(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 the Bankruptcy Court’s approval, implement the Plan, successfully emerge from the Chapter 11 Cases and generate sufficient liquidity from the Restructuring to meet our obligations and operating needs. These factors, together with the Company’s recurring losses from operations and accumulated deficit, create substantial doubt about the Company’s ability to continue as a going concern.
Refer to “—Subsequent Events Related to the Restructuring Support Agreement and the Chapter 11 Cases” for more information on the terms of the Restructuring Support Agreement, the Chapter 11 Cases and the effects of both on our liquidity.
Analysis of Cash Flows
As of September 30, 2017,March 31, 2020, we had unrestricted cash and cash equivalents aggregating $286$941 million. Our primary source of funds duringFor the ninethree months ended September 30, 2017 was cash on hand, cash generated from operations, and cash received from issuance of our Term Loan B. For the nine months ended September 30, 2017,March 31, 2020, we used cash flow from operations, cash on hand, and cash from prior year borrowings to principally fund all of our cash investing and financing activities, which were primarily capital expenditures dividends and debt repayments.
At September 30, 2017,March 31, 2020, we had a working capital deficit of $531$16,027 million including $166 million of long-term debt due within one year, as compared to a working capital deficitsurplus of $788$233 million at December 31, 2016. 2019. The decrease inprimary driver for the working capital deficit is primarily due to a decrease in current liabilitiesat March 31, 2020, was the acceleration of $651 million, partially offset by a reduction in accounts receivablethe maturities of $158 million. substantially all of our debt obligations following the filing of the Chapter 11 Cases.
Cash Flows provided byfrom Operating Activities
Cash flows provided by operating activities increased $223$195 million to $1,185$477 million for the ninethree months ended September 30, 2017March 31, 2020 as compared withto the prior year period.corresponding period in 2019. The overall increase in operating cash flows was primarily the result of the addition of our CTF Operations, partially offset by unfavorableattributable to favorable changes in working capital, along with higherincluding an increase of $393 million of accrued interest expense.
We received $4 million and $35 million in cash tax refunds during the nine months ended September 30, 2017 and 2016, respectively.
In connection with the CTF Acquisition, Frontier recognized acquisition and integration costs of $15 million during the first nine months of 2017as compared to $387 million during the first nine months of 2016. Interest expense of $581 millionMarch 31, 2019. This increase was incurred during the first nine months of 2017 relateddue 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, comparedCompany’s decision to $559 million in interest expense during the first nine months of 2016. Additionally, Frontier incurred $10defer $322 million of interest expense related to the Verizon Bridge Facility (as defined below)payments due March 15, 2020 on our unsecured senior notes.
We paid $1 million in net cash taxes during the first ninethree months of 2016.ended March 31, 2020.
Cash Flows used byfrom Investing Activities
Capital Expenditures
For the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, our capital expenditures were $865$286 million and $1,059$305 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 for business operations
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 be approximately $1.15 billion to $1.2 billionall of the guarantor’s obligations under the Company’s senior secured credit facilities and certain other permitted future senior indebtedness and senior in 2017, as compared to $1.26 billion in 2016.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
Cash Flows used byis payable to holders of record semi-annually in arrears on April 1 and provided from Financing ActivitiesOctober 1 of each year, commencing October 1, 2019.
Debt Reduction
During the first ninethree months of 2017,ended March 31, 2020, Frontier used cash on hand for the scheduled retirement of $328 million of debt, including $210 million of unsecured 8.25% senior notes at maturity, and contractual payments of principal for debt of $118 million. Additionally, Frontier used cash proceeds from the Term Loan B to retire $1,335 million of unsecured senior notes prior to maturity, consisting of $763 million of 8.875% 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, and $5 million principal amount of 8.125% Notes due 2018. senior indebtedness.
During the first ninethree 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,ended March 31, 2019, Frontier used cash on hand to retire an aggregatefor the scheduled retirement of $348 million principal amount of $280senior 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.
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 debt, $189 millionborrowing capacity under our Revolver (as reduced by any Standby Letters of which was senior unsecured debt and $91 million of which was secured debt.
Subject to limitations contained in our indentures and credit facilities, we may from time to time make repurchasesCredit outstanding under the JPM Credit Agreement). As 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
Wedate of filing, we believe our operating cash flows and existing cash balances, existingincluding the full borrowing under our revolving credit facility, and access tocash proceeds from the capital markets, as necessary,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 pay dividends to our stockholders, 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. AsWe completed the sale of September 30, 2017,the Northwest Operations on May 1, 2020. Net of pension funding, certain escrows, and other closing adjustments, we had $42received $1,131 million in proceeds. In addition, we have obtained commitments, subject to the satisfaction of debt maturing duringcertain customary conditions, including the last three monthsapproval of 2017; $743 millionthe Bankruptcy 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 the Bankruptcy Court’s approval, implement the Plan, successfully emerge from the Chapter 11 Cases and $828 milliongenerate sufficient liquidity from the Restructuring to meet our obligations and operating needs. Refer to “—Subsequent Events Related to the Restructuring Support Agreement and the Chapter 11 Cases” for a description of debt will mature in 2018the potential DIP Facility and 2019, respectively.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:
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$1,740 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 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;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 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 March 31, 2020 was LIBOR plus 3.00%. Interest rate margins on the Term Loan B (2.75% for Base Rate borrowings and 3.75% for LIBOR borrowings) are not subject to adjustment. The security package under the JPM Credit Agreement includes pledges of the equity interests in certain Frontier subsidiaries and guarantiesguarantees by certain Frontier subsidiaries. As of September 30, 2017,March 31, 2020, 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.”
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
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)Agreement). Frontier can also issue letters of credit under the Revolver up to a maximum of $134 million. As of September 30, 2017, $129March 31, 2020, $50 million and $101 million of undrawn Standby Letters of Credit had been issued under the LC Agreements. BorrowingsAgreement and Revolver respectively. Letters of credit under the LC Agreement 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 Amendment.
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 and our subsidiaries; the payment of dividendsrestrictions on asset sales and other restricted payments; selling or transferring assets; the maximum levels of our leveragetransfers, mergers and secured leverage ratios; and the entry into mergers or other changes in corporate control. All of the above restrictions arecontrol subject to important detailed qualifications and exceptions that are included inexceptions.
Under the JPM Credit Agreement, filedFrontier 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 an exhibitof the last day of any fiscal quarter, stepping down 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 exhibits1.35 to our Annual Report on Form 10-K1.00 for the fiscal year ended December 31, 2016. In addition,quarters ending June 30, 2020 and thereafter. The covenants provide for junior lien capacity on any indebtedness permitted under the Certificatecredit agreements, while limiting the incurrence of Designations offirst lien debt. Additionally, the credit agreement prohibits us from using proceeds from our 11.125% Mandatory Convertible Preferred Stock, Series A,revolving credit facility to fund dividend payments if the undrawn amount under the Revolver is less than $250 million, and we would be restricted from payingmay not pay dividends on our common stock if we failedin 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 declare and pay dividendscreate liens on our Series A Preferred Stock.assets securing indebtedness and our subsidiaries’ assets or merge or consolidate with other companies, our subsidiaries’ ability to borrow funds and to engage in change of control transactions, subject to important exceptions and qualifications. Our secured notes are guaranteed by each of our subsidiaries that guarantees the JPM Credit
Agreement. In addition, the secured notes are secured on a first-priority basis and a second-priority basis, as applicable, by all the assets that secure our obligations under the JP Credit Agreement on a first-priority basis.
As of September 30, 2017,March 31, 2020, we were in compliance with all of the covenants under our indentureindentures and credit facility covenants.
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. Holdersthe JPM Credit Agreement. On April 14, 2020, the Company Parties filed the Chapter 11 Cases in the Bankruptcy Court. The filing of the Series A Preferred Stock are entitled to receive cumulative dividends atChapter 11 Cases constituted an annual rateEvent 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 million were paid during the nine month periods ended September 30, 2017 and 2016.Default under our debt covenants.
Shareholder Rights Plan
On July 26, 2017, we announced that1, 2019, our Board of Directors declaredadopted a regular quarterly cash dividendshareholder rights plan designed to protect our net operating losses for tax purposes (NOLs) from the effect of $0.60 per sharelimitations 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 payable on September 29, 2017 to holderswithout prior approval 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 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 declaredor without meeting certain customary exceptions (such as a regular quarterly cash dividendresult of $0.60 per sharerepurchases 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 payable on December 29, 2017include 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 holdersactually or constructively own for purposes of record atSection 382 of the close of business on December 15, 2017. IRC or the regulations promulgated thereunder.
The plan is not meant to be an anti-takeover measure and our Board of Directors also declaredhas established a regular quarterly cash dividend on Frontier’s 11.125%
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Mandatory Convertible Preferred Stock, Series A,procedure to consider requests to exempt the acquisition 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 atfrom 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, and will depend upon many factors, includingrequest 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 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 factorscommon stock. In addition, if our Board of Directors deems relevant.determines in good faith that a person has inadvertently become the beneficial owner of 4.9 percent or more of the outstanding shares of our common stock, and such person divests as promptly as practicable a sufficient number of shares of common stock so that such person beneficially owns less than 4.9 percent, then such person will not cause the rights under the plan to become exercisable.
This summary description of the rights plan does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, dated as of July 1, 2019, by and between us and Computershare Trust Company, N.A., as Rights Agent, filed as an exhibit to our Periodic Report on Form 8-K filed on July 1, 2019.
Subsequent Events Related to the Restructuring Support Agreement and the Chapter 11 Cases
Restructuring Support Agreement
On April 14, 2020, the Company Parties entered into the Restructuring Support Agreement with the Consenting Noteholders. The Restructuring Support Agreement contemplates agreed-upon terms for a pre-arranged financial restructuring Plan that leaves unimpaired all general unsecured creditors and holders of secured debt.
Under the Restructuring Support Agreement, the Consenting Noteholders have agreed, subject to certain terms and conditions, to support the Restructuring of the existing debt of, existing equity interests in, and certain other obligations of the Company Parties, pursuant to the Plan to be filed in the Chapter 11 Cases.
The Plan will be based on the restructuring term sheet attached to and incorporated into the Restructuring Support Agreement (the Term Sheet) (such transactions described in, and in accordance with the Restructuring Agreement and the Term Sheet, the Restructuring Transactions), which, among other things, contemplates:
the Company Parties’ obtaining confirmation of the Plan, which shall be on terms consistent with the Restructuring Support Agreement and the Term Sheet, no later than 120 calendar days after the Petition Date (as defined herein);
the Company Parties using commercially reasonable efforts to obtain commitments on the best available terms for a senior secured superpriority debtor-in-possession financing facility (the DIP Facility), with an option for conversion into an Exit Facility (as defined below) on the Plan effective date (Plan Effective Date), on terms and conditions (including as to amount) reasonably acceptable to the Company Parties and reasonably acceptable to the Consenting Noteholders, as of the relevant date, holding greater than 50.1% of the aggregate outstanding principal amount of the Frontier Communications Corporation’s senior unsecured notes and debentures (the Senior Notes) that are subject to the Restructuring Support Agreement (the Required Consenting Noteholders);
one or more third-party debt facilities (Exit Facilities), to be entered into on the Plan Effective Date, in an amount reasonably sufficient to facilitate Plan distributions and ensure incremental liquidity on the Plan Effective Date, and otherwise be on terms and conditions (including as to amount) reasonably acceptable to the Company Parties and reasonably acceptable to the Required Consenting Noteholders;
to the extent not converted into an Exit Facility, full satisfaction in cash on the Plan Effective Date of all DIP Facility claims;
issuance by one or more of the Company Parties of takeback debt (the Takeback Debt), in a principal amount of $750 million, subject to downward adjustment and certain other terms set forth in the Term Sheet, including, but not limited to:
oan interest rate (a) no more than 250 basis points higher than the interest rate of the next more junior secured debt facility to be entered into on the Plan Effective Date if the Takeback Debt is secured on a third lien basis or (b) no more than 350 basis points higher than the interest rate of the most junior secured debt facility to be entered into on the Plan Effective Date if the Takeback Debt is unsecured;
oa maturity no less than one year outside of the longest-dated debt facility to be entered into on the Plan Effective Date, subject to an outside maturity date of eight years from the Plan Effective Date;
o(i) to the extent the Second Lien Notes are reinstated under the Plan, providing the Takeback Debt will be third lien debt, or (ii) to the extent the Second Lien Notes are paid in full in cash during the pendency of the Chapter 11 Cases or under the Plan, providing the Company Parties and the Required Consenting Noteholders will agree on whether the Takeback Debt will be secured or unsecured, subject to certain conditions; and
oall other terms including, without limitation, covenants and governance, shall be reasonably acceptable to the Company Parties and the Required Consenting Noteholders; provided that such terms shall not be more restrictive than those in the indenture for the Second Lien Notes.
subject to acceptance of the Plan by the holders of the Senior Notes, a cash payment (the Incremental Payments) on the Plan Effective Date to each holder of the Senior Notes (to the extent of the available amount of unrestricted balance sheet cash in excess of $150 million on the Plan Effective Date as projected 30 days prior to the anticipated Plan Effective Date, subject to adjustments set forth in the Term Sheet (Surplus Cash));
cash interest payments for the Revolver and, to the extent not already satisfied in full during the Chapter 11 Cases from the proceeds of the DIP Facility, satisfaction in full on the Plan Effective Date of all Revolver claims;
cash interest payments for (i) the Term Loan B maturing on June 15, 2024, and (ii) the $1,650 million aggregate principal amount of the First Lien Notes, as applicable, at non-default rate during the Chapter 11 Cases, which shall not include any make-whole payments, until repayment or reinstatement of such indebtedness;
upon mutual agreement among the Company Parties and the Required Consenting Noteholders, for the $1,600 million aggregate principal amount of the Second Lien Notes (together with the First Lien Notes, the Secured Notes), (i) cash interest payment at non-default rate during the Chapter 11 Cases, which shall not include any make-whole payments, until repayment or reinstatement of the Second Lien Notes or (ii) payment of accrued non-default rate interest on the Plan Effective Date, which shall not include any make-whole payments, and no cash interest payment during the Chapter 11 Cases;
to the extent not already satisfied in full during the Chapter 11 Cases from the proceeds of the DIP Facility, (i) satisfaction in full of all Term Loan B claims and all Secured Notes claims on the Plan Effective Date, or (ii) solely in the event the Company Parties cannot procure financing on terms acceptable to the Company Parties and the Required Consenting Noteholders to repay in full the Term Loan B or the Secured Notes, as applicable, reinstatement of all Term Loan B claims and all Secured Notes claims, as applicable, pursuant to section 1124 of the Bankruptcy Code on the Plan Effective Date;
cash interest payments at non-default rate during the Chapter 11 Cases for the secured and unsecured notes of the Company’s subsidiaries and, on or as soon as reasonably practicable following the Plan Effective Date, reinstatement of such notes pursuant to section 1124 of the Bankruptcy Code;
cash payment of all general unsecured claims (other than Parent Litigation Claims (as defined below)), if applicable, that are not Senior Notes claims or subsidiary unsecured notes claims, reinstatement of such claims pursuant to section 1124 of the Bankruptcy Code or other such treatment rendering such claims unimpaired, in each case, as reasonably acceptable to the Company Parties and the Required Consenting Noteholders;
litigation-related claims against the Company that would be subject to the automatic stay (except those subject to the police and regulatory exception) (the Parent Litigation Claims) will be unimpaired, provided that the Parent Litigation Claims will be allowed in an amount that does not exceed existing insurance coverage plus $25 million;
cash payment in full of all administrative expense claims, priority tax claims, other priority claims, and other secured claims or other such treatment rendering such claims unimpaired, including reinstatement pursuant to section 1124 of the Bankruptcy Code or delivery of the collateral securing any such secured claim and payment of any interest required under section 506(b) of the Bankruptcy Code;
a motion, promptly after the commencement of the Chapter 11 Cases, filed by the Company Parties to assume the Purchase Agreement (the Purchase Agreement), dated as of May 28, 2019, among the Company, Frontier Communications ILEC Holdings LLC, and Northwest Fiber, LLC, as amended, restated, amended and restated, or otherwise modified from time to time, and close the sale of the Northwest Operations subject to certain terms and conditions in the Purchase Agreement, as soon as reasonably practicable;
on or as soon as reasonably practicable following the Plan Effective Date, receipt by the holders of the Senior Notes, in full satisfaction of their claims, their pro rata share of (a) 100% of the common equity (the New Common Stock) of the Company or an entity formed to indirectly acquire substantially all of the assets and/or stock of the Company as may be contemplated by the Restructuring (the Reorganized Company), subject to dilution by the Management Incentive Plan (as defined below), (b) the Takeback Debt and (c) any Surplus Cash remaining after payments of the Incremental Payments;
on the Plan Effective Date, reservation of a pool (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, which will contain terms and conditions as determined at the discretion of the board of directors of the Reorganized Company 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
in the event the Required Consenting Noteholders and the Company Parties determine that the New Common Stock should be listed on a recognized U.S. stock exchange, commercially reasonable efforts by the Reorganized Company to have the New Common Stock listed on a recognized U.S. stock exchange as promptly as reasonably practicable on or after the Plan Effective Date, and prior to any such listing, commercially reasonable efforts to qualify its shares for trading in the pink sheets.
In accordance with the Restructuring Support Agreement, the Consenting Noteholders agreed, among other things, to: (i) support the Restructuring Transactions as contemplated by, and within the timeframes outlined in, the Restructuring Support Agreement and the definitive documents governing the Restructuring Transactions; (ii) not
take any action, directly or indirectly, that is reasonably likely to interfere with acceptance, implementation, or consummation of the Restructuring Transactions; (iii) vote each of its Senior Notes Claims to accept the Plan; and (iv) not transfer Senior Notes Claims held by each Consenting Noteholders except with respect to limited and customary exceptions, including requiring any transferee to either already be bound or become bound by the terms of the Restructuring Support Agreement.
In accordance with the Restructuring Support Agreement, the Company Parties agreed, among other things, to: (i) support and take all steps reasonably necessary and desirable to consummate the Restructuring Transactions in accordance with the Restructuring Support Agreement; (ii) support and take all steps reasonably necessary and desirable to obtain entry of (a) the final orders of the Bankruptcy Court authorizing the relevant Company Parties’ entry into the DIP Facility documents (the DIP Orders), (b) the order of the Bankruptcy Court approving the Plan disclosure statement pursuant to section 1125 of the Bankruptcy Code and (c) the Bankruptcy Court’s order confirming the Plan; (iii) use commercially reasonable efforts to obtain any and all required governmental, regulatory and/or third-party approvals for the Restructuring Transactions; (iv) act in good faith and use commercially reasonable efforts to execute and deliver certain required documents and agreements to effectuate and consummate the Restructuring Transactions as contemplated by the Restructuring Support Agreement; (v) operate their business in the ordinary course of business in a manner consistent with the Restructuring Support Agreement and past practice and use commercially reasonable efforts to preserve their business; and (vi) not, directly or indirectly, object to, delay, impede, or take any other action to interfere with acceptance, implementation, or consummation of the Restructuring Transactions.
The Restructuring Support Agreement may be terminated upon the occurrence of certain events, including the failure to meet specified milestones related to the solicitation of votes to approve the Plan, commencement of the Chapter 11 Cases, confirmation of the Plan, consummation of the Plan, and the entry of orders relating to the DIP Facility.
We have significant deferred tax assets, including NOLs. The impact of the Restructuring on the Company’s NOLs will depend on whether the Restructuring is structured as (i) a taxable disposition of substantially all of the assets and/or subsidiary stock of the Company, (ii) as a recapitalization of the Company, or (iii) some other alternative structure. If structured as a taxable disposition, we anticipate that NOLs of the Company (if any) remaining after the Restructuring will not be available to the Company after consummating the Restructuring. If structured as a recapitalization, we anticipate that the Company will experience an ownership change, and thus NOLs of the Company (if any) remaining after the Restructuring will be subject to limitation, such that the Company may not derive all of the benefits of any such remaining NOLs after consummating the Restructuring.
Chapter 11 Cases
To implement the Plan, on the Petition Date, the Company Parties filed the Chapter 11 Cases under the Bankruptcy Code in the Bankruptcy Court. Each Company Party will continue 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. Documents filed on the docket of and other information related to the Chapter 11 Cases are available at https://cases.primeclerk.com/ftr. Documents and other information available on such website are not part of this document and shall not be deemed incorporated by reference in this document.
To ensure the Company Parties’ ability to continue operating in the ordinary course of business and minimize the effect of the Restructuring on the Company Parties’ customers and employees, the Company Parties filed with the Bankruptcy Court motions seeking a variety of “first-day” relief, including authority to obtain the DIP Facility, pay employee wages and benefits, and pay vendors and suppliers in the ordinary course for all goods and services.
DIP Facility
On April 14, 2020 and prior to the commencement of the Chapter 11 Cases, the Company and certain of its subsidiaries (the DIP Loan Parties) entered into a commitment letter (the Commitment Letter) with Goldman 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 with GS Bank, DB, Barclays and MSSF, the Commitment Parties), pursuant to which, and
subject to the satisfaction of certain customary conditions, including the approval of the Bankruptcy Court, the Commitment Parties have agreed to provide the DIP Loan Parties with a senior secured superpriority debtor-in-possession revolving credit facility (the DIP Revolving Facility) in an aggregate principal amount of $460 million which, upon satisfaction of certain conditions, including the effectiveness of the Plan, will become a longer term senior secured exit revolving facility (the Exit Revolving Facility).
The terms and conditions of the DIP Revolving Facility are set forth in the form Senior Secured Superpriority Debtor-in-Possession Credit Agreement (the Form DIP Credit Agreement) attached to the Commitment Letter. The DIP Revolving Facility includes conditions precedent, representations and warranties, affirmative and negative covenants and events of default customary for financings of this type and size, including an event of default (the Prepayment Event of Default) that is triggered if the revolving loans outstanding under the JPM Credit Agreement are not repaid in full on or prior to the earlier to occur of (i) the 60th day following the Company’s actual receipt of the net cash proceeds from the sale of the Northwest Operations, and (ii) the third business day following the first day on which the Company has received both (x) the net cash proceeds of the sale of the Northwest Operations and (y) an order of the Bankruptcy Court approving the repayment in full of the outstanding revolving loans under the JPM Credit Agreement. The occurrence of the Prepayment Event of Default would cause the termination of the commitments with respect to the Exit Revolving Facility unless otherwise agreed by each Commitment Party. The proceeds of all or a portion of the DIP Revolving Facility may be used for, among other things, general corporate purposes, including working capital and permitted acquisitions and letters of credit, administrative costs, premiums, expenses and fees of the transactions contemplated by the Chapter 11 Cases, for payment of court approved adequate protection obligations and other such purposes consistent with the DIP Revolving Facility. To the extent not converted into an Exit Revolving Facility, DIP Revolving Facility claims will be paid in cash on the Plan Effective Date. The terms and conditions of the Exit Revolving Facility are reflected in an exit facility term sheet attached as an exhibit to the Form DIP Credit Agreement (the Exit Facility Term Sheet). Upon of the satisfaction of certain conditions set forth in the Exit Facility Term Sheet, including compliance with a 1.55:1.00 gross first lien leverage ratio test and the repayment in full of the revolving loans outstanding under the JPM Credit Agreement, the DIP Revolving Facility commitments will become Exit Revolving Facility commitments. The Company has the option to increase the size of the Exit Revolving Facility up to an amount of $600.0 million by obtaining commitments from one or more lenders prior to the Plan Effective Date.
Effects of the Restructuring and the Chapter 11 Cases on Our Liquidity
The filing of the Chapter 11 Cases constituted an event of default that accelerated substantially all of our obligations under the documents governing the JPM Credit Facilities, the First Lien Notes, the Second Lien Notes, our unsecured notes and debentures and the secured and unsecured debentures of our subsidiaries. However, pursuant to the Bankruptcy Code and as described in “Part II. Other Information—Item 1. Legal Proceedings”, the filing of the Bankruptcy Petitions automatically stayed most actions against the Company Parties, including most actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Company Parties’ property. Accordingly, although the filing of the Bankruptcy Petitions triggered events of default under our existing debt obligations, creditors are stayed from taking action as a result of these defaults. Additionally, under Section 502(b)(2) of the Bankruptcy Code, and subject to the terms of the DIP Orders providing for adequate protection payments to certain of our prepetition lenders, we are no longer required to pay interest on our indentures and credit facilities accruing on or after the Petition Date.
Additionally, in connection with the Chapter 11 Cases, we have incurred, and expect to continue to incur, significant professional fees and other costs in connection with the Chapter 11 Cases. There can be no assurance that our current liquidity is sufficient to allow us to satisfy our obligations related to the Chapter 11 Cases or to pursue confirmation of the Plan.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial statements.
Contractual Obligations
Other than as disclosed elsewhere in this report with respect to the filing of the Chapter 11 Cases and the acceleration of substantially all of our debt as a result, there have been no material changes outside the ordinary course of business to the information provided with respect to our contractual obligations, including indebtedness
and purchase and lease obligations, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
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 thanExcept for the updated indefinite-lived intangibles discussion below,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 ended December 31, 2016.2019.
Indefinite-lived Intangibles
Our indefinite-lived intangibles consist of goodwill and trade name, which were generated as a result of business combinations. We test for impairment of these assets annually as of December 31 or more frequently, whenever events occur or facts and circumstances change that make it more likely than not that the fair value of a reporting unit has been reduced below its carrying amount. Events that might indicate impairment include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, material negative changes in relationships with significant customers, and/or a significant decline in our stock price for a sustained period.
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,
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
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 results for the remainder of the year, including revenues, expenses, and the achievement of other cost synergies. Our assessment includes many qualitative factors that require significant judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding the need for, or size of, an impairment. Continued declines in our profitability or cash flows or in sustained low trading prices of our common stock may result in further impairment.
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 (since extended to 2021 under the RDOF program, see below) in return for the Company’s commitment to make broadband available to approximately 774,000 locations within Frontier’s footprint. This amount includes approximately $19 million in the four states of the Northwest Operations. The 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. 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 support was $35 million in 2015 and $27 million in 2016, and is expected to be $17 million in 2017 and $6 million in 2018.II.
In February 2017,On January 30, 2020, the FCC adopted an Order further explainingorder establishing the RDOF program, the next phase of the CAF program. With this order, the FCC plans to hold two auctions totaling $20.4 billion of support over ten years. In the first auction, the FCC plans to offer up to $16 billion in support over ten years ($1.6 billion annually) for an estimated 6 million locations that lack access to speeds of at least 25/3 Mbps based on the FCC’s current maps. After the FCC updates its competitive bidding processmaps with more granular broadband availability information, the FCC plans to continuehold a second auction for any remaining locations with the remaining funding, at least $4.4 billion. Recognizing that the RDOF auction is unlikely to distributeconclude before the end of the sixth year of CAF Phase II fundingsupport (year-end 2020), the order explains that CAF II recipients are entitled to a seventh year of CAF Phase II support through 2021, whether or not they are successful in those high-cost areas where price cap carriers declined the FCC’s offer of support. This auction could presentRDOF auction. The Commission released a new support and deployment opportunity.
On August 4, 2017,public notice tentatively establishing October 22, 2020, as the FCC adopted a Public Notice initiating the pre-auction processdate for the Connect America FundRDOF auction and is still soliciting technical details on the mechanics of the auction. As such, Frontier will continue to receive annual CAF Phase II 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 locationssupport in unserved high-cost areas;2021. While the auction will also account for other service elements such as the minimum data speed provided and data usage allowances. The
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
auction is likely to begin in 2018 though the exact timeframe is unknown. FrontierRDOF has not yet determined whetherbeen completely finalized, it will participatecould 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 2022.
On April 20, 2017, the FCC issued an Order (the 2017 Order) that will significantly alteraltered how Commercial Data Servicescommercial data services are regulated once the rules go into effect.regulated. Specifically, the 2017 Order adopted a test to determine, on a county-by-county basis, whether price cap ILECs, likeprice-cap ILEC services, such as Frontier’s DS1 and DS3 services, will continue to be regulated. The test is likely to resultresulted in deregulation in a substantial number of our markets. Once implemented, the deregulation will allowmarkets 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 year. Multiple partiesupheld the majority of the 2017 Order. As to the part of the decision that was vacated and remanded to the FCC, the FCC has reinstated the deregulation and the FCC’s decision to reaffirm its deregulation has not been appealed.
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 July 23, 2020. Short form applications to participate need to be filed by May 7, 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 appealed and requested a stay of this Order.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 these regulatory changes willassociated 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.
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. We have seen a number of the states we operate in issue executive orders prohibiting the disconnection of services for customers for the length of the state of emergency. State and federal governments continue to ask companies to aid in pandemic response and some are reviewing possibilities of providing additional funding for connectivity, although potential amounts are still unknown. Given the unprecedented and evolving nature of the pandemic and the swift moving response of multiple levels of government, the impact of these changes and potential changes on the company are unknown at this time.
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%March 31, 2020, 86% of our total debt had fixed interest rates. We had no interest rate swap agreements in effect at September 30, 2017.March 31, 2020. 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, 2017March 31, 2020 have floating interest rates. Our undrawn $850The annual impact of 100 basis points change in the LIBOR would result in approximately $24 million revolving credit facility hasof additional interest rates that float with the LIBO Rate, as defined. Consequently, we have limited material future earnings or cash flow exposures from changes in interest rates on our debt.expense. An adverse change in interest rates would increase the amount that we pay on our variable rate obligations and could result in fluctuations in the fair value of our fixed rate obligations. Based upon our overall interest rate exposure, a near-term change in interest rates would not materially affect our consolidated financial position, results of operations or cash flows.
At September 30, 2017,March 31, 2020, the fair value of our long-term debt was estimated to be approximately $15.5$10.1 billion, based on quoted market prices, our overall weighted average borrowing rate was 8.36%8.69% and our overall weighted average maturity was approximately six years. As of September 30, 2017,March 31, 2020, prior to the filing of the Chapter 11 Cases, there hashad been no significant change in the weighted average maturity applicable to our obligations since December 31, 2016.2019. However the filing of the Chapter 11 Cases has accelerated the maturity of substantially all of our debt obligations. Refer to Note 9 for discussion of the impact of the Chapter 11 Cases on our debt obligations.
Equity Price Exposure
Our exposure to market risks for changes in equity security prices as of September 30, 2017March 31, 2020 is primarily limited to our pension plan assets. We have no other security investments of any significant amount.
Our Pension Plan assets decreased from $2,766$2,730 million at December 31, 20162019 to $2,604$2,166 million at September 30, 2017,March 31, 2020, a decrease of $162$564 million, or 6%21%. This decrease was a result of benefit payments of $492$327 million partially offset by positiveand investment returns of $270 million, netlosses (net of investment management and administrative fees, andfees) of $274 million, partially offset by contributions in excess of the Differential (as defined below) of $60 million, during the first nine months of 2017.$37 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)
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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,March 31, 2020, that our disclosure controls and procedures were effective. effective in recording, processing, summarizing and reporting on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and were effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
| (b)
| | (b)Changes in internal control over financial reporting |
We reviewed our internal control over financial reporting at September 30, 2017.
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in an evaluation thereof that occurred during the thirdfirst fiscal quarter of 20172020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting.
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 this report. Thereclaims 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. On March 24, 2020, the court denied plaintiffs’ motion for leave to amend, finding that they had not pled a viable claim. Plaintiffs may seek an appeal of the order dismissing the case. We continue to dispute the allegations and intend to vigorously defend against such claims. In addition, shareholders have been no material changesfiled 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 our legal proceedings fromshareholders, failure to manage internal controls, and failure to oversee and manage the information provided in Item 3. “Legal Proceedings” included in our Annual Report on Form 10-Kcompany; (ii) unjust enrichment and waste of corporate assets claims; and (iii) violations of Section 14(a) of the Exchange Act for the year ended December 31, 2016. 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.
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.
Most of our pending legal proceedings have been stayed as a result of filing the Chapter 11 Cases on April 14, 2020 and the effect of the automatic stay.
Effect of Automatic Stay upon filing under Chapter 11 of the United States Bankruptcy Code
Pursuant to Section 362 of the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed most actions against or on behalf of the Company Parties, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Company Parties’ property. Subject to certain exceptions under the Bankruptcy Code, the filing of the Company Parties’ Chapter 11 Cases also automatically stayed the continuation of most legal proceedings or the filing of other actions against or on behalf of the Company Parties or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Company Parties’ bankruptcy estates, unless and until the Bankruptcy Court modifies or lifts the automatic stay as to any such claim. Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under their police and regulatory powers.
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.
2019.
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.March 31, 2020.
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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| Totals January 1, 2020 to March 31, 2020 |
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| Employee Transactions (1) |
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| 129,031 |
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| $ | 0.57 |
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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.
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, 2017May 6, 2020 |
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