(b) Liquidity and Capital Resources
Analysis of Cash Flows
As of September 30, 2017,2019, we had unrestricted cash and cash equivalents aggregating $286$683 million. Our primary source of funds during the nine months ended September 30, 20172019 was cash on hand, cash generated from operations, and cash received from the issuance of our Term Loan B.First Lien Notes, and borrowings on our Revolver. For the nine months ended September 30, 2017,2019, we used cash flow from operations, cash on hand, and borrowings to principally fund all of our cash investing and financing activities, which were primarily capital expenditures dividends and debt repayments.
At September 30, 2017,2019, we had a working capital deficitsurplus of $531$269 million including $166 million of long-term debt due within one year, as compared to a working capital deficit of $788$1,231 million at December 31, 2016. 2018. The decrease inprimary driver for the working capital deficit is primarily duesurplus at September 30, 2019, was the reclassification of assets and liabilities associated with our Northwest Operations held for sale from long term to a decrease in current liabilities of $651 million, partially offset by a reduction in accounts receivable of $158 million. current.
Cash Flows provided byfrom Operating Activities
Cash flows provided by operating activities increased $223decreased $106 million to $1,185$1,103 million for the nine months ended September 30, 20172019 as compared withto the prior year period.corresponding period in 2018. The increaseoverall decrease in operating cash flows was primarily the result of the addition of our CTF Operations, partially offset by unfavorable changes in working capital, along with higher interest expense.attributable to decreased profitability.
We received $4 million and $35paid $5 million in net cash tax refundstaxes during each of the nine months ended September 30, 20172019 and 2016, respectively.September 30, 2018.
In connection with the CTF Acquisition, Frontier recognized acquisition and integration costs of $15 million during the first nine months of 2017 compared to $387 million during the first nine months of 2016. Interest expense of $581 million was incurred during the first nine months of 2017 related to the September 2015 debt offering and the term loan credit agreement, dated as of August 12, 2015, with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, compared to $559 million in interest expense during the first nine months of 2016. Additionally, Frontier incurred $10 million of interest expense related to the Verizon Bridge Facility (as defined below) during the first nine months of 2016.
Cash Flows used byfrom Investing Activities
Capital Expenditures
For the nine months ended September 30, 20172019 and 2016,2018, our capital expenditures were $865$898 million and $1,059$947 million, respectively, including $19 million and $99 million, respectively, of integration related capital expenditures associated with the CTF Acquisition.respectively. Capital expenditures related to CAF Phase II are included in our reported amounts for capital expenditures. We anticipate capital expenditures
Cash Flows from Financing Activities
New Debt Issuances and Debt Reductions:
On March 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 on April 1 and October 1 of each year, commencing October 1, 2019.
On March 19, 2018, we completed a private offering of $1,600 million aggregate principal amount of 8.50% Second Lien Secured Notes due 2026 (the Second Lien Notes). The Second 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 and subordinated 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 but equal in right of payment with all other unsubordinated obligations of the guarantors. The Second Lien Notes indenture provides that (a) the aggregate amount of all guaranteed obligations guaranteed by the guarantees are limited and shall not, at any time, exceed the lesser of (x) the principal amount of the Second Lien Notes then outstanding and (y) the Maximum Guarantee Amount (as defined in the Second Lien Notes indenture), and (b) for business operationsthe avoidance of doubt, nothing in the Second Lien Notes indenture shall, on any date or from time to be approximately $1.15 billiontime, allow the aggregate amount of all such guaranteed obligations guaranteed by the guarantors to $1.2 billioncause or result in 2017, as compared to $1.26 billion in 2016.the Company or any subsidiary violating any indenture governing the Company’s existing senior notes.
Cash Flows used
The Second Lien Notes are secured on a second-priority basis by all the assets that secure Frontier’s obligations under its senior secured credit facilities on a first-priority basis. The collateral securing the Second Lien Notes and provided from Financing Activitiesthe Company’s senior secured credit facilities is limited to the equity interests of certain subsidiaries of the Company and substantially all personal property of Frontier Video Services, Inc. Interest on the Second Lien Notes is payable semi-annually in arrears on April 1 and October 1 of each year, commencing October 1, 2018. On July 3, 2018, the collateral package for the Second Lien Notes was amended to replace certain operating subsidiary equity pledges with pledges of the equity interests of certain direct subsidiaries of Frontier, consistent with amendments made to Frontier’s credit agreements.
Debt Reduction
During the first nine months of 2017,ended September 30, 2019, Frontier used cash on hand for the scheduled retirement of $328$363 million principal amount of debt, including $210senior 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 in March 2021, (ii) repay in full the outstanding borrowings under the 2016 CoBank Credit Agreement, which otherwise would have matured in October 2021, and (iii) pay related interest, fees and expenses.
During the nine months ended September 30, 2018, Frontier used cash on hand for the scheduled retirement of $115 million of unsecured 8.25% senior notes at maturity, and contractual payments of principal for debtindebtedness and open market purchases of $118 million.$61 million of 8.125% senior notes due 2018. Additionally, Frontier used cash proceeds from the Term Loan B to retire $1,335$1,600 million of unsecured senior notes prior to maturity, consisting of $763 million of 8.875%Second Lien Notes due 2020, $551 million of 8.500% Notes due 2020, $10 million of 9.250% Notes due 2021, $6 million of 7.125% Notes due 2019,offering and $5 million of 8.125% Notes due 2018. During the first nine months of 2017, Frontier recorded a loss on early extinguishment of debt of $89 million driven primarily by premiums paid to retire certain notes and unamortized original issuance costs, slightly offset by discounts received on the retirement of certain notes.
During the first nine months of 2016, Frontier used cash on hand to retire an aggregate principal amount of $280$1,651 million senior unsecured notes prior to maturity, consisting of $447 million of debt, $1898.50% senior notes due 2020, $249 million of 8.875% senior notes due 2020, $555 million of 6.250% senior notes due 2021, and $400 million of 9.250% senior notes due 2021.
On July 3, 2018, the Company entered into Increase Joinder No. 2 to the JPM Credit Agreement, pursuant to which was senior unsecuredthe Company borrowed an incremental $240 million under the Term Loan B maturing in 2024. The Company used the incremental borrowings to repay in full the 2014 CoBank Credit Agreement, repay a portion of the 2016 CoBank Credit Agreement and pay certain fees and expenses related to this incremental borrowing.
Capital Resources
We are highly leveraged, and a substantial portion of our liquidity needs will arise from debt service on our outstanding indebtedness and from funding the costs of operations, working capital and capital expenditures. Our primary sources of cash are cash on hand, cash generated from operations, and proceeds from debt borrowings, including issues of long-term debt and $91$850 million of which was secured debt.
Subject to limitations contained inborrowing capacity under our indentures and credit facilities,Revolver (as reduced by our Standby Letters of Credit outstanding under the JPM Credit Agreement). As of the date of filing, we may from time to time make repurchases of our debt in the open market, through tender offers, by exercising rights to call or in privately negotiated transactions. We may also refinance existing debt or exchange existing debt for newly issued debt obligations.
Capital Resources
We believe our operating cash flows, existing cash balances, existing revolving credit facility and access to the capital markets, as necessary, will be adequate to finance our working capital requirements, fund capital expenditures, make required debt interest and principal payments, pay taxes pay dividends to our stockholders, and support our short-term and long-term operating strategies for at least the next twelve months. A number of factors, including but not limited to, losses of customers, pricing pressure from increased competition, challenges in achieving improvement in revenue and customer trends under our transformation program, lower subsidy and switched access revenues, and the impact of economic and industry conditions may negatively affect our cash generated from operations. As of September 30, 2017, we had $42We have $4 million of debt maturing during the last three months of 2017; $743 million and $8282019, $245 million of debt maturing in 2020, and $327 million of debt maturing in 2021.
We may, from time to time, make repurchases of our debt in the open market, through tender offers, by exercising rights to redeem or prepay debt or in privately negotiated transactions. We may also undertake financing and other strategic transactions, including to refinance or restructure existing debt or exchange existing debt for newly issued debt obligations or equity securities. Approval of any such transaction would rest with our Board of Directors and would depend on market conditions, trading levels of the Company's debt from time to time, the Company's cash position, the limitations contained in our indentures and credit facilities, and other considerations. We cannot assure you if or when we will matureconsummate any such transactions or the terms of any such transaction.
Frontier expects to close the sale for our Northwest Operations in 2018the first half of 2020. Upon closing, Frontier will receive cash proceeds of $1,352 million subject to certain closing adjustments including approximately $60 million related to the deficit for the pension assets and 2019, respectively.liabilities transferring as part of the sale.
Term Loan and Revolving Credit Facilities
JP Morgan Credit Facilities:
On February 27, 2017, Frontier entered into a first amended and restated credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, pursuant to which Frontier combined its revolving credit agreement, dated as of June 2, 2014, and its term loan credit agreement, dated as of August 12, 2015. Under the JPM Credit Agreement as further(as amended on June 15, 2017 by Increase Joinder No.1 (as so amended,to date, the JPM Credit Agreement), Frontier has a $1,625 million senior secured term loan A facility (the Term Loan A) maturing on March 31, 2021, an $850 million undrawn secured revolving credit facility maturing on February 27, 2022 (the Revolver), and $1,500$1,740 million senior secured term loan B facility (the Term Loan B) maturing on June 15, 2024.2024 and an $850 million secured revolving credit facility maturing on February 27, 2024 (the Revolver). The maturities of the Term Loan A,B and the Revolver, and the Term Loan B, 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 September 30, 2019, approximately $227 million principal amount, in the aggregate, remains outstanding on the two series of senior notes maturing in 2020 and less than $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 each of the facilitiesTerm 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 Term Loan A and Revolver (ranging from 0.75%1.00% to 1.75%2.00% for Base Rate borrowings and 1.75%2.00% to 2.75%3.00% for LIBOR borrowings) are subject to adjustment based on Frontier’s Total Leverage Ratio (as defined in the JPM Credit Agreement). The interest rate on the Revolver as of September 30, 2019 was LIBOR plus 3.00%. Interest rate margins on the Term Loan B (2.75% for Base Rate borrowings and 3.75% for LIBOR borrowings) are not subject to adjustment. The security package under the JPM Credit Agreement includes pledges of the equity interests in certain Frontier subsidiaries and guarantiesguarantees by certain Frontier subsidiaries. As of September 30, 2017,2019, Frontier had borrowings of $749 million outstanding under the revolvingRevolver (with letters of credit facility was fully available and noissued under the Revolver totaling $101 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 had been made thereunder. The revolving credit facility is available for general corporate purposes but may not be used to fund dividend payments.
Frontier has twounder its $1,625 million senior secured credit agreementsTerm 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 party thereto:lenders. On March 15, 2019, Frontier used proceeds from the first, foroffering 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), matures with CoBank which was repaid in full on October 24, 2019,July 3, 2018, as described above under “New Debt Issuances and the second, for a $315 million senior term loanDebt Reductions.”
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facility drawn in October 2016 (the 2016 CoBank Credit Agreement), matures on October 12, 2021. We refer to the 2014 CoBank Credit Agreement and the 2016 CoBank Credit Agreement collectively as the CoBank Credit Agreements.
Repayment of the outstanding principal balance under each of the CoBank Credit Agreements is being made in quarterly installments ($9 million, with respect to the 2014 CoBank Credit Agreement, and $8 million, with respect to the 2016 CoBank Credit Agreement), in each case with the remaining outstanding principal balance to be repaid on the applicable maturity date. Borrowings under each of the CoBank Credit Agreements bear interest based on the margins over the Base Rate (as defined in the applicable CoBank Credit Agreement) or over LIBOR, at the election of Frontier.
On March 29, 2017, Frontier amended the 2014 and 2016 CoBank Credit Agreements. The amendments provide that interest rate margins under each of these facilities will range from 0.875% to 3.875% for Base Rate borrowings and 1.875% to 4.875% for LIBOR borrowings, subject to adjustment based on our Total Leverage Ratio, as defined in each credit agreement. The interest rate on each of the facilities as of September 30, 2017 was LIBOR plus 3.875%. In addition, the amendments provide for increases in the maximum Leverage Ratio and expansion of the security package identical to those contained in the February 2017 amendment and restatement of the August 2015 JPM credit agreement.
Letters of Credit Facility
Frontier has a Continuing Agreement for Standby Letters of Credit with Deutsche Bank AG New York Branch and Bank of Tokyo – Mitsubishi UFJ, LTD. (the LC Agreements). Frontier can also issue letters of credit under the Revolver up to a maximum of $134 million. As of September 30, 2017, $1292019, $50 million of undrawn Standby Letters of Credit had been issued under the LC Agreements.Agreements and $101 million Standby Letters of Credit had been issued under the Revolver. In July 2019, a $20 million Letter of Credit issued under the Bank of Tokyo LC agreement was replaced
by a Letter of Credit issued under the Revolver. These Standby Letters of Credit are issued primarily in relations to supporting the Company's workers compensation insurance programs. Borrowings under the LC AgreementAgreements are secured by a pledge ofsecurity package identical to those contained in the stock of certain Frontier subsidiaries and guaranties by certain Frontier subsidiaries.JPM Credit Agreement.
Covenants
The terms and conditions contained in one or more of our indentures the CoBank Credit Agreements and the JPM Credit Agreement include covenants that, among other things, placethe 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 following: the incurrence of liens on our assets securing indebtedness and our subsidiaries’ assets, securing indebtedness;restrictions on the incurrence of indebtedness by usour subsidiaries, restrictions on asset sales and our subsidiaries; the payment of dividendstransfers, mergers and other restricted payments; selling or transferring assets; the maximum levels of our leverage and secured leverage ratios; and the entry into mergers or other changes in corporate control. All of the abovecontrol and restrictions areon dividends and distributions, each subject to important detailed qualifications and exceptions that are included in the JPM Credit Agreement, filed as an exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017 and in the CoBank Credit Agreements and our indentures, filed as exhibits to our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. In addition, under the Certificate of Designations of our 11.125% Mandatory Convertible Preferred Stock, Series A, we would be restricted from paying dividends on our common stock if we failed to declare and pay dividends on our Series A Preferred Stock.exceptions.
As of September 30, 2017,2019, we were in compliance with all of our indenture and credit facility covenants.
Preferred Dividends
We intend to continue to pay regular quarterly dividends on our common and preferred stock. Our ability to fund a regular quarterly dividend will be impacted by our ability to generate cash from operations. Holders of theour Series A Preferred Stock arewere entitled to receive cumulative dividends at an annual rate of 11.125% of the initial liquidation preference of $100 per share, or $11.125 per year per share. Series A Preferred Stock dividends of $161$107 million were paid during the nine month periods ended September 30, 2017 and 2016.
On July 26, 2017, we announced that our Board of Directors declared a regular quarterly cash dividend of $0.60 per2018. Each share of common stock, payable on September 29, 2017 to holders of record at the close of business on September 15, 2017. The Board of Directors also declared a regular quarterly cash dividend on Frontier’s 11.125% Series A Preferred Stock automatically converted into 1.3333 shares of $2.78125 per share, payable on September 29, 2017 to holders of record at the close of business on September 15, 2017.
On October 31, 2017, we announced that our Board of Directors declared a regular quarterly cash dividend of $0.60 per share of common stock, payable on December 29, 2017 to holders of record at the close of business on December 15, 2017. The Board of Directors also declared a regular quarterly cash dividend on Frontier’s 11.125%
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Mandatory Convertible Preferred Stock, Series A, of $2.78125 per share, payable on December 29, 2017 to holders of record at the close of business on December 15, 2017.
The declaration and payment of future dividends on our common stock is at the discretion of our Board of Directors, and will depend upon many factors, including our financial condition, results of operations, growth prospects, funding requirements, payment of cumulative dividends on Series A Preferred Stock, applicable law, restrictions in agreements governing our indebtedness and other factors our Board of Directors deems relevant.June 29, 2018.
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.
Future Commitments
OnIn April 29, 2015, the FCC released its right of first refusal offer of support to price cap carriers under the CAF Phase II program, which is intended to provide long-term support for broadband in high cost unserved or underserved areas. In June 2015, Frontier accepted the CAF Phase II offer, which provides for $332 million in annual support through 2020, including $49$19 million in annual support related to the properties acquired in the CTF Acquisition,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 other FCC 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.
Other than the updated indefinite-lived intangibles discussion below, thereThere 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 ended December 31, 2016.
Indefinite-lived Intangibles
Our indefinite-lived intangibles consist2018, other than those described in Part 1, Item 2. “Management’s Discussion and Analysis of goodwillFinancial Condition and trade name, which were generated as a resultResults of business combinations. We test for impairment of these assets annually as of December 31 or more frequently, whenever events occur or facts and circumstances change that make it more likely than not that the fair value of a reporting unit has been reduced below its carrying amount. Events that might indicate impairment include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, material negative changes in relationships with significant customers, and/or a significant declineOperations” in our stock price for a sustained period.
We early adopted ASU 2017-04 “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”) during the second quarter of 2017. In accordance with ASU 2017-04, our annual goodwill impairment test (and interim test if determined to be necessary) will consist of comparing the fair value of our reporting unit to its carrying value. To the extent that the carrying value exceeds fair value, an impairment will be recognized.
For the purpose of our goodwill impairment test, we first assess qualitative factors to determine if it is more likely than not that fair value of the reporting unit is less than the carrying amount. If it is less, an additional quantitative evaluation must be performed. Our quantitative assessment consists of using a market multiples approach to determine fair value. Marketplace company comparisons and analyst reports within the telecommunications industry have historically supported a range of fair values of multiples between 5.0x and 7.9x annualized EBITDA (defined as operating income,
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net of acquisition and integration costs, pension/ OPEB expense, pension settlement costs, stock-based compensation expense, goodwill impairment, storm-related costs, and restructuring costs and other charges, as well as depreciation and amortization).
During 2017, our common stock has declined and traded at historically low prices. As a result, we tested goodwill for impairment in each of the three quarters in 2017. The second quarter quantitative assessment, as described above, resulted in a conclusion that the estimated enterprise fair value was lower than its carrying value, principally due to the decline in our profitability during the period. Accordingly, we recorded a goodwill impairment of $670 million in the second quarter of 2017. The first and third quarter quantitative assessments, did not result in goodwill impairment charges. In estimating the enterprise fair value we used 5.8x as the multiple in each of the three quarters in 2017.
The market multiples approach that we use incorporates significant estimates and assumptions related to the forecasted resultsQuarterly Report on Form 10-Q for the remainder of the year, including revenues, expenses, and the achievement of other cost synergies. Our assessment includes many qualitative factors that require significant judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding the need for, or size of, an impairment. Continued declines in our profitability or cash flows or in sustained low trading prices of our common stock may result in further impairment. six months ended June 30, 2019.
The enterprise fair value is sensitive to the amount of EBITDA generated by Frontier and the EBITDA multiple used in the calculation. Significant changes in the assumptions or estimates used in our impairment analyses, such as a reduction in profitability and/or cash flows, could result in a non-cash goodwill and indefinite-lived intangible asset impairment charge and materially affect our operating results. The market multiples approach is sensitive to changes in the estimated annual EBITDA, with each $100 million change equating to approximately $580 million of estimated enterprise value. Similarly, a 1% change in the multiple used would affect the estimated enterprise value by approximately $200 million. Sustained low trading prices for our common stock could also affect the reconciliation of our market capitalization and indicate further impairment.
We also considered whether the carrying values of finite-lived intangible assets and property plant and equipment may not be recoverable or whether the carrying value of certain finite-lived intangible assets were impaired, noting no additional impairment was present as of September 30, 2017.
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.
Regulatory Developments
On April 29,In 2015, Frontier accepted the FCC released offers of support to price cap carriers under theFCC’s CAF Phase II program.offer in 29 states, which provides $332 million in annual support through 2020 in return for the Company’s commitment to make broadband available to approximately 774,000 locations within Frontier’s footprint. The intent of these offersCAF 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. Frontier accepted the CAF Phase II offer in 29 states, including our CTF properties, which provides for $332 million in annual support through 2020 and a commitment to make broadband available to approximately 774,000 households. CAF Phase II support is a successor to the approximately $156$198 million in annual USF frozen high-cost support that Frontier had been receivingused to receive prior to the CTF acquisition, and the $42 million in annual transitional USF frozen high-cost support that Verizon had been receiving in California and Texas.CAF II. In addition to the annual support levels, these amounts also include frozen support phasedown amounts in states where the annual CAF II funding is less than the prior annual frozen high-cost support funding. The frozen support phasedown supportPhasedown funding provided to Frontier was $35 million in 2015 and $27 million in 2016, and is expected to be $17 million in 2017 and $6 million incomplete as of December 31, 2018.
In February 2017, the FCC adopted an Order further explaining its competitive bidding process to continue to distribute CAF Phase II funding in those high-cost areas where price cap carriers declined the FCC’s offer of support. This auction could present a new support and deployment opportunity.
On August 4, 2017,1, 2019, the FCC adopted a Public Notice initiatingnotice of proposed rulemaking to establish the pre-auction processRural Digital Opportunity Fund (RDOF), the next phase of the CAF program. In the notice, the FCC proposes two auctions totaling $20.4 billion of support over ten years. In the first auction, the FCC would offer up to $16 billion in support over ten years ($1.6 billion annually) for an estimated 3.9 million locations that the Connect America FundFCC knows do not have access to speeds of at least 25/3 Mbps based on the FCC’s current maps. Then, after the FCC is able to update its maps with more granular broadband availability information, the FCC would 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), and recognizing that CAF recipients are entitled to a seventh year of support if they are not successful in the RDOF auction, the notice asks questions about the timing of and how this seventh year of transitional support should be paid. This notice represents the first step in the Commission’s process towards adopting the RDOF. Several parties, including Frontier, have filed comments in this proceeding. The FCC must review all filed reply comments and adopt an order and multiple public notices before moving forward with an auction. The Phase II auction will award up to $198 million annually for 10 years to service providers that commit to offer voice and broadband services to fixed locations in unserved high-cost areas;While the auction will also account for other service elements such as the minimum data speed provided and data usage allowances. The
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auction is likely to begin in 2018 though the exact timeframe is unknown. FrontierRDOF has not yet determined whether it will participatebeen finalized, its final form could result in any competitive bid process at this time, and becausea material change in the level of funding that Frontier accepted virtually all of its availablereceives from the FCC under CAF II support up front, we expect the funding available within our footprint to be limited. as early as 2021.
On April 20, 2017, the FCC issued an Order that will significantly alteraltered how Commercial Data Services are regulated once the rules go into effect.regulated. Specifically, the Order adopted a test to determine, on a county-by-county basis, whether price cap ILECs, like Frontier’s DS1 and DS3 services, will continue to behave these services regulated. The test is likely to resultresulted in deregulation of these services in a substantial number of our markets. Once implemented, the deregulation will allowmarkets and is allowing Frontier to offer its DS1 and DS3these 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 that year. Multiple parties have appealed the Order in the 8th Circuit Court of Appeals. The Court of Appeals issued a ruling August 28, 2018, which upheld the vast majority of the FCC’s decision easing regulation of business data services of internet service providers and requestedvacated and remanded one piece of the Order back to the FCC. On October 10, 2018, the FCC filed a stayMotion to Stay the Court’s Decision. On July 10, 2019, the FCC issued an Order reinstating its original decision regarding transport that was remanded by the 8th Circuit. While this Order cures the lack of this Order.notice cited by the 8th Circuit, Frontier cannot predict whether parties may again appeal the decision or the extent to which these regulatory changes willcould affect revenues at this time.
On September 25, 2019, the FCC released an order scheduling its CBRS (3.5 GHz) auction, in which the FCC will auction 7 blocks of 10 MHz TDD per county, or 22,631 licenses nationwide, to begin on June 25, 2020. Frontier is evaluating whether to participate in this auction.
In September 2018, California network neutrality legislation was signed into law. The California legislation aims to reimpose the provisions of the FCC’s 2015 Network Neutrality decision. The Department of Justice has filed a lawsuit against California, 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. The California Attorney General has agreed to delay implementing the California law until the federal lawsuit is resolved. Frontier cannot predict the outcome of this litigation and, although Frontier’s current practices comply with the California law, the extent to which regulatory changes associated with the California law could affect revenues at this time. A number of additional states are currently considering Network Neutrality legislation during their 2019 legislative sessions.
On October 1, 2019, the D.C. Circuit Court largely upheld the FCC decision in its 2018 Restoring Internet Freedom Order to reclassify broadband as an “information service.” However, the Court invalidated the FCC’s preemption of
a state’s ability to pass their own network neutrality rules and remanded back to the FCC other parts of the 2018 Order. We anticipate that this ruling will be appealed. California’s network neutrality provisions will remain on hold until all appeals of this case have been exhausted.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk in the normal course of our business operations due to ongoing investing and funding activities, including those associated with our pension plan assets. Market risk refers to the potential change in fair value of a financial instrument as a result of fluctuations in interest rates and equity prices. We do not hold or issue derivative instruments, derivative commodity instruments or other financial instruments for trading purposes. As a result, we do not undertake any specific actions to cover our exposure to market risks, and we are not party to any market risk management agreements other than in the normal course of business. Our primary market risk exposures from interest rate risk and equity price risk are as follows:
Interest Rate Exposure
Our exposure to market risk for changes in interest rates relates primarily to the interest-bearing portion of our pension investment portfolio and the related actuarial liability for pension obligations, as well as our floating rate indebtedness. As of September 30, 2017, 80%2019, 86% of our total debt had fixed interest rates. We had no interest rate swap agreements in effect at September 30, 2017.2019. We believe that our currently outstanding obligation exposure to interest rate changes is minimal. Our objectives in managing our interest rate risk are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, only $3,537 million14% of our outstanding borrowings at September 30, 20172019 have floating interest rates. The annual impact of 100 basis points change in the LIBOR would result in approximately $25 million of additional interest expense. Our undrawn $850 million revolving credit facility has interest rates that float with the LIBO Rate,LIBOR, as defined. Consequently, we have limited material future earnings or cash flow exposures from changes in interest rates on our debt. An adverse change in interest rates would increase the amount that we pay on our variable rate obligations and could result in fluctuations in the fair value of our fixed rate obligations. Based upon our overall interest rate exposure, a near-term change in interest rates would not materially affect our consolidated financial position, results of operations or cash flows.
At September 30, 2017,2019, the fair value of our long-termtotal debt was estimated to be approximately $15.5$11.7 billion, based on quoted market prices, our overall weighted average borrowing rate was 8.36%8.76% and our overall weighted average maturity was approximately sixseven years. As of September 30, 2017,2019, there has been no significant change in the weighted average maturity applicable to our obligations since December 31, 2016.2018.
Equity Price Exposure
Our exposure to market risks for changes in equity security prices as of September 30, 20172019 is limited to our pension plan assets. We have no other security investments of any significant amount.
Our Pension Plan assets decreasedincreased from $2,766$2,348 million at December 31, 20162018 to $2,604$2,670 million at September 30, 2017, a decrease2019, an increase of $162$322 million, or 6%14%. This decreaseincrease was a result of benefit paymentscontributions of $492$129 million partially offset byand positive investment returns of $270 million, net(net of investment management and administrative fees, and contributions in excessfees) of the Differential (as defined below)$404 million, partially offset by benefit payments of $60 million, during the first nine months of 2017.$211 million.
As part of the CTF Acquisition, Verizon was required to make a cash payment to Frontier for the difference in assets initially transferred by Verizon into the Pension Plan and the related obligation (the Differential). In the third quarter of 2017, we received the $131 million Differential payment from Verizon, and have remitted an equivalent amount to the
Pension Plan as of September 30, 2017. As the Differential was reflected as a receivable of the Pension Plan at December 31, 2016, the cash funding had no impact to plan assets.
Item 4. Controls and Procedures
| (a)
| | Evaluation of disclosure controls and procedures
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(a)Evaluation of disclosure controls and procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, regarding the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon this evaluation, our principal executive officer and principal financial officer concluded, as of the end of the period covered by this report, September 30, 2017,2019, that our disclosure controls and procedures were effective.
| (b)
| | (b)Changes in internal control over financial reporting |
We reviewed our internal control over financial reporting at September 30, 2017. There
The adoption of ASC 842 requires the implementation of new accounting policies and processes, including enhancements to our information systems, which changed the Company’s internal controls over financial reporting for lease standard and related disclosures. Other than the above noted change, there have been no changes in our internal control over financial reporting identified in an evaluation thereof that occurred during the third fiscal quarter of 20172019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting.
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Item 1. Legal Proceedings
See Note 15On April 30, 2018, an amended consolidated class action complaint was filed in the United States District Court for the District of Connecticut on behalf of certain purported stockholders against Frontier, certain of its current and former directors and officers and the underwriters of certain Frontier securities offerings. The complaint was brought on behalf of all persons who (1) acquired Frontier common stock between February 6, 2015 and February 28, 2018, inclusive, and/or (2) acquired Frontier common stock or Mandatory Convertible Preferred Stock either in or traceable to Frontier’s offerings of common and preferred stock conducted on or about June 2, 2015 and June 8, 2015. The complaint asserted, among other things, violations of Section 10(b) of the NotesSecurities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 thereunder, Section 20(a) of the Exchange Act and Sections 11 and 12 of the Securities Act of 1933, as amended, in connection with certain disclosures relating to Consolidated Financial Statements includedthe CTF Acquisition. The complaint sought, among other things, damages and equitable and injunctive relief. On March 8, 2019, the District Court granted in Part I, Item 1its entirety Frontier’s motion to dismiss the complaint. The District Court dismissed with prejudice a number of claims and with respect to certain other claims that were not dismissed with prejudice, Plaintiffs were permitted to seek the court’s permission to refile. On May 10, 2019, Plaintiffs filed a motion for leave to amend along with a proposed amended complaint that is narrower in scope than the dismissed complaint. Frontier filed an opposition to the motion for leave to amend, and the motion remains pending. We continue to dispute the allegations and intend to vigorously defend against such claims. In addition, shareholders have filed derivative complaints on behalf of the Company in Connecticut, California, and Delaware courts. The derivative complaints are based, generally, on the same facts asserted in the consolidated class action complaint and allege against current and former officers and directors of the Company (i) breach of fiduciary duty claims for disseminating false and misleading information to shareholders, failure to manage internal controls, and failure to oversee and manage the company; (ii) unjust enrichment and waste of corporate assets claims; and (iii) violations of Section 14(a) of the Exchange Act for the false and misleading statements. We also dispute the allegations in the derivative complaints described above and intend to vigorously defend against such claims. Given that all of these matters are in the early stages of litigation, we are unable to estimate a reasonably possible range of loss, if any, that may result.
We are currently defending an intellectual property lawsuit initiated by Sprint Communications which alleges that the VoIP services that we offer to our customers infringe on certain of the plaintiff’s patents. Sprint has asserted these claims against other broadband providers and obtained significant judgements and settlements. While we intend to defend this lawsuit vigorously, we cannot at this time predict the outcome of this report. There have been no material changes to our legal proceedings from the information provided in Item 3. “Legal Proceedings” included in our Annual Report on Form 10-K for the year ended December 31, 2016. lawsuit or reasonably estimate a possible range of loss.
WeIn addition, we are party to various other legal proceedings (including individual, class and putative class actions)actions as well as federal and state governmental investigations) arising in the normal course of our business covering a wide range of matters and types of claims including, but not limited to, general contracts, billing disputes, rights of access, taxes and surcharges, consumer protection, trademark and patent infringement, employment, regulatory, tort, claims of competitors and disputes with other carriers. Litigation isSuch matters are subject to uncertainty and the outcome of individual matters is not predictable. However, we believe that the ultimate resolution of all suchthese matters, after considering insurance coverage or other indemnities to which we are entitled, will not have a material adverse effect on our financial position, results of operations, or cash flows.
Item 1A. Risk Factors
There have been no material changes to the Risk Factors described in Part 1, Item 1A.1A “Risk Factors” in our Annual Report on Form 10-K, for the fiscal year ended December 31, 2016. 2018, other than those Risk Factors described in Part 2, Item 1A “Risk Factors” in our Quarterly Report on form 10-Q for the six month period ended June 30, 2019.
PART II. OTHER INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities during the quarter ended September 30, 2017.2019.
ISSUER PURCHASES OF EQUITY SECURITIES
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Period | | | Total Number of Shares Purchased | | | Average Price Paid per Share |
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July 1, 2017 to July 31, 2017 | | | | | | | |
Employee Transactions (1) | | | 625 | | | $ | 15.83 |
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August 1, 2017 to August 31, 2017 | | | | | | | |
Employee Transactions (1) | | | 222 | | | $ | 14.68 |
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September 1, 2017 to September 30, 2017 | | | | | | | |
Employee Transactions (1) | | | 68 | | | $ | 13.54 |
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Totals July 1, 2017 to September 30, 2017 | | | | | | | |
Employee Transactions (1) | | | 915 | | | $ | 15.38 |
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| July 1, 2019 to July 31, 2019 |
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| Employee Transactions (1) |
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| 2,207 |
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| $ | 1.55 |
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| August 1, 2019 to August 31, 2019 |
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| Employee Transactions (1) |
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| September 1, 2019 to September 30, 2019 |
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| Employee Transactions (1) |
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| 509 |
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| $ | 1.14 |
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| Totals July 1, 2019 to September 30, 2019 |
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| Employee Transactions (1) |
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| 2,716 |
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| $ | 1.47 |
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(1)Includes restricted shares withheld (under the terms of grants under employee stock compensation plans) to offset minimum tax withholding obligations that occur upon the vesting of restricted shares and the LTIP performance shares earned during the period.shares. Frontier’s stock compensation plans provide that the value of shares withheld shall be based on the average of the high and low price of our common stock on the date the relevant transaction occurs, for shares vested prior to May 2017. Beginning in May 2017, the value of the shares withheld shall be based on the closing price of our common stock on the date the relevant transaction occurs.
PART II. OTHER INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 6. Exhibits
SIGNATURE
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| FRONTIER COMMUNICATIONS CORPORATION |
| (Registrant)
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| By: /s/ Donald Daniels |
| Donald Daniels |
| Senior Vice President and ControllerChief Accounting Officer |
| (Principal Accounting Officer) |
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Date: November 2, 20176, 2019 |
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