Risks Related to Our Indebtedness
We have a significant amount of indebtedness and we may still be able to incur substantially more debt in the future. Such debt and debt service obligations may adversely affect us.
As of June 30, 2021, we have indebtedness of approximately $7 billion of which approximately $6 billion is secured. We may also be able to incur substantial additional indebtedness in the future. Although the terms of the agreements currently governing our existing indebtedness restrict our and our restricted subsidiaries’ ability to incur additional indebtedness and liens, such restrictions are subject to several exceptions and qualifications, and the indebtedness and/or liens incurred in compliance with such restrictions may be substantial. Also, these restrictions do not prevent us or our restricted subsidiaries from incurring obligations that do not constitute indebtedness. In addition, to the extent other new debt is added to our and our subsidiaries’ current debt levels, the substantial leverage risks described below would increase.
The potential significant negative consequences on our financial condition and results of operations that could result from our substantial debt include:
·limitations on our ability to obtain additional debt or equity financing on favorable terms or at all;
·instances in which we are unable to comply with the covenants contained in our indentures and credit agreement or to generate cash sufficient to make required debt payments, which circumstances have the potential of accelerating the maturity of some or all of our outstanding indebtedness;
·the allocation of a substantial portion of our cash flow from operations to service our debt, thus reducing the amount of our cash flows available for other purposes, including capital expenditures that would otherwise improve our competitive position, results of operations or stock price;
·requiring us to sell debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations;
·compromising our flexibility to plan for, or react to, competitive challenges in our business and the telecommunications industry;
·increasing our vulnerability to general adverse economic and industry conditions, including increases in interest rates, particularly given our indebtedness that bears interest at variable rates, as well as to catastrophic events; and
·the possibility of our being put at a competitive disadvantage with competitors who, relative to their size, do not have as much debt as we do, and competitors who may be in a more favorable position to access additional capital resources.
In addition, our First Lien Notes, Second Lien Notes and Takeback Notes, as well as our subsidiary indebtedness are rated below “investment grade” by independent rating agencies. This has resulted in higher borrowing costs for us. These rating agencies may lower our debt ratings further, if in the rating agencies’ judgment such an action is appropriate. A further lowering of a rating would likely increase our future borrowing costs and reduce our access to capital. Our negotiations with vendors, customers and business partners can be negatively impacted if they deem us a credit risk as a result of our credit rating.
The agreements governing our current indebtedness contain various covenants that impose restrictions on us and certain of our subsidiaries that may reduce our operating and financial flexibility and we may not be able to satisfy our obligations under these or other, future debt arrangements.
We face significant operational and industry challenges. Pressures on our business are resulting in a continued deterioration in revenue and liquidity and there is a lower outlook for our industry as a whole. While we have undertaken initiatives to strengthen our business, we have experienced significant challenges in achieving improvements in revenue and customer trends.
The agreements governing our existing indebtedness contain covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to:
·incur additional debt and issue preferred stock;
·incur or create liens;
·redeem and/or prepay certain debt;
·pay dividends on our stock or repurchase stock;
·make certain investments;
·engage in specified sales of assets;
·enter into transactions with affiliates; and
·engage in consolidation, mergers and acquisitions.
In addition, the exit facilities require us to comply with specified financial ratios, including a maximum first lien coverage ratio. Any future indebtedness may also require us to comply with similar or other covenants.
These restrictions on our ability to operate our business could seriously harm our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions and other corporate opportunities. Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants. Failure to comply with any of the covenants in our financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity for the debt under these agreements and to foreclose upon any collateral securing the debt. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing. This could have serious consequences to our financial condition and results of operations.
Frontier is primarily a holding company and, as a result, we rely on the receipt of funds from our subsidiaries in order to meet our cash needs and service our indebtedness, including the notes.
Frontier is primarily a holding company and its principal assets consist of the shares of capital stock or other equity instruments of its subsidiaries. As a holding company, we depend on dividends, distributions and other payments from our subsidiaries to fund our obligations. The operating results of our subsidiaries at any given time may not be sufficient to make dividends, distributions or other payments to us in order to allow us to make payments on our indebtedness. In addition, the payment of these dividends, distributions and other payments, as well as other transfers of assets, between our subsidiaries and from our subsidiaries to us may be subject to legal, regulatory or contractual restrictions. Some state regulators have imposed, and others may consider imposing, on regulated companies, that could limit the ability of such regulated companies to transfer cash between subsidiaries or to the parent company. While none of the existing state regulations materially affect our cash management, any changes to the existing regulations or imposition of new regulations or restrictions may materially adversely affect our ability to transfer cash within our consolidated companies.
We expect to make contributions to our pension plan in future years, the amount of which will be impacted by volatility in asset values related to Frontier’s pension plan and/or changes in pension plan assumptions.
We made contributions of $64 million and $166 million to our pension plan in 2020 and 2019, respectively, and we expect to continue to make contributions in future years. Required pension plan contributions for the fiscal year 2020 were approximately $180 million, including interest owed on contribution deferrals. Certain provisions of the CARES Act permit employers to postpone making pension contributions due in 2020 until January 4, 2021 and we postponed the remaining 2020 contributions of approximately $147 million, in the aggregate, as permitted by the CARES Act. We received from the IRS a waiver of the minimum funding standard under Section 412(c) of the Internal Revenue Code, and Section 302(c) of the Employee Retirement Income Security Act of 1974 for the pension plan year beginning January 1, 2020. With this waiver, we will spread the 2020 contribution, determined as of January 1,
2020 (approximately $127 million in total), over the five subsequent plan years, in addition to the minimum contributions owed for those plan years. In addition, in March 2021, Congress passed the American Rescue Plan Act, or ARPA, which includes certain pension funding relief for plan sponsors.
Volatility in our asset values, liability calculations, or returns may impact the costs of maintaining our pension plan and our future funding requirements. The deferrals described above do not reduce our overall contribution obligations. Any future contribution to our pension plan could be material and could have a material adverse effect on our liquidity by reducing cash flows.
Significant changes in discount rates, rates of return on pension assets, mortality tables and other factors could adversely affect our earnings and equity and increase our pension funding requirements.
Pension costs and obligations are determined using actual results as well as actuarial valuations that involve several assumptions. The most critical assumptions are the discount rate, the long-term expected return on assets and mortality tables. Other assumptions include salary increases, lump sum payments, and retirement age. Some of these assumptions, such as the discount rate and return on pension assets, are reflective of economic conditions and largely out of our control. Changes in the pension assumptions could have a material impact on pension costs and obligations, and could in turn have a material adverse effect on our earnings, equity and funding requirements.
Risks Related to our Emergence from Bankruptcy
The ongoing effects of the Chapter 11 Cases, including the risks and uncertainties associated with bankruptcy, may harm our business following emergence.
We have only recently emerged from bankruptcy. Our senior management has been required to spend a significant amount of time and effort attending to the Restructuring instead of focusing exclusively on our business operations. Risks associated with emergence from bankruptcy include our ability to maintain our relationships with our suppliers, service providers, regulators, customers, employees, and other third parties; and our ability to maintain contracts that are critical to our operations.
Our historical financial information may not be indicative of our future financial performance as a result of the implementation of the Plan.
Our capital structure was significantly altered under the Plan. Upon emergence from bankruptcy, we adopted fresh-start accounting in accordance with ASC 852, Reorganizations. Under fresh-start accounting rules that apply to us upon the Effective Date, our assets and liabilities have been adjusted to fair value and our accumulated deficit has been restated to zero. In addition, we have adopted certain accounting policy changes as part of fresh-start accounting and such policies could result in material changes to our financial reporting and results. Accordingly, our financial condition and results of operations following our emergence from Chapter 11 are not comparable to the financial condition and results of operations reflected in our historical consolidated financial statements. As a result, investors should not rely on these results as indicative of our future performance.
There can be no assurance as to the effect that our bankruptcy and emergence from Chapter 11 will have on our relationships with our business partners.
There can be no assurance as to the effect that our bankruptcy and emergence from Chapter 11 will have on our ongoing relationships with our suppliers, customers, service providers or employees. To the extent that any of these events result in the tightening of payment or credit terms, increases in the price of supplied goods, or the loss of one or more major customers, service providers or key employees, it could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Upon emergence from bankruptcy, the composition of our Board of Directors and our management team changed significantly.
The composition of our senior management team has changed significantly during 2021. Nick Jeffery became Chief Executive Officer as of March 4, 2021 and since that time we have hired a new Chief Financial Officer, a new Chief Network Officer, a new head of our Consumer business and a new Chief People Officer, in addition to other key hires. The composition of our management team may continue to change significantly. Qualified individuals are in high demand and we may incur significant costs to attract them. The loss of other key employees or unexpected changes in the composition of our management team could materially and adversely affect our ability to execute our strategy and implement operational initiatives which could have a material and adverse effect on our financial condition, liquidity and results of operations.
In addition, upon emergence from bankruptcy, the composition of our board of directors changed significantly. Our current directors have different backgrounds, experiences and perspectives from those individuals who previously served on our board of directors during bankruptcy and current board of directors may have different views on strategic initiatives and a range of issues that will determine the future of the Company. As a result, the future strategy and plans of the Company may differ materially from those of the past.
Risks Related to Our Business
If our fiber build out or other initiatives to increase our revenues, profitability and cash flows are unsuccessful, our financial position and results of operations will be negatively and adversely impacted.
We must produce adequate revenues and operating cash flows that, when combined with cash on hand and borrowing under our revolving credit facility and other financings, will be sufficient to service our debt, fund our capital expenditures, pay our taxes, and fund our pension and other employee benefit obligations. We continue to experience revenue declines as compared to prior years. We have undertaken, and expect to continue to undertake, programs and initiatives with the objective of improving revenues, profitability, and cash flows by enhancing our operations and customer service and support processes. In particular, under our fiber expansion plan we intend to grow our fiber network and optimize our existing copper network at attractive IRRs in order to increase our revenues and customer trends, and in turn increase our profitability and cash flows. These programs and initiatives require significant resources and may divert attention from ongoing operations and other strategic initiatives. Despite similar efforts in the past, we have historically experienced significant challenges in achieving improvements in revenue and customer trends.
There can be no assurance that our current and future initiatives and programs will be successful, and even if they are successful, the actual returns from these programs and initiatives may be less than anticipated or may take longer to realize than we anticipate. For example, we may not reach our targets to expand our existing fiber network on the timelines we anticipate, or at all. If current and future programs and initiatives are unsuccessful, result in lower returns than we anticipate, or take longer than we anticipate, it could have a material adverse effect on our financial position and our results of operations.
The effects of COVID-19, including its impact on market conditions, may adversely impact our business and hinder our fiber expansion plans.
The outbreak of COVID-19 and the resulting economic downturn adversely affected the financial markets and the economy more generally, which could adversely impact our business. As of June 30, 2020, the markets remain volatile and the economic outlook remains uncertain.
While overall the operational and financial impacts to our business of the COVID-19 pandemic for the six months ended June 30, 2021 were not significant, we continue to closely monitor the evolution of the pandemic, including new COVID-19 variants, as well as the ongoing impact to our employees, our customers, our business and
our results of operations. We have experienced a slowdown in service activations and an increase in deactivations for our SMB customers; to date, these negative impacts have been partially offset by higher consumer activations and lower churn, but there can be no assurance they will continue to be offset. We also continue to closely track our customers’ payment activity as well as external factors, including the expiration of federal wage subsidies for individuals and small businesses which could materially impact payment trends. With more people working from home, we have experienced higher demands on our network and higher sales activity for our consumer broadband service offering. This sustained increase in network demand could lead to reduced network availability and potential outages, which may impair our ability to meet customer service level commitments, lead to higher costs, higher customer churn and potential increased regulatory actions. These potential changes, among others, could have a material financial impact to Frontier.
Our response to COVID-19 has included several operational safety precautions such as limiting our product offerings in certain markets for certain periods and, for some time, not allowing our field service employees to enter a customer’s home. Through June 30, 2021, we had not experienced any significant disruptions in our supply chain; however, some of our business partners, particularly those vendors operating outside of the United States, have been more greatly impacted which has affected our service levels and distribution of work, and resulted in disruptions to our supply chain or other aspects of our business. Any significant shortages or delays in our supply chain relating to our fiber expansion project may adversely impact our ability to reach our fiber expansion targets on budget and on time.
In addition, we may rely on the equity and debt capital markets in order to finance all or a portion of our fiber expansion plan. Adverse capital market conditions related to COVID-19 (or otherwise) could make it more difficult or expensive, or even infeasible, to finance the fiber expansion through the use of one or more capital market financing transactions.
Potential longer-term impacts of COVID-19 on our business include the potential for higher borrowing costs due to the increasing difference in the higher yield of lower-rated debt as compared to the lower yield of higher-rated debt of similar maturity and incremental financing needs. Our analysis of the potential impact of COVID-19 is subject to change. We are unable to predict the timing, duration or intensity of the COVID-19 situation and its effects on the business and general economic conditions in the United States of America. We continue to monitor and assess the impact of the COVID-19 pandemic. Our financial condition, results of operations, liquidity and cash flows could be significantly affected by the outbreak of the COVID-19 pandemic.
The communications industry is very competitive, and some of our competitors have superior resources which may place us at a disadvantage.
We face competition in every aspect of our business. Through mergers and various service expansion strategies, service providers are striving to provide integrated solutions both within and across geographic markets. Our competitors include CLECs, Internet service providers, wireless companies, OTT, VoIP providers, fiber and other “overbuilders” and cable companies, some of which may be subject to less regulation than we are. These entities may provide services competitive with the services that we offer or intend to introduce. For example, our competitors may seek to introduce networks in our markets that are competitive with or superior to our copper-based networks in those markets. Several competitors were successful bidders in the RDOF auction in areas within Frontier’s service footprint and we expect these competitors will deploy expanded services in these areas that will compete with our services. We also believe that wireless, cable and other providers have increased their penetration of various services in our markets. We expect that competition will remain robust. Our revenue and cash flow will be adversely impacted if we cannot reverse our customer losses or continue to provide high-quality services.
Some of our competitors have market presence, engineering, technical, marketing and financial capabilities which are substantially greater than ours. In addition, some of these competitors have less debt and are able to raise capital at a lower cost than we are able to. Consequently, some of these competitors may be able to develop and expand their communications and network infrastructures more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, including leading edge technologies such as artificial intelligence, machine learning and various types of data science, as well as take advantage of acquisition and other
opportunities more readily and devote greater resources to the marketing and sale of their products and services than we will be able to. Additionally, the greater brand name recognition of some competitors may require us to price our services at lower levels in order to retain or obtain customers. Finally, the cost advantages and greater financial resources of some of these competitors may give them the ability to reduce their prices for an extended period of time if they so choose. Our business and results of operations may be materially adversely impacted if we are not able to effectively compete.
We cannot predict which of the many possible future technologies, products or services will be important in order to maintain our competitive position or what expenditures will be required to develop and provide these technologies, products or services. Our ability to compete successfully will depend on the effectiveness of capital expenditure investments in our properties, our marketing efforts, our ability to deliver high quality customer service, our ability to anticipate and respond to various competitive factors affecting the industry, including a changing regulatory environment that may affect our business and that of our competitors differently, new services that may be introduced, changes in consumer preferences, or habits, demographic trends, economic conditions and pricing strategies by competitors. Increasing competition may reduce our revenues and increase our marketing and other costs as well as require us to increase our capital expenditures and thereby decrease our cash flows.
We may be unable to meet the technological needs or expectations of our customers and may lose customers as a result.
The communications industry is subject to significant changes in technology and replacing or upgrading our infrastructure to keep pace with such technological changes could result in significant capital expenditures. If we do not replace or upgrade technology and equipment and manage broadband speeds and capacity as necessary, we may be unable to compete effectively because we will not be able to meet the needs or expectations of our customers.
In addition, enhancements to product offerings may influence our customers to consider other service providers, such as cable operators or wireless providers. We may be unable to attract new or retain existing customers from cable companies due to their deployment of enhanced broadband and VoIP technology. In addition, new capacity services for broadband technologies may permit our competitors to offer broadband data services to our customers throughout most or all of our service areas. Any resulting inability to attract new or retain existing customers could adversely impact our business and results of operations in a material manner.
We rely on network and information systems and other technology, and a disruption or failure of such networks, systems or technology as a result of computer viruses, cyber-attacks, misappropriation of data or other malfeasance, as well as outages, accidental releases of information or similar events, may disrupt our business and materially impact our results of operations, financial condition and cash flows.
Our information technology networks and infrastructure may be subject to damage, disruptions or shutdowns due to computer viruses, cyber-attacks or breaches, employee or third-party error or malfeasance, power outages, communication or utility failures, systems failures, natural disasters or other catastrophic events.
Further, our network and information systems are subject to various risks related to third parties and other parties we may not fully control. We use encryption and authentication technology licensed from third parties to provide secure transmission of confidential information, including our business data and customer information. Similarly, we rely on employees in our network operations centers, data centers, call centers and retail stores to follow our procedures when handling sensitive information. While we select our third-party business partners and employees carefully, we do not control their actions, which could expose us to cyber-security risks. In addition, our customers using our network to access the Internet may become victim to malicious and abusive Internet activities, such as unsolicited mass advertising (or spam), peer-to-peer file sharing, distribution of viruses, worms and other destructive or disruptive software; these activities could adversely affect our network, result in excessive call volume at our call centers and damage our or our customers’ equipment and data.
While we maintain security measures, disaster recovery plans and business continuity plans for our business and are continuously working to upgrade our existing technology systems and provide employee training around the
cyber risks we face, these risks are constantly evolving and are challenging to mitigate. Like many companies, we are the subject of increasingly frequent cyber-attacks. Any unauthorized access, computer viruses, accidental or intentional release of confidential information or other disruptions could result in misappropriation of our or our customers’ sensitive information; financial loss; reputational harm; increased costs, such as those relating to remediation or future protection; customer dissatisfaction, which could lead to a decline in customers and revenue; government investigations and legal claims or proceedings, fines and other liabilities. There can be no assurance that the impact of such incidents would not be material to our results of operations, financial condition or cash flows.
Our business is sensitive to continued relationships with our wholesale customers.
We have substantial business relationships with other communications carriers for which we provide service. While we seek to maintain and grow our business with these customers, we face significant competition for this wholesale business. If we fail to maintain our grow this business, our revenues and results of operations could be materially and adversely affected.
A significant portion of our workforce is represented by labor unions.
As of June 30, 2021, approximately 70% of our total employees were represented by unions and were subject to collective bargaining agreements. Of this unionized workforce, approximately 70% are covered by collective agreements that either expire or have been ratified in 2021 and approximately 15% are covered by collective bargaining agreements that expire in 2022. In addition, approximately 15% of the unionized workforce are covered by collective bargaining agreements that are on extensions from the dates on which they originally expired in 2019 or 2020.
We cannot predict the outcome of negotiations of the collective bargaining agreements covering our employees. If we are unable to reach new agreements or renew existing agreements, employees subject to collective bargaining agreements may engage in strikes, work slowdowns or other labor actions, which could materially disrupt our ability to provide services. New labor agreements or the renewal of existing agreements may impose significant new costs on us, which could adversely affect our financial condition and results of operations in the future.
Negotiations with the providers of content for our video systems may not be successful, potentially resulting in our inability to carry certain programming channels on our video systems, which could result in the loss of subscribers. Alternatively, because of the power of some content providers, we may be forced to pay an increasing amount for some content, resulting in higher expenses and lower profitability.
We continue to execute on our video strategy of achieving savings by renegotiating contracts to lower content costs or dropping channels entirely. The content owners of the programming that we carry on our multichannel video systems are the exclusive provider of the channels they offer. If we are unable to reach a mutually-agreed contract with a content owner, including pricing and carriage provisions, our existing agreements to carry this content may not be renewed, resulting in the blackout of these channels. The loss of content could result in our loss of customers who place a high value on the particular content that is lost. In addition, many content providers own multiple channels. As a result, we typically have to negotiate the pricing for multiple channels rather than one and carry and pay for content that customers do not value, in order to have access to other content that customers do value. Some of our competitors havematerially larger scale than we do, and may, as a result, be better positioned than we are in such negotiations. As a result of these factors, the expense of content acquisition may continue to increase, and this could result in higher expenses and lower profitability.
We are subject to a significant amount of litigation, which could require us to pay significant damages or settlements.
We are party to various legal proceedings, including, from time to time, individual actions, class and putative class actions, and governmental investigations, covering a wide range of matters and types of claims including, but not limited to, general contract disputes, billing disputes, rights of access, taxes and surcharges, consumer protection, advertising, sales and the provision of services, trademark and patent infringement, employment, regulatory, tort, claims of competitors and disputes with carriers.
In connection with our emergence from bankruptcy, the Plan provided that holders of general unsecured claims, including, but not limited to, litigation claims against us and/or our subsidiaries, had their claims “ride through” the bankruptcy, meaning there was no bar to or discharge of these claims. In particular, litigation claims against us survived the bankruptcy and those claims may be pursued against us on or after the Effective Date. To the extent such claims could have been asserted prior to bankruptcy or arose during the bankruptcy, such claims can be asserted now that we have emerged from bankruptcy. In addition to potential liability for claims asserted against us, we have ongoing obligations to indemnify our former officers and directors and certain underwriters in connection with litigation as we did before the bankruptcy.
Litigation is subject to uncertainty and the outcome if individual matters is not predictable. We may incur significant expenses in defending these lawsuits. In addition, we may be required to pay significant awards or enter into settlements with governmental or other entities which impose significant financial and business remediation measures.
We rely on a limited number of key suppliers and vendors.
We depend on a number of suppliers and vendors for equipment and services relating to our network infrastructure, including network elements such as digital and internet protocol switching and routing equipment, optical and copper transmission equipment, broadband connectivity equipment, various forms of customer premise equipment, optical fiber, wireless equipment, as well as the software that is used throughout our network to manage traffic, network elements, and other functions critical to our operations. If any of our major suppliers were to experience disruption, supply-chain interruptions, financial difficulties, or other unforeseen problems delivering, maintaining, or servicing these network components on a timely basis, our operations could suffer significantly. For example, the ongoing COVID-19 pandemic may affect the ability of our suppliers and vendors to provide products and services to us and may adversely impact our operations. In addition, due to changes in the communications industry, the suppliers of many of these products and services have been consolidating. In the event it were to become necessary to seek alternative suppliers and vendors, we may be unable to obtain satisfactory replacement supplies, services, or utilities on economically-attractive terms, on a timely basis, or at all, which could increase costs or cause disruptions in our services.
Risks Related to Regulation and Oversight
Changesinfederal or state regulations may reduce the switched access charge and subsidy revenues we receive.
A portion of Frontier’s total revenues ($89 million, or 1% in 2020 and $102 million, or 1%, in 2019) are derived from switched access charges paid by other carriers for services we provide in originating intrastate and interstate long-distance traffic. Frontier expects a portion of our revenues will continue to be derived from switched access charges paid by these carriers for these services. The rates Frontier can charge for switched access are regulated by the FCC and state regulatory agencies.
In 2011, the FCC adopted the 2011 Order regarding Intercarrier Compensation, which is the payment framework that governs how carriers compensate each other for the exchange of voice traffic between carriers. However, the 2011 Order did not resolve all questions on Intercarrier Compensation. In an October 2020 order, the FCC adopted a 2-year transition of 1-800 (toll free) switched access charges to bill and keep beginning July 2021,
thus further reducing this declining revenue stream. The FCC continues to consider the possibility of further reducing access rates in the future. We cannot predict when or how the FCC would implement any changes originating access rates, and future reductions in these revenues may directly affect our profitability and cash flows.
In April 2017, the FCC issued an order that resulted in substantial deregulation in a number of our marketsfor special access services where the market is determined to be competitive and the transport market nationwide. While some aspects of the 2017 Order were appealed by stakeholders the 8th Circuit issued a decision that upheld the majority of the 2017 Order. The FCC has since reaffirmed the portions of the 2017 Order that were vacated, and no party appealed the FCC’s second decision.
Certain states also have their own open proceedings to address reform to originating intrastate access charges, other intercarrier compensation, and state universal service funds. Although the FCC has pre-empted state jurisdiction on most access charges, many states could consider moving forward with their proceedings. We cannot predict when or how these matters will be decided or the effect on our subsidy or switched access revenues. However, future reductions in our subsidy or switched access revenues may directly affect our profitability and cash flows as those regulatory revenues do not have an equal level of associated variable expenses.
A portion of Frontier’s total revenues ($344 million, or 5%, in 2020 and $365 million, or 4%, in 2019) are derived from federal and state subsidies for rural and high-cost support, that consists primarily of CAF II support, as well as Federal High Cost support and various state subsidies. The FCC’s 2011 Order changed how federal subsidies are calculated and disbursed. These changes transitioned the USF (Universal Service Fund), which supported voice services in high-cost areas, to the CAF (Connect America Fund), which supports broadband deployment in high-cost areas. In June 2015, we accepted the FCC’s offer of support to price cap carriers under the CAF Phase II program in 25 states, which, excluding the support related to the Northwest Operations divested on May 1, 2020, provides $313 million in annual support through 2021 in return for our commitment to make broadband available to households within our footprint.
On January 30, 2020, the FCC adopted an order establishing the RDOF program. The FCC held the RDOF Phase I auction in the third quarter of 2021. Frontier was awarded approximately $371 million over ten years to build gigabit-capable broadband over a fiber-to-the-premises network to approximately 127,000 locations in eight states (California, Connecticut, Florida, Illinois, New York, Pennsylvania, Texas, and West Virginia). Frontier submitted its Long Form application to the FCC on January 29, 2021 and, assuming the long-form application is granted by the FCC, anticipates that it will begin receiving funding on January 1, 2022. The program will not be as favorable to us as the CAF Phase II program, and this program will result in a material reduction in the level of funding that we receive from the FCC under the CAF Phase II program (approximately $332 million in annual support) to approximately $37 million in annual support under RDOF beginning in 2022. Our inability to replace a substantial portion of this reduction, will in turn result in a material reduction in our revenue and operating income, and could have a material adverse effect on our business, financial condition and results of operations.
While we are implementing a number of operational initiatives in order to realize certain cost savings, our ability to achieve such cost savings on a timely basis, or at all, is subject to various risks and assumptions by our management, which may or may not be realized. In addition, our ability to achieve such costs savings is subject to the incurrence of other costs in our operations, which may be material and may offset all or a portion of such cost savings. As a result, we may not be able to realize these anticipated cost savings on a timely basis or at all. Even if we do realize some or all of such cost savings, they may be insufficient to offset any reductions in subsidies or CAF Phase II funding we receive, or our inability to recover USF contributions.
In addition, we are required to contribute to the USF and the FCC allows us to recover these contributions through a USF surcharge on customers’ bills. This surcharge accounted for $193 million of revenue in 2020 and $221 million in 2019. Our inability to recover USF contributions could have a material adverse effect on our business or results of operations.
Future reductions in these subsidies, the inability to replace a substantial portion of our CAF II or RDOF funding, or our inability to recover USF contributions, could have a material adverse effect on our business or results of operations.
Frontier and our industry will likely remain highly regulated, and we could incur substantial compliance costs that could constrain our ability to compete in our target markets.
As an incumbent local exchange carrier, some of the services we offer are subject to significant regulation from federal, state and local authorities. This regulation could impact our ability to change our rates, especially on our basic voice services and our access rates and could impose substantial compliance costs on us. In some jurisdictions, regulation may restrict our ability to expand our service offerings. In addition, changes to the regulations that govern our business may have an adverse effect on our business by reducing the allowable fees that we may charge, imposing additional compliance costs, reducing the amount of subsidies or otherwise changing the nature of our operations and the competition in our industry. At this time, it is unknown how these regulations, regulatory oversight, or changes to these regulations will affect Frontier’s operations or ability to compete in the future.
FCC rulemakings and state regulatory proceedings, including those relating to intercarrier compensation, universal service and broadband services, could have a substantial adverse impact on our operations.
Our Internet access offerings could become subject to additional laws and regulations as they are adopted or applied to the Internet. As the significance of the Internet expands, federal, state and local governments may pass laws and adopt rules and regulations, including those directed at privacy or service rates, or apply existing laws and regulations to the Internet (including Internet access services), and related matters are under consideration in both federal and state legislative and regulatory bodies. Although the FCC has pre-empted state jurisdiction on network neutrality and privacy, many states, including California, have considered or are moving forward with legislation on these or other Internet-related issues. Multiple states have taken executive or legislative action directed at reinstating aspects of the FCC’s 2015 Order. We cannot predict whether the outcome of expected or pending challenges to the FCC’s order or subsequent state actions will prove beneficial or detrimental to our competitive position. It is also unclear the degree to which the outcome of the November 2020 elections may impact federal or state legislative or regulatory action on net neutrality and privacy issues.
We are subject to the oversight of certain federal and state agencies that have in the past, and may in the future, investigate or pursue enforcement actions against us relating to consumer protection matters.
Certain federal and state agencies, including state attorneys general, monitor and exercise oversight related to consumer protection matters, including those affecting the communications industry. Such agencies have in the past, and may in the future, choose to launch an inquiry or investigation of our business practices in response to customer complaints or other publicized customer service issues or disruptions, including regarding the failure to meet technological needs or expectations of our customers. Such inquiries or investigations could result in reputational harm, enforcement actions, litigation, fines, settlements and/or operational and financial conditions being placed on the Company, any of which could materially and adversely affect our business.
We are subject to the oversight of certain federal and state regulatory agencies regarding commitments that were made by or imposed on the Company by the regulatory agencies in association with securing federal and state regulatory approval for the Restructuring.
The Company made a number of affirmative commitments to federal and certain state regulators to secure approval for the Restructuring, including specific investment, broadband service deployment, service quality improvements, reporting, and compliance commitments. Regulators will monitor and may launch compliance inquiries or investigations and if the Company is found to have failed to comply with its obligations it could result in reputational harm, enforcement actions, litigation, penalties, fines, settlements and/or operational and financial conditions being placed on the Company, any of which could materially and adversely affect our business.
Tax legislation may adversely affect our business and financial condition.
Tax laws are dynamic and continually change as new laws are passed and new interpretations of the law are issued or applied. For example, on December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the TCJA. The TCJA makes broad and complex changes to the U.S. tax code and, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, and imposes limitations on the use of net operating losses arising in taxable years beginning after December 31, 2017. The reduction of the U.S. corporate tax rate results in a decreased valuation of our deferred tax asset and liabilities.
More recently, on March 18, 2020, the Families First Coronavirus Response Act (FFCR Act), and on March 27, 2020, the CARES Act were each enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the use of net operating losses arising in taxable years beginning after December 31, 2017. The Company is continuing to evaluate the impact of this legislation on its consolidated financial position, results of operations, and cash flows. Future regulatory guidance under the FFCR Act and the CARES Act (as well as under the TCJA) may be forthcoming, and such guidance could ultimately increase or lessen their impact on our business and financial condition. It is also highly possible that Congress will enact additional legislation in connection with the COVID-19 pandemic, some of which could have an impact on the Company.
The determination of the benefit from (or provision for) income taxes requires complex estimations and significant judgments concerning the applicable tax laws. If in the future any element of tax legislation changes the related accounting guidance for income tax, it could affect our income tax position and we may need to adjust the benefit from (or provision for) income taxes accordingly.
Risks Related to Our Common Stock
The price of our common stock may be volatile or may decline, which could result in substantial losses for purchasers of our common stock.
Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for them. Many factors, which may be outside our control, may cause the market price of our common stock to fluctuate significantly, including those described elsewhere in the “Risk Factors” section, as well as the following:
variations in our operating and financial performance and prospects from period to period;
our quarterly or annual earnings or those of other companies in our industry compared to market expectations;
future announcements concerning our business or our competitors’ businesses;
the public’s reaction to our press releases, other public announcements and filings with the SEC;
the composition of our public float, including substantial holdings by former creditors that may wish to dispose of our securities;
coverage by or changes in financial estimates by securities analysts or failure to meet their expectations;
market and industry perception of our success, or lack thereof, in pursuing our fiber expansion strategy;
strategic actions by us or our competitors, such as acquisitions or restructurings;
changes in laws or regulations which adversely affect our industry or us;
changes in accounting standards, policies, guidance, interpretations or principles;
changes in senior management or key personnel;
issuances, exchanges or sales, or expected issuances, exchanges or sales of our capital stock;
adverse resolution of new or pending litigation against us; and
changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war and responses to such events.
These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock is low. As a result, you may suffer a loss on your investment.
If there are substantial sales of shares of our common stock, the price of our common stock could decline.
The market price of the shares of our common stock could decline as a result of the sale of a substantial number of our shares of common stock in the public market, or the perception in the market that our significant stockholders intend to sell a significant number of their shares.
We do not intend to pay dividends on our common stock for the foreseeable future.
We currently have no intention to pay dividends on our common stock at any time in the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, certain of our debt instruments contain covenants that restrict the ability of our subsidiaries to pay dividends to us.
Delaware law and certain provisions in our certificate of incorporation may prevent efforts by our stockholders to change the direction or management of our Company.
Our certificate of incorporation and our by-laws contain provisions that may make the acquisition of our Company more difficult without the approval of our Board, including, but not limited to, the following: action by stockholders may only be taken at an annual or special meeting duly called by or at the direction of our board of directors; and advance notice for all stockholder proposals is required.
These and other provisions in our certificate of incorporation, bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to initiate actions that are opposed by our board of directors, including actions to delay or impede a merger, tender offer or proxy contest involving our Company. The existence of these provisions could negatively affect the price of our common stock and limit opportunities for you to realize value in a corporate transaction.
If securities or industry analysts do not publish or cease publishing research or reports, or publish unfavorable research or reports, about us, our business or our industry, or if they adversely change their recommendations regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts may publish about us, our business, our industry or our competitors. If we do not maintain adequate research coverage or if any of the analysts who may cover us downgrade our stock, publish inaccurate or unfavorable research about our business or provide relatively more favorable recommendations about our competitors, our stock price could decline. If any analyst who may cover us were to cease coverage of our Company or fail to regularly publish reports about us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
General Risks
The ability to attract and retain key personnel is critical to the success of our business and may be affected by our emergence from bankruptcy.
Our success depends in part upon key personnel. We cannot guarantee that our key personnel will not leave or compete with us. If executives, managers or other key personnel resign, retire or are terminated, or their service is otherwise interrupted, we may not be able to replace them in a timely manner. The loss, incapacity or unavailability for any reason of key members of our management team could have a material impact on our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities during the quarter ended SeptemberJune 30, 2017.2021.
ISSUER PURCHASES OF EQUITY SECURITIES
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Period | | | Total Number of Shares Purchased | | | Average Price Paid per Share |
| | | | | | | |
July 1, 2017 to July 31, 2017 | | | | | | | |
Employee Transactions (1) | | | 625 | | | $ | 15.83 |
| | | | | | | |
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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(1) Includes
Upon emergence from the Chapter 11 Cases on April 30, 2021, all equity interests in Frontier outstanding prior to the Effective Date were canceled, released, and extinguished, and we are of no further force or effect and Reorganized Frontier issued a total of 244,401,000 shares withheld (underof common stock to the termsholders 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. Frontier’s stock compensation plans provide that the value of shares withheld shall be based on the averageexisting Senior Notes in partial satisfaction of the high and low priceallowed Senior Notes claims.
The shares of our common stock ondescribed above are exempt from registration under the date the relevant transaction occurs, for shares vested priorSecurities Act pursuant to May 2017. Beginning in May 2017, the valueSection 1145 of the shares withheld shall be based onBankruptcy Code (which generally exempts from such registration requirements the closing priceissuance of our common stock on the date the relevant transaction occurs.securities under a plan of reorganization).
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(a) | Exhibits:
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| Exhibit Number |
| Description |
| 31.1
| 3.1
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| Amended and Restated Certificate of Incorporation of Frontier Communications Parent, Inc. (incorporated herein by reference to Exhibit 3.1 of Frontier’s Current Report on Form 8-K filed on April 30, 2021).
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| 3.2 |
| Amended and Restated Bylaws of Frontier Communications Parent, Inc. (incorporated herein by reference to Exhibit 3.2 of Frontier’s Current Report on Form 8-K filed on April 30, 2021).
|
| 4.1 |
| Indenture, dated as of April 30, 2021, by and among Frontier Communications Holdings, LLC, the guarantors party thereto, the collateral grantor party thereto and Wilmington Trust, National Association, as trustee and collateral agent (incorporated herein by reference to Exhibit 4.1 of Frontier’s Current Report on Form 8-K12G3 filed on April 30, 2021).
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| 4.2 |
| Form of 5.875% Second Lien Secured Notes due 2029 (included in Exhibit 4.1 hereto). |
| 4.3 |
| Supplemental Indenture, dated as of April 30, 2021, by and among Frontier Communications Holdings, LLC and Wilmington Trust, National Association, as trustee, with respect to the First Lien Notes due October 2027 (incorporated herein by reference to Exhibit 4.3 of Frontier’s Current Report on Form 8-K12G3 filed on April 30, 2021).
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| 4.4 |
| Supplemental Indenture, dated as of April 30, 2021, by and among Frontier Communications Holdings, LLC and Wilmington Trust, National Association, as trustee, with respect to the First Lien Notes due May 2028 (incorporated herein by reference to Exhibit 4.4 of Frontier’s Current Report on Form 8-K12G3 filed on April 30, 2021).
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| 4.5 |
| Supplemental Indenture, dated as of April 30, 2021, by and among Frontier Communications Holdings, LLC and Wilmington Trust, National Association, as trustee, with respect to the Second Lien Notes (incorporated herein by reference to Exhibit 4.5 of Frontier’s Current Report on Form 8-K12G3 filed on April 30, 2021).
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| 10.1 |
| Amended and Restated Credit Agreement dated as of April 30, 2021, by and among Frontier Communications Holdings, LLC, as borrower, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, Goldman Sachs Bank USA, as revolver agent, and the lenders from time to time party thereto (incorporated herein by reference to Exhibit 10.1 of Frontier’s Current Report on Form 8-K12G3 filed on April 30, 2021).
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| 10.2 |
| Form of Director Offer Letter (incorporated herein by reference to Exhibit 10.2 of Frontier’s Current Report on Form 8-K12G3 filed on April 30, 2021). |
| 10.3 |
| Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.3 of Frontier’s Current Report on Form 8-K12G3 filed on April 30, 2021). |
| 10.4 |
| Form of Frontier Communications Parent, Inc. 2021 Management Incentive Plan (incorporated herein by reference to Exhibit 10.4 of Frontier’s Current Report on Form 8-K12G3 filed on April 30, 2021).
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| 10.5 |
| Employment Agreement between the Company and Scott C. Beasley, dated as of May 25, 2021 (incorporated herein by reference to Exhibit 10.1 of Frontier’s Current Report on Form 8-K filed on June 2, 2021).
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| 10.6 |
| Employment Agreement between the Company and Alan Gardner, dated as of May 31, 2021. |
| 10.7 |
| Employment Agreement between the Company and John Harrobin, dated as of May 8, 2021. |
| 10.8 |
| Employment Agreement between the Company and Veronica Bloodworth, dated as of March 29, 2021. |
| 10.9 |
| Transition Agreement between the Company and Sheldon Bruha, dated as of June 10, 2021. |
| 31.1 |
| Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
| 31.2
| 31.2 |
| Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
| 32
| 32 |
| Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS 101
| XBRL Instance Document.
| The following materials from Frontier’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in iXBRL (inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Loss; (iv) the Consolidated Statements of Equity (Deficit); (v) the Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements. |
| 101.SCH104
| XBRL Taxonomy Extension Schema Document.
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| 101.PRECover Page from Frontier’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in iXBRL and contained in Exhibit 101.
| XBRL Taxonomy Presentation Linkbase Document.
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| 101.CAL
| XBRL Taxonomy Calculation Linkbase Document.
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| 101.LAB
| XBRL Taxonomy Label Linkbase Document.
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| 101.DEF
| XBRL Taxonomy Extension Definition Linkbase Document.
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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 CORPORATIONPARENT, INC. |
| (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, 2017August 5, 2021 |
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