10-K 1 ftr-20161231x10k.htm 10-K 2016 Form 10K

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

or



TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ___________



Commission file number 001-11001



Picture 2



FRONTIER COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)





 

 

Delaware

 

06-0619596

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 



 

 

401 Merritt 7

 

 

Norwalk, Connecticut

 

06851

(Address of principal executive offices)

 

(Zip Code)



 

 

Registrant's telephone number, including area code:  (203) 614-5600



Securities registered pursuant to Section 12(b) of the Act:



 

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.25 per share

 

The NASDAQ Stock Market LLC

Series A Participating Preferred Stock Purchase Rights

 

The NASDAQ Stock Market LLC



Securities registered pursuant to Section 12(g) of the Act:  NONE



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  X     No __



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes     No  X



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         Yes  X     No __



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).           Yes  X     No __



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.     (Check one):



    Large Accelerated Filer        Accelerated Filer         Non-Accelerated Filer        Smaller Reporting Company



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes   No



The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2016 was $5,764,318,000 based on the closing price of $4.94 per share on such date. The number of shares outstanding of the registrant's common stock as of February 10, 2017 was 1,172,525,000.



DOCUMENT INCORPORATED BY REFERENCE

Portions of the Proxy Statement for Frontier’s 2017 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. 

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 







TABLE OF CONTENTS





 

PART I

Page No.



 

Item 1.      Business

2



 

Item 1A.    Risk Factors

12



 

Item 1B.    Unresolved Staff Comments 

22



 

Item 2.      Properties

22



 

Item 3.      Legal Proceedings

22



 

Item 4.      Mine Safety Disclosures

22



 

PART II

 



 

Item 5.      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer

 

Purchases of Equity Securities

23



 

Item 6.      Selected Financial Data

26



 

Item 7.      Management’s Discussion and Analysis of Financial Condition and Results of

 

Operations

27



 

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

48



 

Item 8.      Financial Statements and Supplementary Data

48



 

Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial

 

Disclosure

49



 

Item 9A.    Controls and Procedures

49



 

Item 9B.   Other Information

49



 

PART III

 



 

Item 10.   Directors, Executive Officers and Corporate Governance

50



 

Item 11.   Executive Compensation

51



 

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related

 

Stockholder Matters

51



 

Item 13.   Certain Relationships and Related Transactions, and Director Independence

51



 

Item 14.   Principal Accountant Fees and Services

51



 

PART IV

 



 

Item 15.   Exhibits and Financial Statement Schedules

52



 

Signatures

56



 

Index to Consolidated Financial Statements

F-1

 

 

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 



PART I



Item 1.   Business



Frontier Communications Corporation (Frontier) is a provider of communications services in the United States, with approximately 5.4 million customers, 4.3 million broadband subscribers and 28,300 employees, operating in 29 states. In recent years, Frontier has completed multiple acquisitions.  On April 1, 2016, we acquired the wireline operations of Verizon Communications, Inc. in California, Texas and Florida for a purchase price of $10,540 million in cash and assumed debt.



Frontier’s Service Territories



Picture 1

How We Serve Our Customers



We conduct business with both residential and business customers.



Residential. We provide broadband, video, voice and other services and products to our residential customers.  We deliver these services generally over a combination of fiber and copper based networks.



Business (commercial customers and wholesale carrier customers).   



Commercial.  We sometimes refer to our commercial customers as SME (small business, medium business and larger enterprise) customers.  We provide a broad range of services to our SME customers, including broadband service, Ethernet service, traditional circuit-based services (TDM services) and voice services.  We also sell customer premise equipment (CPE) and provide CPE-related maintenance services.  



-

Larger Enterprise:  Fortune 1000, multi-location companies, large government entities, large educational institutions, and non-profits. 



-

Medium Business:  Single or multi-location companies and mid-sized government entities, educational institutions and non-profits. 



-

Small Business:  Mostly single-location businesses, the smaller of which have purchase patterns similar to residential customers.  



2

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

Carrier.  Carrier customers are often referred to as wholesale customers and include national operators such as AT&T and Verizon, Local Exchange Companies that need to access locations within Frontier’s footprint, Competitive Local Exchange Companies (CLECs) and wireless carriers.  Carrier customers buy both voice and data services. 



Services and Products



We offer a broad portfolio of communications services for residential and business customers.  These services are offered on either a standalone basis or in a bundled package, depending on each customer’s needs. 



Data and Internet services.  We offer a comprehensive range of broadband services. The principal residential service we provide is broadband internet service. Commercial services include Ethernet, Dedicated Internet, Multiprotocol Label Switching (MPLS), Time Division Multiplexing (TDM) data transport services and optical transport services. These services are all supported by 24/7 technical support and an advanced network operations center. We also offer wireless broadband services (using unlicensed spectrum) in select markets utilizing networks that we own or operate.  In addition, we offer our Frontier Secure suite of products, including computer security, cloud backup and sharing, identity protection and equipment insurance.



Video services.  We offer video services under the Vantage brand to certain of our customers in portions of Connecticut, South Carolina, Minnesota, and Illinois and under the FiOS® brand in portions of California, Texas, Florida, Indiana, Oregon and Washington. We also offer satellite TV video service to our customers under an agency relationship with DISH® in all of our markets.



Voice services. We provide voice services, including data-based VoIP, long distance and voice messaging services, to residential and business customers in our markets.  These services are billed monthly in advance. Long distance service to and from points outside our operating properties are provided by interconnection with the facilities of interexchange carriers.  Our long distance services are billed in advance for unlimited use service and on a per minute-of-use basis for a fixed number of minutes.



We also offer packages of communications services.  These packages permit customers to bundle their products and services, including voice service, video and Internet services, and other product offerings.

Access services.  We offer a range of access services.  Our switched access services allow other carriers to use our facilities to originate and terminate their local and long distance voice traffic. These services are generally offered on a month-to-month basis and the service is billed primarily on a minutes-of-use basis. Switched access charges have been based on access rates filed with the FCC for interstate services and with the respective state regulatory agency for intrastate services.  Intercarrier compensation reform has impacted the rates that we may charge for these services. See, “Regulatory Environment” below.  Other access services we offer, such as special access, allow other carriers to have a continuous, non-switched connection to customers within our service territory.        

Customer Premise Equipment.  We offer our SME customers third-party communications equipment tailored to their specific business needs by partnering with Mitel, Airbus, Avaya, Hewlett Packard, Adtran and other equipment manufacturers. CPE is typically sold in conjunction with voice, data and Internet services, and may also be sold on a standalone basis. 



Frontier Operating Strategies



Grow Broadband and Invest in our Network.  A main component of our strategy is to enable and strengthen the broadband capabilities of our network.  We focus on broadband as the core growth component of our service offering, either bundled with our voice and/or video services, or on a standalone basis.  We continuously improve our broadband speeds and availability in our markets and view these investments as opportunities to attract and retain a greater number of customers and increase average revenue per residential and business customer.  Our capital expenditures include enhancing the existing outside plant by expanding fiber-based infrastructure throughout our network, upgrading network hardware, expanding transport capacity of our middle-mile and data backbone, and growing our video capabilities.  We continue to deploy next generation Broadband Remote Access Servers throughout our network to facilitate the expansion of broadband and video service offerings and increase broadband speeds. Similarly, for our commercial customers we are focused on expanding and upgrading our premium Ethernet service offerings across our network.

 

3

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

Improve Customer Experience and Retention. We provide multiple service and product options in our residential and business offerings to the customer base in each of our markets. We believe this strategy results in a better customer experience and allows us to maximize retention of existing customers and to attract new customers. At December 31, 2016, 63% of our residential broadband customers subscribed to at least one other service offering. Our bundled services include broadband, voice, and video offerings, including simplified messaging services, higher speed products and digital security products.  In late 2016, we announced a new organization structure, including separate and specialized consumer and commercial operations which will focus on the differing needs of these customer groups.



Improve Productivity and Operational Efficiency.  We continuously engage in productivity initiatives with a focus on simplifying our processes, eliminating redundancies and further reducing our cost structure while improving our customer service capabilities.  We have achieved significant day one cost savings in the wireline acquisition in California, Texas and Florida in 2016.  There are substantial operational cost take-out opportunities that we are aggressively pursuing across all of our properties.



Network Architecture and Technology



Our local exchange carrier networks consist of host central office and remote sites, primarily equipped with digital and Internet Protocol switches.  The outside plant consists of transport and distribution delivery networks connecting our host central office with remote central offices and ultimately with our customers.  We own fiber optic and copper cable, which have been deployed in our networks and are the primary transport technologies between our host and remote central offices and interconnection points with other incumbent carriers. 



We have expanded and enhanced our fiber optic and copper transport systems to support increasing customer demand for high bandwidth transport services. We routinely enhance our network and upgraded with the latest Internet Protocol Transport and routing equipment, Reconfigurable Optical Add/Drop Multiplexers (ROADM) transport systems, Very High Bit-Rate Digital Subscriber Line  (VDSL) broadband equipment, and VoIP switches.  These systems will support advanced services such as Ethernet, Dedicated Internet, Multiprotocol Label Switching (MPLS) transport, and VoIP.  The network is designed with redundancy and auto-failover capability on our major circuits.



We connect to the households and business locations in our service territory using a combination of fiber optic and copper technologies.  In some cases we provide direct fiber into a residence or a business premises.  In other cases a location is served with a hybrid combination of fiber and copper.  Residences in our service territory are served by fiber-to-the-home (FTTH) and by fiber-to-the-node (FTTN), meaning fiber carries the traffic to an intermediate location where the signals are converted to copper wire for the final delivery to the household.  We provide data, video, and voice services to the customer over both of these architectures. 



As of December 31, 2016, our broadband availability to the households throughout Frontier’s territories is as follows:



 

 

 

 

(Downstream speed capability)

 

Number of Households
(in millions)

 

% of Households with capability



 

 

 

 

Up to 10 Mbps

 

13.4

 

88%

10 Mbps and above

 

8.9

 

58%

25 Mbps and above

 

6.0

 

39%

50 Mbps and above

 

4.5

 

29%

100 Mbps and above

 

3.6

 

24%



 

 

 

 

No broadband capability

 

1.8

 

12%



 

 

 

 

Total Households

 

15.2

 

 



In certain markets, we have begun to offer residential broadband services with 1 gigabit download speed capabilities.



Rapid and significant changes in technology are occurring in the communications industry.  Our success will depend, in part, on our ability to anticipate and adapt to technological changes. We believe that our existing network

4

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

architecture strategy will enable us to respond to these ongoing technological changes efficiently. In addition, we anticipate reducing costs through the sharing of best practices across operations, centralization or standardization of functions and processes, and deployment of technologies and systems that provide for greater efficiencies and profitability. We will continue to make strategic enhancements to our network, with a focus on higher return investments.



Competitive Positioning



Competition for residential customers comes from cable operators, wireless carriers and online video providers, among others. 



-

Cable operators: in a majority of our markets, cable operators offer high speed Internet, video and voice services than we do and compete with us aggressively on speed and price by marketing their offerings with significant promotional period pricing. 



-

Wireless carriers: primarily compete with us for broadband, video, and voice services in our markets by offering increasingly larger data packages to mobile customers.  The percentage of homes with a landline telephone has been declining, a trend we expect will continue. 



-

Online video providers: many consumers are opting for internet-delivered video services (Over the Top, or OTT) through providers such as Netflix, Hulu, Amazon,  YouTube and DirecTV Now rather than traditional, multi-channel video.  In response, we have made investments in our network to deliver OTT video content to consumers who might not opt for traditional video services.   



Many residential customers prefer to bundle their voice, data and Internet and video services with a single provider.  In areas where we do not directly offer a network based video service, we offer satellite TV video service through DISH.  This can impact acquisition of new customers and retention of existing customers, representing a critical factor for the attachment of video, broadband and voice products. As of December 31, 2016 34% of our residential customers subscribed to at least two service offerings, and 19%  subscribed to at least three service offerings.



Competition for business customers comes from telecommunications providers, cable operators, CLECs and other enterprises, some of which are substantially larger than us.  As compared to our residential customers, these customers often require more sophisticated and more data-centered solutions (e.g., IP PBX, E911 networks, Ethernet, SIP trunking).



In order to remain competitive, we must continue to evolve our product offerings to remain current with the changing needs of the market, to provide strong customer service and support, to invest in our network so we maintain adequate capacity and can deliver new capabilities as needed, and to package our offerings to make them attractive to customers.



Regulatory Environment 



Some of our operations are subject to regulation by the FCC and various state regulatory agencies, often called public service or utility commissions. We expect federal and state lawmakers, the FCC and the state regulatory agencies to continue to revise the statutes and regulations governing communications services.

Regulation of our business

We are subject to federal, state and local regulation and we have various regulatory authorizations for our regulated service offerings.  At the federal level, the FCC generally exercises jurisdiction over information services, interstate or international telecommunications services and over facilities to the extent they are used to provide, originate or terminate interstate or international services.  State regulatory commissions generally exercise jurisdiction over intrastate telecommunications services and the facilities used to provide, originate or terminate those services.  Most of our local exchange companies operate as incumbent carriers in the states in which they operate and are certified in those states to provide local telecommunications services.  In addition, local governments often regulate the public rights-of-way necessary to install and operate networks, and may require service providers to obtain licenses or franchises regulating their use of public rights-of-way. Municipalities and other local government agencies also may regulate other limited aspects of our business, by requiring us to obtain cable franchises and construction permits and to abide by applicable building codes.

5

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

Some states regulatory agencies have substantial oversight over incumbent telephone companies, and their interconnection with competitive providers and provision of non-discriminatory network access to certain network elements to them.  Under the Federal Telecommunications Act of 1996, state regulatory commissions have jurisdiction to arbitrate and review interconnection disputes and agreements between incumbent telephone companies and competitive local exchange carriers, in accordance with rules set by the FCC.  The FCC and state regulatory commissions also impose fees on providers of telecommunications services to support state universal service programs.  Many of the states in which we operate require prior approvals or notifications for certain acquisitions and transfers of assets, customers, or ownership of regulated entities.



In addition, in some states we are subject to operating restrictions and minimum service quality standards (the failure to meet such restrictions may result in penalties).  We also are required to report certain financial information.  At the federal level and in a number of the states in which we operate, we are subject to price cap or incentive regulation plans under which prices for regulated services are capped.  Some of these plans have limited terms and, as they expire, we may need to renegotiate with various states.  These negotiations could impact rates, service quality and/or infrastructure requirements, which could also impact our earnings and capital expenditures.  In other states in which we operate, we are subject to rate of return regulation that limits levels of earnings and returns on investments.  Approximately 19% of our total access lines at December 31, 2016 are in state jurisdictions under the rate of return regulatory model.  We will continue to advocate for no or reduced regulation with various regulatory agencies in those states.  In some of our states, we have already been successful in reducing or eliminating price regulation on end-user services.



Federal Regulatory Environment    



Frontier, along with all telecommunications providers, is subject to FCC rules governing privacy of specified customer information. Among other things, these rules obligate carriers to implement procedures to: protect specified customer information from inappropriate disclosure; obtain customer permission to use specified information in marketing; authenticate customers before disclosing account information; and annually certify compliance with the FCC’s rules. Although most of these regulations are generally consistent with our business plans, they may restrict our flexibility in operating our business. 



Some regulations are, or could in the future be, the subject of judicial proceedings, legislative hearings and administrative proposals or challenges that could change the manner in which the entire industry operates.  Neither the outcome of any of these developments, nor their potential impact on us, can be predicted at this time. Regulation can change rapidly in the communications industry, and such changes may have an adverse effect on us.



The current status of material regulatory initiatives is as follows:



Federal High-Cost Subsidies: The FCC has adopted rules changing the eligibility requirements for federal subsidies offered to wireline carriers providing service to high-cost, low-density markets, as well as the amounts of such subsidies, as follows:



Connect America Fund (CAF):  On November 18, 2011, the FCC adopted the Universal Service Fund (USF)/Intercarrier Compensation (ICC) Report and Order (the 2011 Order), which changed how federal subsidies are calculated and disbursed, and began the transition of Federal USF (Universal Service Fund), which supported voice services in high-cost areas, to the CAF, which supports broadband deployment in high-cost areas.  Frontier received $133 million from 2012 through 2014 across two rounds of CAF Phase I funding to make broadband available to approximately 194,600 previously unserved or underserved households. We completed deployment of broadband service to the first round of CAF Phase I households in 2015 as required by the FCC rules and will complete the second round of CAF Phase I build by the March 2017 deadline.  



On April 29, 2015, the FCC released offers of support to price cap carriers under the CAF Phase II program.  The intent of these offers is 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 million in annual USF frozen high cost support that Frontier had been receiving 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

6

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

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.



In 2017, the FCC is expected to adopt a competitive bidding process to continue to distribute CAF Phase II funding in those high-cost areas where price cap carriers declined the FCC’s offer of support, possibly presenting a new support and deployment opportunity.  The FCC’s competitive bidding process has not yet been finalized, therefore, Frontier is unable to determine whether it will participate in any competitive bid process at this time.



Intercarrier Compensation: In the 2011 Order, the FCC also reformed Intercarrier Compensation, which is the payment framework that governs how carriers compensate each other for the exchange of interstate switched traffic, and began a multi-year transition to the new rates. The 2011 Order provided for the gradual elimination of terminating traffic charges by July 2017 with a related decline in operating expenses. Switched access revenue declined sequentially in the third quarter of 2016, reflecting the rate reductions mandated by the 2011 Order, and we anticipate that we have experienced nearly all of the rate decline related to the 2011 Order. Frontier has been able to recover a significant portion of those lost revenues through end user rates and other replacement support mechanisms, a trend we expect will continue through 2017 and beyond.  There are no longer any active Intercarrier Compensation-related challenges to the 2011 Order, and we believe that the 2011 Order provides a stable regulatory framework to facilitate our ongoing focus on the deployment of broadband into our rural markets.



Special Access: The FCC also has an ongoing proceeding, which dates back to 2015, to consider whether to make changes to its regulatory regime governing special access services, including whether to mandate lower rates, change standards for deregulation and pricing flexibility, or to require changes to other terms and conditions.  In connection with its inquiry into specifically identified special access tariff pricing plans discussed below, on April 28, 2016, the FCC released a Notice of Proposed Rulemaking on special access or “business data” services.  It sought comment on proposed changes to the way the FCC regulates traditional special access services based on market competition, and on a proposal to adopt pricing rules for Ethernet services in markets that are found to be “noncompetitive.”  On October 7, 2016, the FCC released a Fact Sheet detailing former FCC Chairman Wheeler’s proposal for addressing special access issues, though this proposal was never adopted.  The composition of the FCC has since changed following the Presidential election, and as a result the proceeding remains open and the potential impact to Frontier of this proceeding is unknown



On April 28, 2016, the FCC completed its inquiry into whether certain terms and conditions contained in specifically identified special access tariff pricing plans offered by four carriers, including Frontier, are just and reasonable. The FCC held that certain of the tariff terms for business data TDM services, specifically DS1s and DS3s, were unreasonable. Specifically, the FCC struck down “excessive” early termination fees and “all-or-nothing” provisions. Frontier has revised its tariffs in accordance with the FCC’s Order. The FCC’s decision has no retroactive effect, and there has been no material impact to Frontier from it. The FCC deferred the issue of how its ruling will affect customers currently purchasing services from these tariffs to the Notice of Proposed Rulemaking mentioned above.



Intrastate Services: Some state regulatory commissions regulate some of the rates ILECs charge for intrastate services, including rates for intrastate access services paid by providers of intrastate long distance services.  Some states also have their own open proceedings to address reform to intrastate access charges and other intercarrier compensation and state universal service funds. Although the FCC has pre-empted state jurisdiction on most access charges, some 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. 



Voice Over Internet Protocol (VoIP):  Regulators at both the federal and state levels continue to address whether VoIP services are subject to the same or different regulatory and intercarrier compensation regimes as traditional voice telephony.  The FCC has concluded that VoIP and facilities-based broadband Internet access providers must comply with the Communications Assistance for Law Enforcement Act, a decision that the United States Court of Appeals for the District of Columbia Circuit has upheld.  The FCC has also required VoIP providers to provide enhanced 911 emergency calling capabilities.  In the 2011 Order, the FCC determined that VoIP-originated traffic terminating on the Public Switched Telephone Network is subject to interstate access rates. Effective December 29, 2011, the 2011 Order required providers to pay interstate access rates for the termination of VoIP toll traffic.  On April 25, 2012, the FCC, in an Order on Reconsideration, specified that changes to originating access rates for VoIP traffic would not be implemented until July 2014. The 2011 Order was challenged in court, and the FCC was petitioned to reconsider various aspects. While most challenges have been resolved, on November 18, 2016, the U.S. Court of Appeals for the D.C. Circuit remanded to the FCC AT&T’s challenge regarding the ability of competitive carriers to assess VoIP access charges.  The net impact of the 2011 Order during the period from July

7

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

2012 through December 2014 was not significant for Frontier.  The net effect of 2011 Order changes to originating access after July 1, 2014 is dependent upon the percentage of VoIP traffic.



Additionally, the 2011 Order requires VoIP providers to pay interstate terminating interconnection charges and requires all carriers terminating traffic to provide appropriate call information, thus prohibiting so-called “phantom traffic.”  However, the FCC declined to address other VoIP-related issues, and the FCC has stated its intent to address open questions regarding the treatment of VoIP services in its ongoing “IP-Enabled Services Proceeding.” Internet telephony may have an advantage in the marketplace over our traditional services if this service remains less regulated. 



Current and potential Internet regulatory obligations:    On June 14, 2016, the United States Court of Appeals for the D.C. Circuit upheld the FCC’s 2015 Order in which the FCC asserted jurisdiction over broadband service, utilizing its jurisdictional authority under Title II and Section 706 of the Communications Act of 1996, classified broadband service as a “telecommunications service”.  The FCC adopted rules to “preserve a Free and Open Internet” (i.e., net neutrality) that impose specific obligations for fixed and mobile providers of broadband Internet access services and specifically prohibit the following: blocking access to legal content, applications, services, or non-harmful devices; impairing or degrading lawful Internet traffic on the basis of content, applications, services, or non-harmful devices; favoring some lawful Internet traffic over other lawful traffic in exchange for consideration; and otherwise unreasonably harming consumers or edge providers. These obligations are largely consistent with the practices Frontier already had in place. The FCC also announced additional transparency requirements, which allow for a “safe harbor” disclosure framework, intended to provide consumers more information about a provider’s network management practices, performance, speed, price, and data caps.



Several parties have asked the D.C. Circuit to reconsider its decision and, depending on the outcome, are likely to ask the Supreme Court to review the Order.  Frontier continues to comply with the existing regulatory requirements, and it is unclear whether the pending appeal will have any impact on the regulatory structure. 



In addition to the net neutrality rules, the FCC on October 27, 2016, relied on its newfound Title II authority to promulgate privacy rules for broadband providers.  These rules govern how broadband providers can use sensitive customer information and the steps providers must take to protect that information.  Petitions for reconsideration of these rules were due in January 2017, and whether these rules will remain in place is uncertain, particularly due to the change in administration.

 

Video programming 



Federal, state and local governments extensively regulate the video services industry.  Our FiOS and Vantage video services are subject to, among other things: subscriber privacy regulations; requirements that we carry a local broadcast station or obtain consent to carry a local or distant broadcast station; rules for franchise renewals and transfers; the manner in which program packages are marketed to subscribers; and program access requirements.



We provide video programming in some of our markets in California, Connecticut, Florida, Indiana, Minnesota, North Carolina, Oregon, South Carolina, Texas and Washington pursuant to franchises, permits and similar authorizations issued by state and local franchising authorities. Most franchises are subject to termination proceedings in the event of a material breach.  In addition, most franchises require payment of a franchise fee as a requirement to the granting of authority.



Many franchises establish comprehensive facilities and service requirements, as well as specific customer service standards and monetary penalties for non-compliance.  In many cases, franchises are terminable if the franchisee fails to comply with material provisions set forth in the franchise agreement governing system operations.  We believe that we are in compliance and meeting all material standards and requirements.  Franchises are generally granted for fixed terms of at least ten years and must be periodically renewed.  Local franchising authorities may resist granting a renewal if either past performance or the prospective operating proposal is considered inadequate.

8

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

Environmental regulation



The local exchange carrier subsidiaries we operate are subject to federal, state and local laws and regulations governing the use, storage, disposal of, and exposure to hazardous materials, the release of pollutants into the environment and the remediation of contamination.  As an owner and former owner of property, we are subject to environmental laws that could impose liability for the entire cost of cleanup at contaminated sites, including sites formerly owned by us, regardless of fault or the lawfulness of the activity that resulted in contamination. We believe that our operations are in substantial compliance with applicable environmental laws and regulations.



Segment Information



We currently operate in only one reportable segment.



Financial Information about Foreign and Domestic Operations and Export Sales



We have no foreign operations.



General



The dollar amount of our order backlog is not a significant consideration in our business and is not a meaningful metric for us.  We have no material contracts or subcontracts that may be subject to renegotiation of profits or termination at the election of the federal government. 



Intellectual Property



We believe that we have the trademarks, trade names and intellectual property licenses that are necessary for the operation of our business.  



Employees



As of December 31, 2016, we had approximately 28,300 employees, as compared to approximately 19,200 employees as of December 31, 2015.  During 2016, reduction in workforce activities resulted in the severance of approximately 1,950 employees of which approximately 450 employees remained as employees as of December 31, 2016.  Approximately 17,900 of our total employees are represented by unions. The number of employees covered by a collective bargaining agreement that expired in 2016, but have been extended and are still effective for 2017, is approximately 600. The number of employees covered by collective bargaining agreements that expire in 2017 is approximately 3,800. We consider our relations with our employees to be good.



Available Information



We are subject to the informational requirements of the Securities Exchange Act of 1934 (the Exchange Act).  Accordingly, we file periodic reports, proxy statements and other information with the Securities and Exchange Commission (SEC).  These reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330.  In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements and other information regarding Frontier and other issuers that file electronically. 



We make available, free of charge on our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as practicable after we electronically file these documents with, or furnish them to, the SEC.  These documents may be accessed through our website at www.frontier.com under “Investor Relations.”  The information posted or linked on our website is not part of this report.  We also make our Annual Report available in printed form upon request at no charge.



We also make available on our website, as noted above, or in printed form upon request, free of charge, our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Specific Code of Business Conduct and Ethics Provisions for Certain Officers, and the charters for the Audit, Compensation, and Nominating and Corporate Governance committees of the Board of Directors.  Stockholders may request printed copies of these materials by writing to: 401 Merritt 7, Norwalk, Connecticut 06851 Attention: Corporate Secretary. 



9

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

Forward-Looking Statements 



This Annual Report on Form 10-K contains "forward-looking statements," related to future, not past, events. Forward-looking statements address our expected future business and financial performance and financial condition, and contain words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "see," "will," "would," or "target." Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include: 



·

competition from cable, wireless and wireline carriers,  satellite, and OTT companies, and the risk that we will not respond on a timely or profitable basis;



·

our ability to successfully adjust to changes in the communications industry, including the effects of technological changes and competition on our capital expenditures, products and service offerings;



·

our ability to implement successfully our organizational structure changes;



·

risks related to the operation of properties acquired from Verizon, including our ability to retain or obtain customers in those markets, our ability to realize anticipated cost savings, and our ability to meet commitments made in connection with the acquisition;



·

reductions in revenue from our voice customers that we cannot offset with increases in revenue from broadband and video subscribers and sales of other products and services;



·

our ability to maintain relationships with customers, employees or suppliers;



·

the impact of regulation and regulatory, investigative and legal proceedings and legal compliance risks;



·

continued reductions in switched access revenues as a result of regulation, competition or technology substitutions;



·

the effects of changes in the availability of federal and state universal service funding or other subsidies to us and our competitors;



·

our ability to effectively manage service quality in our territories and meet mandated service quality metrics;



·

our ability to successfully introduce new product offerings;



·

the effects of changes in accounting policies or practices, including potential future impairment charges with respect to our intangible assets;



·

our ability to effectively manage our operations, operating expenses, capital expenditures, debt service requirements and cash paid for income taxes and liquidity, which may affect payment of dividends on our common and preferred shares;



·

the effects of changes in both general and local economic conditions on the markets that we serve;



·

the effects of increased medical expenses and pension and postemployment expenses;



·

the effects of changes in income tax rates, tax laws, regulations or rulings, or federal or state tax assessments;



·

our ability to successfully renegotiate union contracts;



·

changes in pension plan assumptions, interest rates, regulatory rules and/or the value of our pension plan assets, which could require us to make increased contributions to the pension plan in 2017 and beyond;



·

adverse changes in the credit markets;



10

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

·

adverse changes in the ratings given to our debt securities by nationally accredited ratings organizations;  



·

the availability and cost of financing in the credit markets;



·

covenants in our indentures and credit agreements that may limit our operational and financial flexibility;



·

the effects of state regulatory cash management practices that could limit our ability to transfer cash among our subsidiaries or dividend funds up to the parent company;



·

the effects of severe weather events or other natural or man-made disasters, which may increase our operating expenses or adversely impact customer revenue; and



·

the impact of potential information technology or data security breaches or other disruptions.



Any of the foregoing events, or other events, could cause our results to vary from management’s forward-looking statements included in this report.  You should consider these important factors, as well as the risks set forth under Item 1A. “Risk Factors,” in evaluating any statement in this report or otherwise made by us or on our behalf. We have no obligation to update or revise these forward-looking statements and do not undertake to do so.



Investors should also be aware that while we do, at various times, communicate with securities analysts, it is against our policy to disclose to them selectively any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by an analyst, irrespective of the content of the statement or report. To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

11

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 





Item 1A.  Risk Factors    



Before you make an investment decision with respect to any of our securities, you should carefully consider all the information we have included in this Annual Report on Form 10-K and our subsequent periodic filings with the SEC.  In particular, you should carefully consider the risk factors described below and the risks and uncertainties related to “Forward-Looking Statements,” any of which could materially adversely affect our business, operating results, financial condition and the actual outcome of matters as to which forward-looking statements are made in this annual report.   The risks and uncertainties described below are not the only ones facing Frontier.  Additional risks and uncertainties that are not presently known to us or that we currently deem immaterial or that are not specific to us, such as general economic conditions, may also adversely affect our business and operations.  The following risk factors should be read in conjunction with the balance of this annual report, including the consolidated financial statements and related notes included in this report.



Risks Related to Our Business 



We will likely face further reductions in voice customers, switched access minutes of use, long distance revenues and subsidy revenues.



We have experienced declining voice customers, switched access minutes of use and related revenues, long distance revenues, federal and state subsidies and related revenues because of economic conditions, increasing competition, changing technology and consumer behavior (such as wireless displacement of wireline use, e-mail use, instant messaging and increasing use of VoIP), technology and regulatory constraints, and financial decisions by governmental authorities.  We will likely continue to experience further reductions in the future.  These factors, among others, are likely to cause our local network service, switched network access, long distance and subsidy revenues to continue to decline, and these factors may cause our cash generated by operations to decrease.



We face intense competition.



The communications industry is extremely competitive. Through mergers and various service expansion strategies, service providers are striving to provide integrated solutions both within and across geographic markets.  Our competitors include competitive local exchange carriers, Internet service providers, wireless companies, OTT, VoIP providers 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.  We also believe that wireless and cable telephony 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.



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 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, 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.



Some of our competitors have superior resources, which may place us at a cost and price disadvantage.



Some of our competitors have market presence, engineering, technical, marketing and financial capabilities, substantially greater than ours.  In addition, some of these competitors 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, 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

12

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

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 may be unable to stabilize or grow our revenues and cash flows despite the initiatives we have implemented.



We must produce adequate revenues and cash flows that, when combined with cash on hand and funds available under our revolving credit facility and other financings, will be sufficient to service our debt, fund our capital expenditures, pay our taxes, fund our pension and other employee benefit obligations and pay dividends pursuant to our dividend policy.  We have experienced revenue declines in 2016 and 2015 as compared to prior years for our Frontier legacy operations, and our recently acquired operations have also experienced revenue declines. While we have identified potential areas of opportunity and implemented several revenue and cost initiatives, we cannot assure you that these efforts will be successful or that these initiatives will improve our financial position or our results of operations.



Weak economic conditions may decrease demand for our services or necessitate increased discounts.



We could be adversely impacted by weak economic conditions or their effects.  Downturns in the economy and competition in our markets could cause some of our customers to reduce or eliminate their purchases of our basic and enhanced voice services, broadband and video services and make it difficult for us to obtain new customers or retain existing customers.  In addition, if economic conditions are depressed or further deteriorate, our customers may delay or discontinue payment for our services or seek more competitive pricing from other service providers, or we may be required to offer increased discounts in order to retain our customers, which could have a material adverse effect on our business or results of operations.  



Disruption in our networks, infrastructure and information technology may cause us to lose customers and/or incur additional expenses.



To attract and retain customers, we must provide reliable service.  Some of the risks to our networks, infrastructure and information technology include physical damage, security breaches, capacity limitations, power surges or outages, software defects and other disruptions beyond our control, such as natural disasters and acts of terrorism.  From time to time in the ordinary course of business, we experience short disruptions in our service due to factors such as cable damage, theft of our equipment, inclement weather and service failures of our third-party service providers.  We could experience more significant disruptions in the future.  We could also face disruptions due to capacity limitations if changes in our customers’ usage patterns for our broadband services result in a significant increase in capacity utilization, such as through increased usage of video or peer-to-peer file sharing applications.  Disruptions may cause interruptions in service or reduced capacity for customers, either of which could cause us to lose customers and/or incur additional expenses, and thereby adversely affect our business, revenues and cash flows.



Our business is sensitive to the creditworthiness of our wholesale customers.



We have substantial business relationships with other communications carriers for which we provide service.  While bankruptcies of these carriers have not had a material adverse effect on our business in recent years, future bankruptcies in the industry could result in the loss of significant customers, as well as cause more price competition and an increased allowance for doubtful accounts receivable.  Such bankruptcies may be more likely in the future if economic conditions stagnate.  As a result, 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 December 31, 2016, we had approximately 28,300 employees. Approximately 17,900 of our total employees were represented by unions and were subject to collective bargaining agreements. As of December 31, 2016, we had approximately 600 employees covered by a  collective bargaining agreement that expired in 2016, but have been extended and are still effective for 2017. Of the union-represented employees as of December 31, 2016, approximately 3,800, or 21%, of the unionized workforce are covered by collective agreements that expire in 2017 and approximately 3,500, or 20%, of the unionized workforce are covered by collective bargaining agreements that expire in 2018. 

13

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 



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.



If we are unable to hire or retain key personnel, we may be unable to operate our business successfully.



Our success will depend in part upon the continued services of our management.  We cannot guarantee that our key personnel will not leave or compete with us.  The loss, incapacity or unavailability for any reason of key members of our management team could have a material impact on our business.  In addition, our financial results and our ability to compete will suffer if we are unable to attract, integrate or retain other qualified personnel in the future.



We may be unable to realize the anticipated benefits of recent acquisitions.



In recent years, we have completed multiple acquisitions.  We cannot assure you that we will be able to realize the full benefit of any anticipated growth opportunities or cost synergies from such acquisitions or that these benefits will be realized within the expected time frames.



We may complete a future significant strategic transaction that may not achieve intended results or could increase the number of our outstanding shares or amount of outstanding debt.



We continuously evaluate and may in the future enter into additional strategic transactions. Any such transaction could happen at any time, could be material to our business and could take any number of forms, including, for example, an acquisition, merger or a sale of certain of our assets.



Evaluating potential transactions and integrating completed ones may divert the attention of our management from ordinary operating matters.  The success of these potential transactions will depend, in part, on our ability to realize the anticipated growth opportunities and cost synergies through the successful integration of the businesses we acquire with our existing business.  Even if we are successful in integrating acquired businesses, we cannot assure you that these integrations will result in the realization of the full benefit of any anticipated growth opportunities or cost synergies or that these benefits will be realized within the expected time frames.  In addition, acquired businesses may have unanticipated liabilities or contingencies.



If we complete an acquisition, investment or other strategic transaction, we may require additional financing that could result in an increase in the number of our outstanding shares of stock or the aggregate amount and/or cost of our debt, which may result in an adverse impact to our ratings.  The number of shares of our stock or the aggregate principal amount of our debt that we may issue may be significant.  Moreover, the terms of any debt financing may be expensive or adversely impact our results of operations.



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 FiOS and Vantage 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 must negotiate with the content owners of the programming that we carry on our multichannel video systems (marketed as FiOS video and Vantage video).  These content owners 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 much value, in order to have access to other content that customers value quite highly.  Some of our competitors have materially larger scale than we do, and may, as a result, be better positioned than we are in such

14

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

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.     



Risks Related to Liquidity, Financial Resources and Capitalization



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.



Frontier made contributions of $28 million and $62 million to its pension plan in 2016 and 2015, respectively, and we expect to continue to make contributions in future years.  Volatility in our asset values, liability calculations, or returns may impact the costs of maintaining our pension plan and our future funding requirements. Any future material contribution could have a negative impact on our liquidity by reducing cash flows. 

 

We currently have a significant amount of indebtedness, including secured indebtedness, and are able to incur substantial additional indebtedness and grant substantial additional liens in the future. Such debt and debt service obligations may adversely affect us.



We have a significant amount of indebtedness, which amounted to $18.2 billion outstanding at December 31, 2016, of which $2.3 billion was secured. We also have access to a $750 million secured Revolving Credit Facility, which currently is undrawn. 



The terms of our indentures and credit facilities allow us to incur substantial additional indebtedness and grant substantial additional liens in the future. In addition, these terms do not prevent us or our restricted subsidiaries from incurring various types of obligations that do not constitute indebtedness” under these terms.  



If we incur any additional indebtedness that ranks equally with our senior notes and debentures, the holders of that new debt will be entitled to share ratably with holders of our senior notes and debentures in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding up of Frontier. If any such additional indebtedness is secured, it will be effectively senior to our unsecured senior notes and debentures to the extent of the collateral securing such indebtedness. This may have the effect of reducing the probability of payment, or the amount of proceeds paid, to holders of our senior notes and debentures. 



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 agreements 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 and dividends that would otherwise improve our competitive position, results of operations or stock price;



·

requiring us to issue 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; 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.

15

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 



In addition, our senior notes and debentures are rated below “investment grade” by independent rating agencies. This can result in higher borrowing costs for us. We cannot assure you that these rating agencies will not lower our current debt ratings, if in the rating agencies’ judgment such an action is appropriate.  A lowering of a rating may further increase our future borrowing costs and reduce our access to capital.



The indentures and agreements governing our debt, including our senior notes and debentures and our credit facilities, contain covenants that impose restrictions on us and certain of our subsidiaries that may affect our ability to operate our business, make payments on our debt, and pay dividends.



The indentures and 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 indebtedness, guarantee indebtedness or issue preferred stock;



·

create liens;



·

enter into mergers or consolidations, or transfer or sell all or substantially all of our assets;



·

pay dividends on, or make distributions in respect of, or redeem or repurchase, capital stock, make certain investments or make other restricted payments;



·

make certain asset sales;



·

enter into agreements that might prevent certain of our subsidiaries from making distributions, loans or advances to us or other subsidiaries; and



·

engage in transactions with affiliates.



In addition, our credit facilities require us to comply with additional covenants, including financial ratios. 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 existing or future financing indentures and agreements could result in a default under those documents and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity of the debt 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 indentures and credit agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing.



16

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

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 our senior notes and debentures.



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, including those arising under our senior notes and debentures, and meet our cash needs. We cannot assure you that the operating results of our subsidiaries at any given time will be sufficient to make dividends, distributions or other payments to us in order to allow us to make payments on our indebtedness, including our senior notes and debentures. 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, including us, cash management practices 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 affects 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.



Our senior notes and debentures are structurally subordinated to liabilities of our subsidiaries.



Our subsidiaries have not guaranteed our senior notes and debentures. As a result, holders of such securities will not have any claim as a creditor against our subsidiaries. Accordingly, all obligations of our subsidiaries (including any liens granted by our subsidiaries on any of their assets to secure any of our obligations) will have to be satisfied before any of the assets of such subsidiaries would be available for distribution, upon a liquidation or otherwise. Although the indentures governing our senior notes and debentures, and our credit agreements, limit the indebtedness our subsidiaries may incur, our subsidiaries are able to incur a substantial amount of additional debt.  Additionally, although the indentures and credit agreements limit the liens that may be granted on the assets of our subsidiaries, our subsidiaries are able to grant liens to secure a substantial amount of liabilities, including, without limitation, certain indebtedness under our credit facilities.



Our senior notes and debentures are unsecured and subordinated to any secured indebtedness.



Our senior notes and debentures are unsecured and therefore are subordinated to our existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness.  At December 31, 2016, our secured indebtedness consisted of obligations under the 2015 Credit Agreement, the CoBank Credit Agreements, the Revolving Credit Agreement and the Continuing Agreement for Standby Letters of Credit dated February 4, 2008 between Frontier and Deutsche Bank AG New York Branch, each of which is secured equally and ratably by a pledge of all of the outstanding shares of capital stock of Frontier North Inc., a wholly-owned subsidiary. In the event of a bankruptcy or similar proceeding, the assets that serve as collateral for our secured indebtedness will be available to satisfy the obligations under the secured indebtedness before any payments are made on the senior notes and debentures from the proceeds of such assets.  The indentures governing our senior notes and debentures permit us, subject to specified limitations, to incur a substantial amount of additional secured debt.



If the senior notes issued in September 2015 are rated investment grade by at least two of Moody’s, S&P or Fitch, many of the covenants will not apply and the holders of the notes will lose the protection of the covenants.



Each of the supplemental indentures governing our senior notes issued in September 2015 contain certain covenants that will be suspended during any period in which such series of notes are rated investment grade by at least two of Moody’s, S&P or Fitch and no default or event of default has occurred and is continuing. Such covenants limit, among other things, our ability to pay distributions, incur debt and enter into certain other transactions. There can be no assurance that any series of notes will ever be rated investment grade, or that if they are rated investment grade, that the series of notes will maintain these ratings. To the extent the covenants are subsequently reinstated, any such actions taken while the covenants were suspended would not result in an event of default under the supplemental indentures governing the applicable series of notes.



17

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 



Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase.



At December 31, 2016, approximately 12% of our total debt is subject to variable rates of interest. Borrowings under our credit facilities are at variable rates of interest and expose us to interest rate risk. If interest rates were to increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease. In the future, we may enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we might not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into might not fully mitigate our interest rate risk.



We may not have sufficient funds to repurchase our senior notes upon a change of control triggering event.



The terms of our senior notes require us to make an offer to repurchase the notes upon the occurrence of a Change of Control and Ratings Decline (as defined in the indentures governing the notes) at a purchase price equal to 101% of the respective principal amounts of the notes plus accrued and unpaid interest to, but not including, the date of the purchase. It is possible that we would not have sufficient funds at the time of such a change of control triggering event to make the required repurchase of the applicable series of notes and would be required to obtain third party financing to do so. We may not be able to obtain this financing on commercially reasonable terms, or on terms acceptable to us, or at all. In addition, the occurrence of certain change of control events may constitute an event of default under the terms of our credit facilities. Such an event of default would entitle the lenders under our credit facilities to, among other things, cause all outstanding debt thereunder to become due and payable.



We cannot assure that we will be able to continue paying dividends.



The amount and timing of future dividend payments is subject to applicable law and will be made at the discretion of our Board of Directors based on factors such as cash flow and cash requirements, capital expenditure requirements, financial condition and other factors.

Our ability to declare and pay dividends on the Series A Preferred Stock may be limited.

Our declaration and payment of dividends on the Series A Preferred Stock in the future will be determined by our Board of Directors in its sole discretion and will depend on business conditions, our financial condition, earnings and liquidity and other factors. Our ability to declare and pay dividends and make other distributions with respect to our capital stock, including the Series A Preferred Stock, is restricted by the terms of certain of our existing financing arrangements and may be restricted by the terms of financing arrangements that we enter into in the future. In the event that the agreements governing any such indebtedness restrict our ability to declare and pay dividends in cash on the shares of Series A Preferred Stock, we may be unable to declare and pay dividends in cash on the shares of Series A Preferred Stock unless we can repay or refinance the amounts outstanding under such agreements.

In addition, under Delaware law, our Board of Directors may only declare and pay dividends on shares of our capital stock out of our statutory “surplus” (which is the amount equal to total assets minus total liabilities, in each case at fair market value, minus statutory capital), or if there is no such surplus, out of our net profits for the then current and/or immediately preceding fiscal year. Further, even if we are permitted under our contractual obligations and Delaware law to declare and pay cash dividends on the shares of Series A Preferred Stock, we may not have sufficient cash to do so through the mandatory conversion date of June 29, 2018.



18

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

We have a significant amount of goodwill and other intangible assets on our balance sheet.  If our goodwill or other intangible assets become impaired, we may be required to record a non-cash charge to earnings and reduce our stockholders’ equity.



Under generally accepted accounting principles, intangible assets are reviewed for impairment on an annual basis or more frequently whenever events or circumstances indicate that their carrying value may not be recoverable.  Frontier monitors relevant circumstances, including general economic conditions, enterprise value EBITDA multiples for other providers of communications services, our overall financial performance, and the market prices for our stock, and the potential impact that changes in such circumstances might have on the valuation of Frontier’s goodwill or other intangible assets.  If our goodwill or other intangible assets are determined to be impaired in the future, we may be required to record a non-cash charge to earnings during the period in which the impairment is determined, which would reduce our stockholders’ equity.



Risks Related to Regulation



Changes in federal or state regulations may reduce the switched access charge revenues we receive.



A portion of Frontier’s total revenues ($170 million, or 2%, in 2016 and $177 million, or 3%, in 2015) are derived from switched access charges paid by other carriers for services we provide in originating and terminating 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 amount of switched access charge revenues that Frontier will receive for these services is regulated by the FCC and state regulatory agencies and the rate Frontier can charge for terminating switched access is expected to decline in 2017.



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 interstate traffic. The 2011 Order began a multi-year transition that moves the rate for terminating traffic to near zero by 2017.  Frontier is permitted to recover a significant portion of those revenues through end user rates and other replacement support mechanisms. Additionally, the 2011 Order requires VoIP providers to pay interstate terminating interconnection charges and requires all carriers terminating traffic to provide appropriate call information, thus prohibiting so-called “phantom traffic.”  The reform of the Universal Service Fund shifts the existing High-Cost portion of the fund from supporting voice services to supporting broadband deployment in high-cost areas.  The 2011 Order preempts the states with regard to the regulation of intrastate terminating access rates.  The 2011 Order has been challenged in court and the FCC was petitioned to reconsider various aspects of it. The only issue that remains active on appeal is the ability of competitive carriers to assess VoIP access charges.



The FCC also has an ongoing proceeding considering whether to make changes to its regulatory regime governing special access services. When and how these proposed changes will be addressed is unknown and, accordingly, we cannot predict the impact of future changes on our results of operations.



Certain states also have their own open proceedings to address reform to intrastate access charges and 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.



We are reliant on support funds provided under federal and state laws.



A portion of Frontier’s total revenues ($626 million, or 7%, in 2016 and $500 million, or 9%, in 2015) are derived from federal and state subsidies for rural and high-cost support, commonly referred to as USF.  The FCC’s 2011 Order changed how federal subsidies are calculated and disbursed, with these changes being phased-in beginning in July 2012.  These changes transition the USF, which supports voice services in high-cost areas, to the CAF, which supports broadband deployment in high-cost areas.



Future reductions in these subsidies, or in our ability to recover such fees, could have a material adverse effect on our business or results of operations.



19

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

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.  Regulation could constrain our ability to compete and, in some jurisdictions, may restrict our ability to expand our service offerings.  In addition, changes to the regulations that govern our business (including any implementation of the 2011 Order or the 2015 Order) 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 will affect Frontier’s operations or ability to compete in the future.  This and other 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.



In addition, on June 14, 2016, the U.S. Court of Appeals for the D.C. Circuit upheld the FCC’s February 26, 2015 order that changed the regulatory classification of broadband service from an “information service” to a “telecommunications service”. In the Order, the FCC adopted specific obligations for fixed-mobile providers of broadband Internet access services and specifically prohibited the following: blocking access to legal content, applications, services, or non-harmful devices; impairing or degrading lawful Internet traffic on the basis of content, applications, services, or non-harmful devices; favoring some lawful Internet traffic over other lawful Internet traffic in exchange for consideration; and otherwise unreasonably harming consumers or edge providers, and announced additional transparency requirements intended to provide consumers more information about a providers network management practices, performance, speed and data caps. 



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, 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.  We cannot predict whether the outcome of pending challenges to the FCC’s order or future proceedings will prove beneficial or detrimental to our competitive position.



Risks Related to Technology



We may be unable to meet the technological needs or expectations of our customers, and may lose customers as a result.



The telecommunications 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 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 and the management of broadband speed and capacity issues 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 wireless 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.



Our services could be adversely affected and we may be subject to increased costs and claims in connection with Internet and systems security and malicious practices.



We use encryption and authentication technology licensed from third parties to provide secure transmission of confidential information, including our business data and customer information.  We also rely on employees in our network operations centers, data centers, call centers and retail stores to follow our procedures when handling such information.  Any unauthorized access, computer viruses, accidental or intentional release of confidential information or other disruptions could result in increased costs, customer dissatisfaction leading to loss of customers and revenues, and fines and other liabilities. 



20

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

In addition, Frontier or Frontier’s customers using our network to access the Internet may become victim to malicious and abusive Internet activities, including unsolicited mass advertising (“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.  



Frontier maintains security measures, disaster recovery plans and business continuity plans for its business.  However, Frontier’s information technology networks and infrastructure may nonetheless be vulnerable to damage, disruptions or shutdowns due to attack by hackers or breaches, employee error or malfeasance, power outages, computer viruses, telecommunication or utility failures, systems failures, natural disasters or other catastrophic events. Any such events could result in legal claims or proceedings, liability or penalties, disruption in operations, misappropriation of sensitive data, damage to Frontier’s reputation and costly response measures, which could adversely affect Frontier’s business. There can be no assurance that such disruptions or misappropriations and the resulting repercussions will not be material to our results of operations, financial condition or cash flows.



21

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

Item 1B.  Unresolved Staff Comments



None.



Item 2.     Properties



We own property, which consists primarily of land and buildings, office and warehouse facilities, central office equipment, software, outside plant and related equipment. Outside communications plant includes aerial and underground cable, conduit, poles and wires. Central office equipment includes digital switches and peripheral equipment. As such, our properties do not provide a basis for description by character or location of principal units. All of our property is considered to be in good working condition and suitable for its intended purpose.



Our gross investment in property, by category, as of December 31, 2016, was as follows:





 

 

 



 

 

 

($ in millions)

 

 

 



 

 

 

Land

$

235 

 

Buildings and leasehold improvements

 

2,300 

 

General support

 

1,495 

 

Central office/electronic circuit equipment

 

7,683 

 

Poles

 

995 

 

Cable, fiber and wire

 

10,267 

 

Conduit

 

1,611 

 

Other

 

52 

 

Construction work in progress

 

903 

 

Total

$

25,541 

 



 

 

 



 

 

 



Item 3.   Legal Proceedings



See Note 19 of the Notes to Consolidated Financial Statements included in Part IV of this report.



We are party to various legal proceedings (including individual, class and putative class actions) 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 is subject to uncertainty and the outcome of individual matters is not predictable.  However, we believe that the ultimate resolution of all such matters, after considering insurance coverage or other indemnities to which we are entitled, will not have a material adverse effect on our financial position, results of operations, or cash flows.



Item 4.    Mine Safety Disclosures



Not applicable.

22

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 



PART II



Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities



Our common stock is currently traded on the NASDAQ Global Select Market under the symbol FTR. The amount and timing of dividends payable on our common stock are within the sole discretion of our Board of Directors. On December 11, 2014, our Board of Directors approved a 5% increase over the 2014 dividend rate in the planned quarterly cash dividend rate, commencing with the dividend for the first quarter of 2015. Dividends on shares of the Series A Preferred Stock are payable on a cumulative basis when, as and if declared by our Board of Directors (or an authorized committee thereof) at an annual rate of 11.125% on the liquidation preference of $100.00 per share, on the last business day of March, June, September and December of each year, up to the mandatory conversion date of June 29, 2018. Series A Preferred Stock dividends of $214 million and $120 million were paid in 2016 and 2015, respectively. Cash dividends paid to common shareholders were $493 million and $456 million in 2016 and 2015, respectively.  The declaration and payment of future dividends on our common stock is at the discretion of our Board of Directors, and will depend upon many factors, including our financial condition, results of operations, growth prospects, funding requirements, payment of cumulative dividends on Series A Preferred Stock, applicable law, restrictions in agreements governing our indebtedness and other factors our Board of Directors deem relevant.



A portion of the dividends on common stock is classified as total ordinary dividends and represents qualified dividends, and a portion of the dividends is classified as non-dividend distributions and represents a return of capital. For the year ended December 31, 2016, all dividends on common stock were classified as non-dividend distributions and represented a return of capital.



The following table indicates the high and low intra-day sales prices per share of common stock, as reported by the NASDAQ Global Select Market, and sets forth dividends paid per share of common stock during the periods indicated.









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

2016

 

2015



 

High

 

Low

 

Dividend

 

High

 

Low

 

Dividend

First Quarter

 

$

5.85 

 

$

3.81 

 

$

0.105 

 

$

8.46 

 

$

6.36 

 

$

0.105 

Second Quarter

 

$

5.75 

 

$

4.57 

 

$

0.105 

 

$

7.50 

 

$

4.86 

 

$

0.105 

Third Quarter

 

$

5.22 

 

$

4.07 

 

$

0.105 

 

$

5.64 

 

$

4.19 

 

$

0.105 

Fourth Quarter

 

$

4.36 

 

$

3.10 

 

$

0.105 

 

$

5.47 

 

$

4.44 

 

$

0.105 



As of February 10, 2017, the approximate number of security holders of record of our common stock was 419,910. This information was obtained from our transfer agent, Computershare Inc.





23

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

STOCKHOLDER RETURN PERFORMANCE GRAPH



The following performance graph compares the cumulative total return of our common stock to the S&P 500 Stock Index and to the S&P Telecommunication Services Index for the five-year period commencing December 31, 2011



Picture 5



The graph assumes that $100 was invested on December 31, 2011 in each of our common stock, the S&P 500 Stock Index and the S&P Telecommunication Services Index and that all dividends were reinvested.



Picture 3









The foregoing performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent we specifically incorporate it by reference into such filing.





RECENT SALES OF UNREGISTERED SECURITIES, USE OF PROCEEDS FROM REGISTERED SECURITIES



There were no unregistered sales of equity securities during the fourth quarter of 2016.

24

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 





ISSUER PURCHASES OF EQUITY SECURITIES









 

 

 

 

 

 

 



 

 

 

 

 

 

 

Period

 

 

Total Number of Shares Purchased

 

 

Average Price Paid per Share



 

 

 

 

 

 

 

October 1, 2016 to October 31, 2016

 

 

 

 

 

 

 

Employee Transactions (1)

 

 

2,070 

 

 

$

4.02



 

 

 

 

 

 

 

November 1, 2016 to November 30, 2016

 

 

 

 

 

 

 

Employee Transactions (1)

 

 

2,389 

 

 

$

3.25



 

 

 

 

 

 

 

December 1, 2016 to December 31, 2016

 

 

 

 

 

 

 

Employee Transactions (1)

 

 

5,205 

 

 

$

3.68



 

 

 

 

 

 

 

Totals October 1, 2016 to December 31, 2016

 

 

 

 

 

 

 

Employee Transactions (1)

 

 

9,664 

 

 

$

3.64





(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. Frontier’s stock compensation plans provide that the value of shares withheld shall be the average of the high and low price of our common stock on the date the relevant transaction occurs. 

25

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

Item 6.  Selected Financial Data



The following tables present selected historical consolidated financial information of Frontier for the periods indicated. The selected historical consolidated financial information of Frontier as of and for each of the five fiscal years in the period ended December 31, 2016 has been derived from Frontier’s historical consolidated financial statements.  The selected historical consolidated financial information as of December 31, 2016 and 2015 and  for each of the years in the three-year period ended December 31, 2016 is derived from the audited historical consolidated financial statements of Frontier included elsewhere in this Form 10-K. The selected historical consolidated financial information as of December 31, 2014, 2013 and 2012 and for each of the years ended December 31, 2013 and 2012 is derived from the audited historical consolidated financial statements of Frontier not included in this Form 10-K. 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions, except per share amounts)

 

Year Ended December 31, (1)



 

2016

 

2015

 

2014

 

2013

 

2012



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

8,896 

 

$

5,576 

 

$

4,772 

 

$

4,762 

 

$

5,012 

Operating Income

 

888 

 

$

745 

 

$

820 

 

$

981 

 

$

987 

Net income (loss) (2) (3) (4) (5)

 

(373)

 

$

(196)

 

$

133 

 

$

115 

 

$

153 

Net income (loss) attributable to Frontier

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common shareholders (2) (3) (4) (5)

 

(587)

 

$

(316)

 

$

133 

 

$

113 

 

$

137 

Net income (loss) attributable to Frontier

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common  shareholders per basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share (2) (3) (4) (5)

 

$

(0.51)

 

$

(0.29)

 

$

0.13 

 

$

0.11 

 

$

0.14 

Net income (loss) attributable to Frontier

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common shareholders per diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share (2) (3) (4) (5)

 

(0.51)

 

$

(0.29)

 

$

0.13 

 

$

0.11 

 

$

0.13 

Cash dividends declared (and paid) per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common share

 

0.42 

 

$

0.42 

 

$

0.40 

 

$

0.40 

 

$

0.40 

Cash dividends declared (and paid) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of Series A Preferred Stock

 

11.125 

 

6.24 

(6)

 -

 

 -

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

As of December 31,

($ in millions)

 

2016

 

2015

 

2014

 

2013

 

2012



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

29,013 

 

$

27,084 

 

$

18,810 

 

$

16,540 

 

$

17,577 

Long-term debt

 

17,560 

 

$

15,508 

 

$

9,393 

 

$

7,810 

 

$

8,324 

Total shareholders' equity of Frontier

 

4,519 

 

$

5,614 

 

$

3,658 

 

$

4,056 

 

$

4,108 







(1)

Operating results include activities for the CTF operations from the date of their acquisition from Verizon on April 1, 2016 and the Connecticut operations from the date of their acquisition from AT&T on October 24, 2014. 

(2)

Operating results include the pre-tax impacts of losses on retirement of debt of $160 million ($99 million, or $0.10 per share, after tax) and $90 million ($57 million, or $0.06 per share, after tax) for 2013 and 2012, respectively.

(3)

Operating results include pre-tax acquisition and integration costs of $436 million ($283 million, or $0.24 per share, after tax), $236 million ($133 million, or $0.12 per share, after tax), $142 million ($91 million, or $0.09 per share, after tax),  $10 million ($6 million, or $0.01 per share, after tax) and $82 million ($51 million, or $0.05 per share, after tax) for 2016, 2015, 2014, 2013 and 2012, respectively.

(4)

Operating results include pre-tax restructuring costs and other charges of $91 million ($59 million, or $0.05 per share, after tax), $2 million ($1 million after tax), $2 million ($1 million, after tax), $12 million ($7 million, or $0.01 per share, after tax) and $32 million ($20 million, or $0.02 per share, after tax) for 2016, 2015, 2014, 2013 and 2012, respectively.

(5)

Operating results include pre-tax pension settlement costs of $44 million ($27 million, or $0.03 per share, after tax) for 2013.

(6)

Represents dividends on the 11.125% Mandatory Convertible Preferred Stock, Series A, from the issuance date of June 10, 2015 through December 31, 2015.



26

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 



Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

            Introduction



(a)  Results of Operations



2016 Compared to 2015



On April 1, 2016, we completed our acquisition of Verizon’s wireline properties in California, Texas, and Florida (the CTF Acquisition).  Frontier’s scope of operations and balance sheet changed materially as a result of the completion of the CTF Acquisition. Historical financial and operating data presented for Frontier includes the results of the CTF Operations that were acquired in the CTF Acquisition from the date of acquisition on April 1, 2016 and is not indicative of future operating results. The financial discussion below includes a comparative analysis of our results of operations on a historical basis for Frontier operations as of and for the years ended December 31, 2016 and 2015. Unless otherwise noted, the variance explanations discussed below are based upon an analysis of the 2016 financial data for Frontier legacy operations (excluding the CTF Operations) in comparison to 2015.



The sections below include tables that present customer counts, average monthly revenue per customer (ARPC) and residential customer churn which we define as the average of the amount of residential customer deactivations during the month divided by the number of residential customers at the beginning of the month. The following also categorizes revenue into customer revenue (residential and business) and regulatory revenue (switched access and subsidy).  The decline in the number of customers was partially offset by increased penetration of additional higher revenue generating products and services sold to both residential and business customers, which has increased our average monthly revenue per customer in 2016 as compared to 2015. Similar to other wireline providers, we have experienced declines in the number of traditional voice customers, switched access minutes of use and rates per switched access minute of use, due to the FCC’s intercarrier compensation reform, as a result of competition and the availability of substitutes, a trend which we expect will continue.



Management believes that residential customer counts and average monthly revenue per customer are important factors in evaluating our residential customer trends.  Among the key services we provide to residential customers are voice service, data service and video service. We continue to explore the potential to provide additional services to our customer base, with the objective of meeting all of our customers’ communications needs.



27

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 



2016 CUSTOMER RELATED METRICS COMPARED TO 2015







 

 

 

 

 

 

 

 

 

 



 

As of or for the year ended December 31,



 

2016

 

% Increase (Decrease)

 

2015



 

 

 

 

 

 

 

 

 

 

Customers (in thousands)

 

 

5,393 

(1)

58 

%

 

 

 

3,413 



 

 

 

 

 

 

 

 

 

 

Residential customer metrics:

 

 

 

 

 

 

 

 

 

 

Customers (in thousands)

 

 

4,891 

(1)

57 

%

 

 

 

3,124 

Average monthly residential

 

 

 

 

 

 

 

 

 

 

   revenue per customer

 

$

77.47 

 

21 

%

 

 

$

63.93 

Customer monthly churn

 

 

1.98% 

 

%

 

 

 

1.82% 



 

 

 

 

 

 

 

 

 

 

Business customer metrics:

 

 

 

 

 

 

 

 

 

 

Customers (in thousands)

 

 

502 

(1)

74 

%

 

 

 

289 

Average monthly business

 

 

 

 

 

 

 

 

 

 

    revenue per customer

 

$

673.72 

 

(2)

%

 

 

$

690.88 



 

 

 

 

 

 

 

 

 

 

Broadband subscribers (in thousands)

 

 

4,271 

(2)

73 

%

 

 

 

2,462 

Video subscribers (in thousands)

 

 

1,419 

(2)

156 

%

 

 

 

554 

Switched access minutes of use (in thousands)

 

 

19,450 

 

27 

%

 

 

 

15,327 



 

 

 

 

 

 

 

 

 

 

Employees

 

 

28,332 

 

48 

%

 

 

 

19,160 







(1)

2,283,000 residential customers, 250,000 business customers and 2,533,000 total customers were acquired at the time of the April 2016 CTF Acquisition.

(2)

2,052,000 broadband subscribers and 1,165,000 video subscribers were acquired at the time of the April 2016 CTF Acquisition.



Customer Trends

We provide service and product options in our residential and business offerings to the customer base in each of our markets which results in a better customer experience that allows us to maximize retention of existing customers and attract new customers. As of December 31, 2016, 63% of our residential broadband customers were subscribed to at least one other service offering.



During 2016, we gained approximately 2.0 million customers, net, as compared to a loss of 96,000 customers, net, in 2015. Although we added approximately 2.5 million customers in 2016 following the CTF Acquisition, we lost a net of approximately 553,000 customers across all of our markets. These customer losses were more heavily weighted in the newly acquired CTF markets due to transition disruptions following the acquisition, resulting in higher than normal customer churn, as well as the suspension of collection activities prior to and after the closing of the CTF Acquisition, and the suspension of marketing efforts for a period of time following the acquisition.  These actions resulted in fewer additions than would otherwise have been achieved. Higher than normal customer losses are expected to continue into 2017 as collections efforts are caught-up for delinquent accounts and marketing efforts ramp up.



We had approximately 4.9 million and 3.1 million total residential customers as of December 31, 2016 and 2015, respectively.  Although we added approximately 2.3 million total residential customers attributable to the CTF Acquisition in 2016, we lost approximately 516,000 residential customers, net, during 2016, composed of losses in both our legacy markets and in the CTF markets,  principally driven by declines in voice customers. Our residential customer monthly churn was 1.98% for 2016. Average monthly residential revenue per customer (residential ARPC) increased $13.54, or 21%, to $77.47 during 2016 as compared to 2015. The overall increase in residential ARPC is a result of higher video revenue from our CTF Operations and improvements in data services revenue for our legacy operations, partially offset by lower voice services revenue.  We expect to improve our video and data subscriber trends for our Frontier legacy and CTF operations.  We anticipate continuing declines in voice services revenue as fewer residential customers subscribe to landline voice services. Frontier expects continuing increases in data services revenue, primarily driven by increased broadband subscribers, and continuing declines in voice services revenue.



28

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

We had approximately 0.5 million and 0.3 million total business customers as of December 31, 2016 and 2015, respectively. Although we added 250,000 total business customers attributable to the CTF Acquisition in 2016, we lost approximately 38,000 business customers, net in 2016, composed of losses in both our legacy markets and in the CTF markets. Average monthly business revenue per customer (business ARPC) decreased $17.16, or 2%, to $673.72 during 2016 as compared to 2015.  The business ARPC decrease is primarily attributable to our CTF markets having lower ARPC per SME (small business, medium business and larger enterprise customers) customer and proportionally fewer wholesale customers relative to total business customers as compared to our legacy markets.  Frontier expects the declines in voice services revenue and wireless backhaul revenues from business customers to continue in 2017, mitigated, in part, by increases in data services revenue. We have seen modest increases in our revenues from small/medium/enterprise (SME) customers throughout 2016, and our Ethernet product revenues from our SME and carrier customers has grown by 8% for the Frontier legacy operations during 2016.



At December 31, 2016, we had approximately 1.8 million more broadband subscribers than we did at December 31, 2015.  We added 2,052,000 subscribers as part of the CTF Acquisition; however, we lost approximately 243,000 net subscribers, primarily due to fewer gross activations and higher customer churn.  At December 31, 2016, 57% of our consolidated residential broadband customers subscribed to speeds in excess of our 6 Mbps basic speed tier, up from 29% at December 31, 2015.



We offer video services under the Vantage brand to our customers in Connecticut, South Carolina, Minnesota, and Illinois and under the FiOS® brand in California, Texas, and Florida (and on a limited basis in Indiana, Oregon and Washington).  We also offer satellite TV video service to our customers under an agency relationship with DISH® in all of our markets.  During the year, we added 1,165,000 video subscribers in the CTF Acquisition.  For the full year, we lost approximately 300,000 net video subscribers across all markets.  At December 31, 2016, we had 1.14 million linear video subscribers that are served with FiOS or Vantage video service. In addition to our linear video subscribers, we have 274,000 DISH satellite video customers.



2016 REVENUE COMPARED TO 2015







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the Year Ended December 31,

 



 

2016

 

2015

 



 

 

 

 

 

 

 

Frontier Legacy (excluding CTF Operations)

 

 

 

 



 

Consolidated

 

CTF

 

 

 

$ Increase

 

% Increase

 

 

 

 

($ in millions)

 

Amount

 

Operations

 

Amount

 

(Decrease)

 

(Decrease)

 

Amount

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Voice services

 

$

2,886 

 

$

1,077 

 

$

1,809 

 

$

(213)

 

(11)

%

 

 

$

2,022 

 

Data and Internet services

 

 

3,693 

 

 

1,366 

 

 

2,327 

 

 

(10)

 

(0)

%

 

 

 

2,337 

 

Video services

 

 

1,244 

 

 

978 

 

 

266 

 

 

(19)

 

(7)

%

 

 

 

285 

 

Other

 

 

276 

 

 

26 

 

 

250 

 

 

(5)

 

(2)

%

 

 

 

255 

 

Customer revenue

 

 

8,099 

 

 

3,447 

 

 

4,652 

 

 

(247)

 

(5)

%

 

 

 

4,899 

 

Switched access and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

subsidy

 

 

797 

 

 

175 

 

 

622 

 

 

(55)

 

(8)

%

 

 

 

677 

 

Total revenue

 

$

8,896 

 

$

3,622 

 

$

5,274 

 

$

(302)

 

(5)

%

 

 

$

5,576 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the Year Ended December 31,

 



 

2016

 

2015

 



 

 

 

 

 

 

 

Frontier Legacy (excluding CTF Operations)

 

 

 

 



 

Consolidated

 

CTF

 

 

 

$ Increase

 

% Increase

 

 

 

 

($ in millions)

 

Amount

 

Operations

 

Amount

 

(Decrease)

 

(Decrease)

 

Amount

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

4,383 

 

$

2,092 

 

$

2,291 

 

$

(141)

 

(6)

%

 

 

$

2,432 

 

Business

 

 

3,716 

 

 

1,355 

 

 

2,361 

 

 

(106)

 

(4)

%

 

 

 

2,467 

 

Customer revenue

 

 

8,099 

 

 

3,447 

 

 

4,652 

 

 

(247)

 

(5)

%

 

 

 

4,899 

 

Switched access and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

subsidy

 

 

797 

 

 

175 

 

 

622 

 

 

(55)

 

(8)

%

 

 

 

677 

 

Total revenue

 

$

8,896 

 

$

3,622 

 

$

5,274 

 

$

(302)

 

(5)

%

 

 

$

5,576 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



29

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

REVENUE



We generate revenues primarily through either a monthly recurring fee or a fee based on usage, and revenue recognition is not dependent upon significant judgments by management, with the exception of a determination of a provision for uncollectible amounts.



Consolidated total revenue for 2016 increased $3,320 million to $8,896 million as compared to 2015. Excluding additional revenue of $3,622 million in 2016 attributable to CTF operations, our revenue for 2016 decreased $302 million, or 5%, as compared to 2015. This decline in 2016 is primarily the result of decreases in voice services revenues and lower switched and nonswitched access revenue, partially offset by an increase in data services revenue, each as described in more detail below.



Customer revenue for the year ended December 31, 2016 increased $3,200 million to $8,099 million as compared to 2015. Excluding additional customer revenue of $3,447 million attributable to the CTF Operations, our customer revenue for 2016 decreased $247 million, or 5%, as compared to 2015. 



Consolidated residential customer revenue for the year ended December 31, 2016 increased $1,951 million, or 80%, as compared to 2015. Consolidated residential customer revenue for the year ended December 31, 2016 included $2,092 million of revenue attributable to the CTF Operations. Residential customer revenues for our legacy operations for the year ended December 31, 2016 decreased $141 million, or 6%, compared to 2015, primarily as a result of decreases in voice services revenue, partially offset by increases in data services revenue.  Similar to other wireline providers, we have experienced declines in the number of traditional voice customers and switched access minutes of use as a result of competition and the availability of substitutes, a trend we expect to continue. The consolidated monthly average revenue per customer (ARPC) for our residential customers increased 21% for the year ended December 31, 2016 as compared to 2015. The overall increase in residential ARPC is a result of higher video revenue from our CTF Operations and improvements in data services revenue for our legacy operations, partially offset by lower voice services revenue.



Consolidated business customer revenue for 2016 increased $1,249 million, or 51%, as compared to 2015.  Consolidated business customer revenue for 2016 included $1,355 million of revenue attributable to the CTF Operations.  Business customer revenue for our legacy operations declined $106 million, or 4%, as compared to 2015, principally as a result of decreases in our voice services revenue and wireless backhaul revenue. The consolidated ARPC for our business customers decreased 2%, for the year ended December 31, 2016 as compared with 2015.  The business ARPC decrease is primarily attributable to our CTF markets having lower ARPC per SME (small business, medium business and larger enterprise customers) customer and proportionally fewer wholesale customers relative to total business customers as compared to our legacy markets.



Consolidated switched access and subsidy revenue of $797 million represented 9% of our revenues for 2016. Switched access revenue was $170 million in 2016, or 2% of our revenues, down from $177 million, or 3% of our revenues, in 2015. The Report and Order released by the FCC on November 18, 2011 (the 2011 Order) provided for the gradual elimination of terminating traffic charges by 2017 with a related decline in operating expenses.  Switched access revenue declined sequentially in the third quarter of 2016, reflecting the rate reductions mandated by the 2011 Order, and we anticipate that we have experienced nearly all of the rate decline related to the 2011 Order.  We have been able to recover a significant portion of these lost revenues through end user rates and other replacement support mechanisms, a trend we expect will continue throughout 2017. We expect declining revenue trends in switched access revenue to continue in 2017 in our legacy operations.  Subsidy revenue, including CAF Phase II subsidies, was $626 million in 2016, or 7% of our revenues, which increased from $500 million, or 9% of our revenues, in 2015.



We categorize our products, services and other revenues among the following five categories:



Voice Services

Voice services include traditional local and long distance wireline services, data-based Voice over Internet Protocol (VoIP) services, as well as voice messaging services offered to our residential and business customers. Voice services also include the long distance voice origination and termination services that we provide to our business customers and other carriers.



Voice services revenue for 2016 decreased as compared with 2015, primarily due to the continued loss of voice customers and, to a lesser extent, decreases in individual feature packages, as well as long distance revenue among those customers that do not have a bundled long distance plan, partially offset by increased local voice charges to residential and business end users. 

30

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 



Data and Internet Services 

Data and Internet services include broadband services for residential and business customers. We provide data transmission services to high volume business customers and other carriers with dedicated high capacity circuits (“nonswitched access”) including services to wireless providers (“wireless backhaul”).  In addition, we offer our Frontier Secure suite of products, including computer security, cloud backup and sharing, identity protection and equipment insurance. Frontier Secure also provides technical support services for businesses.



Data and Internet services revenue for 2016 decreased as compared with 2015.  Data services revenues for 2016 increased $45 million, or 3%, primarily due to higher Frontier Secure revenues. Nonswitched access revenues decreased $55 million, or 6%, primarily due to lower monthly recurring revenues for wireless backhaul and other carrier services. We expect wireless data usage to continue to increase, which may drive the need for additional wireless backhaul capacity. Despite the need for additional capacity, in the near term, we anticipate that our overall wireless backhaul revenues (which comprise approximately 3% of our total revenues) will continue to be subject to decline in 2017, as our carrier customers migrate to Ethernet solutions at lower price points or migrate to our competitors.



Video Services

Video services include revenues generated from services provided directly to residential customers through the FiOS video and Vantage video brands, and through DISH satellite TV services.



Video services for 2016 decreased primarily due to a decrease in the total number of video subscribers.



Other

Other customer revenue includes sales of customer premise equipment to our business customers and directory services, less our provision for bad debts.



Other revenues for 2016 decreased primarily due to lower directory services revenue.



Switched Access and Subsidy

Switched access and subsidy revenues include revenues derived from allowing other carriers to use our network to originate and/or terminate their local and long distance voice traffic (“switched access”). These services are primarily billed on a minutes-of-use basis applying tariffed rates filed with the FCC or state agencies. We also receive cost subsidies from state and federal authorities, including the Connect America Fund.



Switched access and subsidy revenue for 2016 decreased as compared to 2015. Subsidy revenues decreased $16 million, or 3% in 2016, primarily attributable to the one-time true-up payments and phasedown support recognized in 2015 in connection with the CAF Phase II program.  Switched access revenue decreased $39 million, or 22%, in 2016 primarily due to the impact of the decline in minutes of use related to access line losses and the displacement of minutes of use by wireless and other communications services, combined with the lower rates enacted by the FCC’s intercarrier compensation.

31

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 



2016 OPERATING EXPENSES COMPARED TO 2015



NETWORK ACCESS EXPENSE







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the Year Ended December 31,



 

2016

 

2015



 

 

 

 

 

 

 

Frontier Legacy (excluding CTF Operations)

 

 

 



 

Consolidated

 

CTF

 

 

 

 

$ Increase

 

% Increase

 

 

 

($ in millions)

 

Amount

 

Operations

 

Amount

 

(Decrease)

 

(Decrease)

 

Amount



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Network access expenses

 

$

1,470 

 

$

852 

 

$

618 

 

$

(22)

 

(3)

%

 

 

$

640 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Network access expenses include access charges and other third-party costs directly attributable to connecting customer locations to our network and video content costs. Such access charges and other third-party costs exclude network related expenses, depreciation and amortization, and employee related expenses.



Network access expenses for 2016 decreased in our legacy markets, primarily due to lower long distance costs and video content costs as a result of a decline in video customers, partially offset by increases in customer premise equipment costs, pole and conduit rental expense, and Frontier Secure costs.



NETWORK RELATED EXPENSES







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the Year Ended December 31,



 

2016

 

2015



 

 

 

 

 

 

 

Frontier Legacy (excluding CTF Operations)

 

 

 



 

Consolidated

 

CTF

 

 

 

 

$ Increase