, within the timeframes outlined in, and in accordance with the Restructuring Support Agreement;
(ii) not 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 (as defined in the Restructuring Support Agreement) 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 theBankruptcy Court (the DIP Orders) authorizing the relevant Company Parties' entry into the documents governing a senior secured superpriority debtor-in-possession financing facility (the DIP Facility), (b) the order of theBankruptcy Court approving the disclosure statement related to the Plan pursuant to section 1125 of the Bankruptcy Code and (c) theBankruptcy 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 businesses 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 businesses; 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 confirmation of the Plan and consummation of the Plan.
For a description of the Term Sheet incorporated into the Restructuring Support Agreement, see "-Plan and Disclosure Statement" below.
Chapter 11 Cases
As an initial step towards implementation of the Plan, on the Petition Date, the Company Parties filed the Chapter 11 Cases in theBankruptcy Court pursuant to chapter 11 of the Bankruptcy Code.Each Company Party continues 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 (RDD). In general, as debtors-in-possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business, however, we may not engage in transactions outside the ordinary course of business without the prior approval of theBankruptcy Court . To that end, on the Petition Date, the Company Parties filed certain motions and applications intended to limit the disruption of the bankruptcy proceedings on its operations (the First Day Motions). Pursuant to the First Day Motions, approved after a final hearing held onMay 22, 2020 , theBankruptcy Court authorized us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders: continue to operate our cash management system and honor certain prepetition obligations related thereto; maintain existing business forms; continue to perform intercompany 63 --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
transactions; obtain super priority administrative expense status to
post-petition intercompany balances; pay certain prepetition claims of critical
vendors, lien claimants and section 503(b)(9) of the Bankruptcy Code claimants
in the ordinary course of business on a post-petition basis; pay prepetition
employee wages, salaries, other compensation and reimbursable employee expenses
and continue employee benefits programs; pay obligations under prepetition
insurance policies, continue to pay certain brokerage fees; renew, supplement,
modify or purchase insurance coverage; maintain our surety bond program; pay
certain prepetition taxes and fees; honor certain prepetition obligations to
customers and continue certain customer programs in the ordinary course of
business; and pay or honor prepetition claims of content providers.
Plan and Disclosure Statement
OnMay 15, 2020 , the Company Parties filed the Plan and related Disclosure Statement describing the Plan and the solicitation of votes to approve the same, each of which were amended onJune 26, 2020 ,June 29, 2020 andJune 30, 2020 . OnJune 30, 2020 , theBankruptcy Court entered an order approving the adequacy of the Disclosure Statement, the solicitation and notice procedures and the forms of voting ballots and notices in connection therewith. The order establishedJune 29, 2020 as the voting record date,July 2, 2020 as the solicitation launch date andJuly 31, 2020 as the voting deadline. A hearing in theBankruptcy Court to consider confirmation of the Plan is scheduled forAugust 21, 2020 . The Plan will be subject to usual and customary conditions to plan confirmation, including obtaining the requisite vote of a class of impaired creditors and approval of theBankruptcy Court .
The Plan, among other things, contemplates:
?the applicable Company Parties' or Reorganized Company Parties to taking any actions necessary or advisable to effectuate the Restructuring Transactions described in the Plan;
?the Company Parties using commercially reasonable efforts to obtain commitments on the best available terms for the DIP Facility, with an option for conversion into an Exit Facility (as defined below) on the Plan effective date (the 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 theFrontier 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 (collectively, the 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 (if any);
?on the Plan Effective Date, one or more of the Reorganized Company Parties
shall issue takeback debt (the "Takeback Debt"), in a principal amount of
oan interest rate that is either (a) no more than 2.50% 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 3.50% 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, provided that in no event shall the
maturity of the Takeback Debt be longer than eight years from the Plan Effective
Date;
oto the extent the Second Lien Notes are reinstated under the Plan, providing
the Takeback Debt will be third lien debt; provided that 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, the Company Parties and the Required Consenting
Noteholders will agree on whether the Takeback Debt will be secured or unsecured
within three business days of the Company Parties' delivery to the Consenting
Noteholders of a term sheet for the financing to repay the Second Lien Notes in
full in cash that contains terms and
64
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
conditions reasonably acceptable to the Company Parties and the Required Consenting Noteholders;
othe Takeback Debt amount is subject to downward adjustment by the Consenting Noteholders holding at least sixty-six and two-thirds percent of the aggregate outstanding principal amount of Senior Notes that are held by all Consenting Noteholders; 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, estimated and calculated in a manner reasonably acceptable to the Company Parties and the Required Consenting Noteholders, subject to certain adjustments described in the Plan (the Surplus Cash)); ?cash interest payments at the non-default contract rate for the Revolver through the earlier of the Plan Effective Date or repayment 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 contract rate during the Chapter 11 Cases, which shall not include any make-whole or redemption premium, until repayment or reinstatement of such indebtedness; ?for the$1,600 million aggregate principal amount of the Second Lien Notes (together with the First Lien Notes, the Secured Notes), cash interest payment at non-default contract rate during the Chapter 11 Cases, which shall not include any make-whole or redemption premium, until repayment or reinstatement of the Second Lien Notes; ?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 contract 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;
?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
65
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
(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 (the Reorganized Company Parties), subject to
dilution by the Management Incentive Plan (as defined below), (b) the Takeback
Debt and (c) unrestricted cash of Reorganized Frontier in excess of $150 million
as of the Plan Effective Date;
?on the Plan Effective Date, reservation of a pool (the Management 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 the Reorganized Company Parties, which will contain
terms and conditions as determined at the discretion of the board of directors
of the Reorganized Company Parties after the Plan Effective Date; provided that
up to 50% of the Management 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
?on the Plan Effective Date, Reorganized Frontier shall issue the New Common
Stock and cause it to be transferred to Frontier pursuant to the Restructuring
Transactions, the interests in Frontier shall be cancelled, and Frontier shall
transfer the New Common Stock to the holders of Senior Notes.
Documents filed on the docket 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.
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 (as amended by that certain Letter Agreement datedApril 28, 2020 , by that certain Letter Agreement datedMay 12, 2020 , by that certain Letter Agreement datedJune 10, 2020 , by that certain Letter Agreement datedJune 29, 2020 and as further amended, modified or supplemented from time to time, 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 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 revolving DIP Facility in an aggregate principal amount of$460 million which, upon satisfaction of certain conditions, including the effectiveness of the Plan, will convert into a longer term revolving Exit Facility. The terms and conditions of the DIP 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 Facility includes conditions precedent (including the repayment in full of all revolving loans outstanding under the JPM Credit Agreement), representations and warranties, affirmative and negative covenants and events of default customary for financings of this type and size. The proceeds of all or a portion of the DIP Facility may be used for, among other things, general corporate purposes, including working capital and permitted acquisitions, for payment of fees, costs and expenses 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 Facility. To the extent not converted into an Exit Facility, DIP Facility claims will be paid in cash on the Plan Effective Date. The terms and conditions of the Exit 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 the satisfaction of certain conditions set forth in the Exit Facility Term Sheet, including compliance with a 1.55:1.00 pro forma gross first lien leverage ratio test and the repayment in full of the revolving loans outstanding under the JPM Credit Agreement, the DIP Facility commitments will convert into Exit Facility commitments. The Company has the option to increase the size of the Exit Facility up to an amount of$600.0 million by obtaining commitments from one or more lenders prior to the Plan Effective Date.
A final hearing on the DIP Facility and DIP Credit Agreement is scheduled for
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Regulatory Approvals
As set forth in the Plan and the Disclosure Statement, in order to implement the restructuring contemplated by the Plan, the Company Parties must satisfy several conditions after confirmation of the Plan but prior to emergence from Chapter 11. Among other things, the Company Parties must obtain requisite regulatory approvals, including requiredPublic Utility Commission (PUC) approvals in certain states, includingArizona ,California ,Connecticut ,Illinois ,Minnesota ,New York ,Pennsylvania andWest Virginia . The level of review undertaken by state PUCs, and the length of time to complete such review, varies by state. The Company is the subject of ongoing investigations by certain state PUCs, which may have an impact on the timing of receipt of PUC approvals in such states and/or lead to the imposition of financial sanctions and/or operational restrictions, including revocation of operating authority, In addition, certain state PUCs may impose conditions on the approval of the Restructuring Transactions, including commitments to make significant capital expenditures to improve intrastate service. No assurance can be given as to the terms, conditions, and timing of the required approvals or clearances.
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 and purchase and lease obligations, as disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
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. Frontier accepted theFCC 's CAF Phase II offer in 25 states, which provides$313 million in annual support through 2020 (since extended to 2021 under RDOF), to make available 10 Mbps downstream/1 Mbps upstream broadband service to households across some of the 25 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. 67 --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
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 SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Regulatory Developments
Frontier accepted theFCC 's CAF Phase II offer in 25 states, which provides$313 million in annual support through 2020 (since extended to 2021 under theRural Digital Opportunity Fund (RDOF) Order) in return for the Company's commitment to make broadband available to households within Frontier's footprint. OnJanuary 30, 2020 , theFCC adopted an order establishing the RDOF program. With this order, theFCC plans to hold two auctions totaling$20.4 billion of support over ten years. In the first auction (RDOF Phase I), 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 (RDOF Phase II) for any remaining locations with the remaining funding, at least$4.4 billion . OnJuly 15, 2020 , Frontier filed an application to be eligible to participate in the RDOF Phase I auction, which is scheduled to commence onOctober 29, 2020 . Until after that auction is completed, theFCC quiet period rules will apply. Recognizing that RDOF support will not be made available before the end of the sixth year of CAF Phase II support (year-end 2020), theFCC 's RDOF 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 an RDOF 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.
Frontier did file a short form application for the CBRS auction and is currently
under the
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. 69 --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
On March 13, 2020 , 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 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. Some of the states we operate in have
issued executive orders as a result of COVID-19 that further impact our
business, including prohibiting the disconnection of services for customers for
the length of the state of emergency. While the initial 60-day period of the
Keep Americans Connected Pledge has expired, 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 as well as the uncertainty of funding available for
services provided, the full impact of these changes and potential changes on the
Company are unknown at this time.
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