2017 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, 2017

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



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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

11.125% Mandatory Convertible Preferred Stock, Series A

 

The NASDAQ Stock Market LLC

The NASDAQ Global Select Market



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, a smaller reporting company, or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 

Large Accelerated Filer           Accelerated Filer           Non-Accelerated Filer 

Smaller Reporting Company          Emerging Growth Company 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     



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, 2017  was $1,358,686,000 based on the closing price of $17.40 per share (on a post-split basis) on such date. The number of shares outstanding of the registrant's common stock as of February 10, 2018 was 78,408,000.



DOCUMENT INCORPORATED BY REFERENCE

Portions of the Proxy Statement for Frontier’s 2018 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 

23



 

Item 2.     Properties

23



 

Item 3.     Legal Proceedings

23



 

Item 4.     Mine Safety Disclosures

23



 

PART II

 



 

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

 

Purchases of Equity Securities

24



 

Item 6.     Selected Financial Data

27



 

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

 

Operations

28



 

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

52



 

Item 8.     Financial Statements and Supplementary Data

52



 

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

 

Disclosure

53



 

Item 9A.  Controls and Procedures

53



 

Item 9B.  Other Information

53



 

PART III

 



 

Item 10.   Directors, Executive Officers and Corporate Governance

54



 

Item 11.   Executive Compensation

55



 

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

 

Stockholder Matters

55



 

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

55



 

Item 14.   Principal Accountant Fees and Services

55



 

PART IV

 



 

Item 15.   Exhibits and Financial Statement Schedules

56



 

Signatures

61



 

Index to Consolidated Financial Statements

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PART I



Item 1.   Business



Frontier Communications Corporation (Frontier) is a provider of communications services in the United States, with approximately 4.9 million customers, 3.9 million broadband subscribers and 22,700 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



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How We Serve Our Customers



We conduct business with both consumer and commercial customers.



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



Commercial (small, medium and large enterprise business (SME) as well as wholesale customers).   



Commercial.  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 offer advanced hardware and network solutions and services.  



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



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



o

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



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Wholesale:  Wholesale customers are often referred to as carriers or service providers and include national operators such as AT&T and Verizon; Local Exchange Companies that need to access locations within Frontier’s footprint to offer local services; and wireless carriers and integrated carriers that offer a variety of services across all of these categories.  Wholesale customers buy both voice and data services to supplement their own network infrastructure. 



Services and Products



We offer a broad portfolio of communications services for consumer and commercial 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 and networking services. The principal consumer service we provide is broadband internet service. Commercial services include a complete portfolio of Ethernet services, dedicated internet, software defined wide area network (SDWAN), 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. 



Video services.  We offer video services under FiOS® brand in portions of California, Texas, Florida, Indiana, Oregon and Washington, and the VantageTM brand in portions of Connecticut, North Carolina, South Carolina, Minnesota, Illinois, New York, and Ohio. 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 consumer and commercial customers in all of 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 billed in arrears for services on a per minute-of-use basis.



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 are based on access rates filed with the Federal Communications Commission (FCC) for interstate services and with the respective state regulatory agency for intrastate services. See “Regulatory Environment” below.

Advanced Hardware and Network Solutions.  We offer our SME customers various hardware and network solutions utilizing cloud functionality and Customer Premise Equipment (CPE). We offer third-party communications equipment tailored to their specific business needs by partnering with Mitel, Cisco, Ingram Micro, 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



Consumer Business



Improve Customer Experience and Retention. We provide multiple service and product options to our consumer customers. Our strategy is to foster relationships and loyalty throughout the customer lifecycle in order to improve experiences, reduce churn and grow revenue. Our plan to retain customers includes providing easier access to account services and trouble-shooting options through online portals and user interfaces. We incorporate and utilize customer feedback to improve our product offerings with the goal of improving the overall customer experience for our subscribers. We focus and refine our marketing strategy for sales and retention to drive further improvement in the business.



New Customer Acquisition. We focus on broadband as the core growth component of our service offerings, either bundled with our voice and/or video services, or on a standalone basis. We seek to attract and retain a greater number of customers and increase average revenue per customer (ARPC). We are committed to

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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

growing our customer base through providing higher broadband speeds and capacity that will enable us to reach new markets, target new customers, and grow the business while maximizing our full footprint.



Improve Revenue Trends.  As we expand the range of services we offer customers, increase the capabilities of our networks, and increase the penetration of our services, we increase our revenue opportunity and are better positioned to increase the average amount of revenue we can receive from a customer. 



Commercial Business



Improve Revenue Trends.  Our strategy is to achieve revenue growth in our Commercial business through the acquisition of new customers, increasing the penetration of services with existing customers, and improved retention of existing customers.



Offer a Competitive Product Portfolio.  We offer both traditional services as well as an expanding range of advanced, packet-based services, such as Ethernet, SDWAN, Unified Communication as a Service (UCaaS) cloud-based connectivity for our large enterprise customers, and more cost-effective integrated voice and data services for our medium and small business customers.



New Customer Acquisition.  We have increased our sales force with an emphasis on adding new customers and increasing penetration of existing customers, particularly in areas where we have a robust fiber network.



Improve Customer Experience and Retention. We plan to grow our revenues in the commercial sector through increased retention and deepening of existing customer relationships. The proper alignment of our sales force, service personnel, and resources will enable us to provide excellent service to our existing enterprise, medium and small business customers, while obtaining the greatest opportunities for revenue growth and expansion.



Company-Wide 



Invest in our Network through Capital Expenditures. Our investment focus is the enhancement of our existing network and the expansion of fiber-based infrastructure in our network. We continue to upgrade network hardware, expand transport capacity of our middle-mile and data backbone, and enhance our video capabilities. Similarly, we are focused on enhancing our premium Ethernet service offerings across our network for our commercial customers.



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 continue to migrate our network and systems to common operating platforms in order to increase efficiency and we have been migrating traffic to a common architecture to eliminate duplication.



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 demand for high bandwidth transport services. We routinely enhance our network and upgrade 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 support advanced services such as Ethernet, Dedicated Internet, Multiprotocol Label Switching (MPLS) transport, VoIP, and SDWAN. The network is designed with redundancy and auto-failover capability on our major circuits.



We connect to 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

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signals are converted to copper wire for the final delivery to the household.  We provide data, video, and voice services to customers over both of these architectures. Additionally, fixed wireless broadband (FWB) will play an important part of our future broadband strategy and could be deployed for some business Ethernet services. FWB is delivered by the use of an antenna on a  Frontier base location and another antenna at the customer location.



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 next generation network 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 consumer customers comes from cable operators, wireless carriers and online video providers, among others. 



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



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Wireless carriers: Wireless operators 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. 



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Online video providers: Many consumers are opting for internet-delivered video services (Over the Top, or OTT) through online service providers 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. The percentage of homes with a video product has been declining, a trend we expect will continue.



Many consumer customers prefer to bundle their voice, data, 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 positively 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, 2017, 50% of our consumer customers subscribed to at least two service offerings, and 17% subscribed to at least three service offerings.



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



In order to remain competitive, we continue to evolve our product offerings to stay 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.

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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. Certain federal and state agencies, including attorneys general, monitor and exercise oversight related to consumer protection issues. 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.

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 some 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.



Additionally, in some states we are subject to operating restrictions and minimum service quality standards. 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, 2017 are in state jurisdictions under the rate of return regulatory model. We continue to advocate for no or reduced regulation with various regulatory agencies in those states. In some of the states we operate in 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:



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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 the high-cost component of the Federal USF, 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 locations. We completed deployment of broadband service to the first round of CAF Phase I households in 2015 and to the second round of CAF Phase I locations in March 2017 as required by the FCC rules.



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 areas unserved by a competitor. 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 less than the prior annual frozen high cost support funding. The frozen support phasedown support was $17 million in 2017 and is expected to be $9 million in 2018.



In 2017, the FCC adopted a competitive bidding process to distribute approximately $200 million per year in 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 released the eligible areas in December 2017 but the competitive bidding process has not yet been fully 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 effectively all terminating traffic charges by July 2017. Frontier’s switched access revenue declined sequentially in the third quarter of 2017, 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. There are no longer any active Intercarrier Compensation-related challenges to the 2011 Order. However, the 2011 Order did not resolve all questions on originating access rates. The FCC continues to consider the possibility of a transition of originating access rates, although the impact on Frontier, if any, is unknown at this time. Our total revenue for Intercarrier Compensation was $7 million for the year ended December 31, 2017. 



Special Access: In April 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.” In August 2017, the FCC’s decision in this proceeding, which deregulates the market for end user special access services where the market is determined to be competitive and deregulates the transport market nationwide, became effective. This decision is generally favorable in that it gives Frontier more flexibility to operate its business in a deregulated fashion like its competitors in the market. Frontier is in the process of implementing various aspects of this decision and otherwise adjusting its rates on select business data service elements in response to market conditions.  Some aspects of the decision are under appeal by stakeholders, including Frontier. Whether the appeals will be successful on any grounds is unknown.



Intrastate Services: Some state regulatory commissions regulate some of the rates ILECs charge for intrastate services, including originating switched access 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 originating 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.

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We cannot predict when or how these matters will be decided or the effect on our subsidy or switched access revenues. Our total revenue for Intrastate switched access services was $53 million for the year ended December 31, 2017, spread across all the states we serve.



Current and Potential Internet Regulatory Obligations and Privacy: In December 2017 the FCC voted to overturn the FCC’s 2015 decision in which it had asserted jurisdiction over broadband service, declared broadband a “Title II” telecommunications service, and imposed rules to “preserve a Free and Open Internet” (i.e., net neutrality). Specifically, the FCC voted to eliminate explicit bans on blocking, throttling and paid prioritization in favor of requiring Internet service providers (ISPs) to be fully transparent about their practices. Both the FCC and Federal Trade Commission (FTC) will now have a role in ensuring that the ISPs are managing their network in the manner in which they publicly state they are.



The December 2017 decision also puts ISPs on an equal footing with other online web companies with respect to privacy rules, with the FTC being the lead agency on privacy enforcement.  This decision follows Congress’s March 2017 action under the Congressional Review Act to vacate the 2015 rules that created a separate and more onerous privacy regime for ISPs than other online web companies.  Frontier’s Internet service will now be subject to the same privacy rules as online web companies, including disclosure of its practices to consumers, which is Frontier’s current practice. 



The December 2017 ruling is not yet effective and will likely be appealed in court. Meanwhile, the 2015 ruling is still under appeal, though it now appears moot. Frontier continues to comply with the existing regulatory requirements, and it is unclear whether the pending or future appeals will have any impact on the regulatory structure.



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, Illinois, Indiana, Minnesota, New York, North Carolina, Ohio, 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.



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 one reportable segment.



Financial Information about Foreign and Domestic Operations and Export Sales



We have no foreign operations.



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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.



We own or have the rights to use various trademarks, service marks and trade names referred to in this report. Solely for convenience, we refer to trademarks, service marks and trade names in this prospectus without the ™, SM and ® symbols. Such references are not intended to indicate, in any way, that we will not assert, to the fullest extent permitted by law, our rights to our trademarks, service marks and trade names. Other trademarks, trade names or service marks appearing in this report are the property of their respective owners.



Employees



As of December 31, 2017, we had approximately 22,700 employees, as compared to approximately 28,300 employees as of December 31, 2016.  During 2017, reduction in workforce activities resulted in the severance of approximately 1,300 employees. Approximately 16,000 of our total employees are represented by unions as of December 31, 2017. The number of employees covered by a collective bargaining agreement that expired in 2017, but have been extended and are still effective for 2018, is approximately 1,400. The number of employees covered by collective bargaining agreements that expire in 2018 is approximately 4,300. 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, or incorporated by reference into, 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.



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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 



Forward-Looking Statements 



This Annual Report on Form 10-K contains "forward-looking statements," related to future 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," "may," “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:



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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;



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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 organizational structure changes successfully;



·

risks related to the operation of our properties, including our ability to retain or obtain customers in our Legacy markets and those acquired from Verizon;



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our ability to realize anticipated cost savings and our ability to meet commitments made in connection with the Verizon acquisition;



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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 effects of governmental legislation and regulation on our business, such as the repeal of net neutrality, including costs, disruptions, possible limitations on operating flexibility and changes to the competitive landscape resulting from such legislation or regulation;



·

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



·

government infrastructure projects (such as highway construction) that impact our capital expenditures;



·

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 meet our remaining CAF II funding obligations on a timely basis, it could be subject to penalties or obligations to return certain CAF II funds;



·

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;



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·

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



·

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



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the effects of changes in income tax rates, tax laws, regulations or rulings, or federal or state tax assessments, including the risk that such changes may benefit our competitors more than us;



·

our ability to successfully renegotiate union contracts;



·

changes in pension plan assumptions, interest rates, discount 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 2018  and beyond;



·

adverse changes in the credit markets;



·

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 as well as our ability to access the capital markets in the future;



·

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 has, and may in the future, increase our operating and capital 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.

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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 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 have experienced declining revenues and may experience further declines in our revenues going forward.



We have experienced declining revenues as a result of declining voice services revenues, lower switched and nonswitched access revenues and declining video and data services revenues. Such declines have been driven primarily by customer losses, changing technology and consumer behavior (such as wireless displacement of wireline use, e-mail use, instant messaging and increasing use of VoIP), increased competition, regulatory constraints and financial decisions by governmental authorities. There can be no assurances that we will be able to stabilize or increase our revenues in the future. Future declines in our revenues could materially and adversely impact our ability to execute on our business strategy, comply with our financial covenants, repay our debts as they become due, negotiate with third parties or attract and retain employees. 



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 operating 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, and fund our pension and other employee benefit obligations. We have experienced revenue declines in 2017 and 2016 as compared to prior years. 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.



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. For example, our competitors may seek to introduce networks in our legacy markets that are competitive with or superior to our copper-based networks in those markets. We also believe that wireless and cable 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, or habits, demographic trends, economic conditions and pricing strategies by competitors. Increasing competition may

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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 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 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.



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 have in the past, and could in the future, 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 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. We could also face disruptions in our networks if third-party providers elect not to continue doing business with us or put their services up for auction and we are not able to retain their services as a result. Disruptions may cause interruptions in service or reduced capacity for customers, either of which could cause us to lose customers, or increase our operating expense, all of which could 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 or insolvency of these carriers have not had a material adverse effect on our business in recent years, future bankruptcies or insolvencies 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 and insolvencies 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, 2017, we had approximately 22,700 employees. Approximately 16,000 of our total employees were represented by unions and were subject to collective bargaining agreements. As of December 31, 2017, we had approximately 1,400 employees covered by a  collective bargaining agreement that expired in 2017, but have been extended and are still effective for 2018. Of the union-represented employees as of December 31, 2017,  approximately 4,300, or 27%, of the unionized workforce are covered by collective agreements that expire in

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2018 and approximately 7,600, or 48%, of the unionized workforce are covered by collective bargaining agreements that expire in 2019.



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 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 have a significant amount of goodwill and other intangible assets on our balance sheet. We recorded goodwill impairments in 2017 and if our goodwill or other intangible assets become further impaired, we may be required to record additional non-cash charges 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. As a result of the continued decline in the share price of our common stock in each of the four quarters in 2017, we tested goodwill for impairment. Our second and fourth quarter quantitative assessments indicated that the carrying value of the enterprise exceeded its fair value and, therefore, an impairment existed. We recorded goodwill impairments totaling $2,748 million for 2017.If our goodwill or other intangible assets are determined to be further 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.



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

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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.



We have in the past and may in the future consider disposing of certain assets or asset groups. We may not be able to dispose of such assets on terms that are attractive to us, or at all.  To the extent we consummate such a transaction, we may experience operational challenges in segregating such assets.



In the past, we have disposed of assets for a variety of reasons, and we may, from time to time, consider disposing of other assets or asset groups in the future. We may not be able to dispose of any such assets on terms that are attractive to us, or at all, which could adversely impact our financial condition or results of operation. In addition, to the extent we consummate an agreement for the sale and disposition of an asset or asset group, we may experience operational difficulties segregating them from our retained assets and operations, which could impact the execution or timing for such dispositions and could result in disruptions to our operations and/or claims for damages, among other things.



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 value, in order to have access to other content that customers do value. Some of our competitors have materially larger scale than we do, and may, as a result, be better positioned than we are in such negotiations. As a result of these factors, the expense of content acquisition may continue to increase, and this could result in higher expenses and lower profitability.



Risks Related to Liquidity, Financial Resources and Capitalization 



We currently have a significant amount of indebtedness, including secured indebtedness, and are contractually permitted 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 $17.9 billion outstanding at December 31, 2017, of which $3.6 billion was secured. We also have access to a $850 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.



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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;



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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 possibility that we may trigger the springing maturity provisions in our credit agreements;



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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;



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requiring us to issue debt or equity securities or to sell some of our core assets, possibly on unfavorable terms, to meet payment obligations;



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compromising our flexibility to plan for, or react to, competitive challenges in our business and the telecommunications industry; and



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the possibility of our being put at a competitive disadvantage with competitors who, relative to their size, do not have as much debt as we do, and competitors who may be in a more favorable position to access additional capital resources.



In addition, our senior notes and debentures are rated below “investment grade” by independent rating agencies. This has resulted in higher borrowing costs for us. We cannot assure that these rating agencies will not lower our debt ratings further, if in the rating agencies’ judgment such an action is appropriate. A further lowering of a rating would likely increase our future borrowing costs and reduce our access to capital. Our negotiations with vendors, customers and business partners can be negatively impacted if they deem us a credit risk as a result of our credit rating.



The 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;



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



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



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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.

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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.



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. In addition, our subsidiaries may be able to incur $1.4 billion of additional debt (including secured debt), subject to the contractual limitations in our debt instruments applicable to such subsidiaries. Holders or our senior notes and debentures would be structurally subordinated to any such future debt as well.



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, 2017, our secured indebtedness consisted of obligations under the JPM Credit Agreement, the CoBank Credit Agreements, the Revolving Credit Agreement, Term Loan B and the Continuing Agreement for Standby Letters of Credit between Frontier and Deutsche Bank AG New York Branch and Bank of Tokyo – Mitsubishi UFJ, LTD, each of which is secured by the security package under the JPM Credit Agreement which includes pledges of the equity interests in certain Frontier subsidiaries and guaranties by certain Frontier subsidiaries.  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.



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



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At December 31, 2017, approximately 20% 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.



Any future payment of dividends on our capital stock will be at the sole discretion of our Board of Directors and subject to certain important limitations, including legal and contractual restrictions.



The amount and timing of future dividend payments, if any, on our common stock and Series A Preferred Stock will be made at the sole discretion of our Board of Directors based on factors such as cash flow and cash requirements, capital expenditures requirements, financial condition, covenants in our debt instruments and legal restrictions. 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 or immediately preceding fiscal year. In addition, our ability to declare and pay dividends is restricted by our existing financing arrangements and may be restricted by future financing arrangements. For example, our credit agreements prohibit us from using proceeds from our revolving credit facility to fund dividend payments if the undrawn amount under the revolver is less than $250 million, and we may not pay dividends on our common stock in excess of $2.40 per share in any fiscal year. As such, there can be no assurances that we will declare and pay any future dividends on our capital stock.



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 $75 million, net of the Differential payment received (See note 17), and $28 million to its pension plan in 2017 and 2016, 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.



 Significant changes in discount rates, rates of return on pension assets, mortality tables and other factors could adversely affect our earnings and equity and increase our pension funding requirements.



Pension costs and obligations are determined using actual results as well as actuarial valuations that involve several assumptions. The most critical assumptions are the discount rate, the long-term expected return on assets and mortality tables. Other assumptions include salary increases and retirement age. Some of these

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assumptions, such as the discount rate and return on pension assets, are reflective of economic conditions and largely out of our control. Changes in the pension assumptions could adversely affect our earnings, equity and funding requirements.





Risks Related to Regulation and Oversight



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



A portion of Frontier’s total revenues ($165 million, or 2%, in 2017 and $170 million, or 2%, in 2016) are derived from switched access charges paid by other carriers for services we provide in originating intrastate and interstate long-distance traffic. Frontier expects a portion of our revenues will continue to be derived from switched access charges paid by these carriers for these services. The rates Frontier can charge for switched access are regulated by the FCC and state regulatory agencies.



In 2011, the FCC adopted the 2011 Order regarding Intercarrier Compensation, which is the payment framework that governs how carriers compensate each other for the exchange of voice traffic between carriers. The 2011 Order began a multi-year transition that moves the rate for terminating traffic to near zero by 2017, with the final phase down of a subset of traffic in 2018. 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 FCC also reformed the Universal Service Fund in this order to shift the High-Cost portion of the fund from supporting voice services to supporting broadband deployment in high-cost areas.



However, the 2011 Order did not resolve all questions on Intercarrier Compensation.  The FCC continues to consider the possibility of transitioning originating access rates in the future. We cannot predict when or how the FCC would implement any changes originating access rates, and future reductions in these revenues may directly affect our profitability and cash flows as these regulatory revenues do not have an equal level of associated variable expenses.



In August 2017, the FCC decision to deregulate the market for special access services where the market is determined to be competitive and the transport market nationwide became effective.  Some aspects of that decision are under appeal by stakeholders.  We cannot predict the outcome of that appeal or the impact of future changes on our results or operations.



Certain states also have their own open proceedings to address reform to originating intrastate access charges, other intercarrier compensation, and state universal service funds. Although the FCC has pre-empted state jurisdiction on most access charges, many states could consider moving forward with their proceedings. We cannot predict when or how these matters will be decided or the effect on our subsidy or switched access revenues. However, future reductions in our subsidy or switched access revenues may directly affect our profitability and cash flows as those regulatory revenues do not have an equal level of associated variable expenses.



A portion of Frontier’s revenues are derived from federal and state subsidies. To the extent the federal or any state government reduces such subsidies, our operating income could be materially and adversely impacted.



A portion of Frontier’s total revenues ($395 million, or 4%, in 2017 and $409 million, or 5%, in 2016) are derived from federal and state subsidies for rural and high-cost support, that consists of CAF II support, Federal High Cost support, and various state subsidies. The FCC’s 2011 Order changed how federal subsidies are calculated and disbursed. These changes transitioned the USF (Universal Service Fund), which supported voice services in high-cost areas, to the CAF (Connect America Fund), which supports broadband deployment in high-cost areas. Federal subsidies represented approximately 92% of subsidy revenue in 2017 and 89% in 2016, with the remainder being state subsidies. 



Frontier is required to contribute to the Universal Service Fund.  The FCC allows Frontier to recover these contributions through a USF Surcharge on customers’ bills.  This surcharge accounted for $216 million of revenue in 2017 and $217 million in 2016. 



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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

Future reductions in these subsidies, or in our ability to recover Universal Service Fund contributions, could have a material adverse effect on our business or results of operations.



Frontier and our industry will likely remain highly regulated, and we could incur substantial compliance costs that could constrain our ability to compete in our target markets.



As an incumbent local exchange carrier, some of the services we offer are subject to significant regulation from federal, state and local authorities. This regulation could impact our ability to change our rates, especially on our basic voice services and our access rates, and could impose substantial compliance costs on us. In some jurisdictions, regulation may restrict our ability to expand our service offerings. In addition, changes to the regulations that govern our business (including any implementation of the 2011 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.



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 December 2017, the FCC voted to roll back the FCC’s 2015 Order applying the Title II framework to broadband services.  This decision restores the light touch regulatory treatment of broadband service in place prior to 2015 and preserves the FCC’s transparency requirements.  The decision also clarifies that the Federal Trade Commission is the proper venue for enforcement of the transparency requirements and privacy practices.  Several parties are expected to appeal this order and may seek a stay of its provisions. 



Our Internet access offerings could become subject to additional laws and regulations as they are adopted or applied to the Internet. As the significance of the Internet expands, federal, state and local governments may pass laws and adopt rules and regulations, including those directed at privacy, or apply existing laws and regulations to the Internet (including Internet access services), and related matters are under consideration in both federal and state legislative and regulatory bodies. Although the FCC has pre-empted state jurisdiction on network neutrality and privacy, many states could consider moving forward with legislation on these or other Internet-related issues. At least two states, Montana and New York have already taken executive action directed at reinstating aspects of the FCC’s 2015 Order.  We cannot predict whether the outcome of expected or pending challenges to the FCC’s order or future proceedings will prove beneficial or detrimental to our competitive position.



We are subject to the oversight of certain federal and state agencies that have in the past, and may in the future, investigate or pursue enforcement actions against us relating to consumer protection matters.



Certain federal and state agencies, including state attorneys general, monitor and exercise oversight related to consumer protection matters, including those affecting the communications industry. Such agencies have in the past, and may in the future, choose to launch an inquiry or investigation of our business practices in response to customer complaints or other publicized customer service issues or disruptions. Such inquiries or investigations could result in reputational harm, enforcement actions, litigation, fines, settlements and/or operational and financial conditions being placed on the company, any of which could materially and adversely affect our business.



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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

Tax legislation may adversely affect our business and financial condition.



Tax laws are dynamic and continually change as new laws are passed and new interpretations of the law are issued or applied. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the TCJA). The TCJA makes broad and complex changes to the U.S. tax code and, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, and imposes limitations on the use of net operating losses arising in taxable years beginning after December 31, 2017. The reduction of the U.S. corporate tax rate results in a decreased valuation of our deferred tax asset and liabilities. The overall impact of the new federal tax law is uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will conform to the newly enacted federal tax law. The determination of the benefit from (provision for) income taxes requires complex estimations, significant judgments and significant knowledge and experience concerning the applicable tax laws. Given that we are still in the transition period for the accounting for income tax effects of the TCJA, the current assessment on deferred tax assets (liabilities) is based on the currently available information and guidance. If in the future any element of the tax reform changes the related accounting guidance for income tax, it could affect our income tax position and we may need to adjust the benefit from (provision for) income taxes accordingly.



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 and manage broadband speeds and capacity as necessary, we may be unable to compete effectively because we will not be able to meet the needs or expectations of our customers.



In addition, enhancements to product offerings may influence our customers to consider other service providers, such as cable operators or wireless providers. We may be unable to attract new or retain existing customers from cable companies due to their deployment of enhanced broadband and VoIP technology. In addition, new capacity services for 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.



We rely on network and information systems and other technology, and a disruption or failure of such networks, systems or technology as a result of computer viruses, cyber-attacks, misappropriation of data or other malfeasance, as well as outages, accidental releases of information or similar events, may disrupt our business and materially impact our results of operations, financial condition and cash flows.



We maintain security measures, disaster recovery plans and business continuity plans for our business and are continuously working to upgrade our existing technology systems and provide employee training around the cyber risks we face. Nevertheless, our information technology networks and infrastructure may be subject to damage, disruptions or shutdowns due to computer viruses, cyber-attacks or breaches, employee or third-party error or malfeasance, power outages, telecommunication or utility failures, systems failures, natural disasters or other catastrophic events.



Further, our network and information systems are subject to various risks related to third parties and other parties we may not fully control. We use encryption and authentication technology licensed from third parties to provide secure transmission of confidential information, including our business data and customer information. Similarly, we rely on employees in our network operations centers, data centers, call centers and retail stores to follow our procedures when handling sensitive information. While we select our third-party business partners and employees carefully, we do not always control their actions, which could expose us to cyber-security risks. In addition, our customers using our network to access the Internet may become victim to malicious and abusive Internet activities, such as unsolicited mass advertising (or spam), peer-to-peer file sharing, distribution of viruses, worms and other destructive or disruptive software; these activities could adversely affect our network, result in excessive call volume at our call centers and damage our or our customers’ equipment and data.



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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

Any unauthorized access, computer viruses, accidental or intentional release of confidential information or other disruptions could result in misappropriation of our or our customers’ sensitive information; reputational harm; increased costs, such as those relating to remediation or future protection; customer dissatisfaction, which could lead to a decline in customers and revenue; and legal claims or proceedings, fines and other liabilities. There can be no assurance that the impact of such incidents would not be material to our results of operations, financial condition or cash flows.  





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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, 2017, was as follows:





 

 

 



 

 

 

($ in millions)

 

 

 



 

 

 

Land

$

231 

 

Buildings and leasehold improvements

 

2,282 

 

General support

 

1,570 

 

Central office/electronic circuit equipment

 

8,137 

 

Poles

 

1,095 

 

Cable, fiber and wire

 

10,997 

 

Conduit

 

1,646 

 

Construction work in progress

 

538 

 

Total

$

26,496 

 



 

 

 



 

 

 



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, governmental investigations) arising in the normal course of our business covering a wide range of matters and types of claims including, but not limited to, general contracts, billing disputes, rights of access, taxes and surcharges, consumer protection, advertising, 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.

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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. 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 were paid in each of 2017 and 2016. Cash dividends paid to common shareholders were $266 million and $493 million in 2017 and 2016, 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 deems relevant.



A portion of the dividends on common stock may be 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, 2017, 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.









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

2017

 

2016



 

High

 

Low

 

Dividend

 

High

 

Low

 

Dividend

First Quarter

 

$

57.30 

 

$

28.80 

 

$

0.600 

 

$

87.75 

 

$

57.15 

 

$

1.575 

Second Quarter

 

$

32.85 

 

$

16.50 

 

$

0.600 

 

$

86.25 

 

$

68.55 

 

$

1.575 

Third Quarter

 

$

18.21 

 

$

11.65 

 

$

0.600 

 

$

78.30 

 

$

61.05 

 

$

1.575 

Fourth Quarter

 

$

12.83 

 

$

6.08 

 

$

0.600 

 

$

65.40 

 

$

46.50 

 

$

1.575 



As of February 10, 2018, the approximate number of security holders of record of our common stock was 235,270. This information was obtained from our transfer agent, Computershare Inc.





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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, 2012.



Picture 3



The graph assumes that $100 was invested on December 31, 2012 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.







 

 

 

 

 

 



 

 

 

 

 

 



 

INDEXED RETURNS



Base

Years Ending



Period

 

 

 

 

 

Company / Index

12/12

12/13

12/14

12/15

12/16

12/17

Frontier Communications Corporation

100

119.36  182.62  138.38  110.15  18.24 

S&P 500 Index

100

132.39  150.51  152.59  170.84  208.14 

S&P Telecommunication Services

100

111.47  114.80  118.70  146.58  144.75 



 

 

 

 

 

 











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 2017.

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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 





ISSUER PURCHASES OF EQUITY SECURITIES









 

 

 

 

 

 

 



 

 

 

 

 

 

 

Period

 

 

Total Number of Shares Purchased

 

 

Average Price Paid per Share



 

 

 

 

 

 

 

October 1, 2017 to October 31, 2017

 

 

 

 

 

 

 

Employee Transactions (1)

 

 

9,220 

 

 

$

11.65



 

 

 

 

 

 

 

November 1, 2017 to November 30, 2017

 

 

 

 

 

 

 

Employee Transactions (1)

 

 

11 

 

 

$

11.86



 

 

 

 

 

 

 

December 1, 2017 to December 31, 2017

 

 

 

 

 

 

 

Employee Transactions (1)

 

 

169 

 

 

$

11.55



 

 

 

 

 

 

 

Totals October 1, 2017 to December 31, 2017

 

 

 

 

 

 

 

Employee Transactions (1)

 

 

9,400 

 

 

$

11.65





(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.

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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, 2017 has been derived from Frontier’s historical consolidated financial statements. The selected historical consolidated financial information as of December 31, 2017 and 2016 and for each of the years in the three-year period ended December 31, 2017 is derived from the audited historical consolidated financial statements of Frontier included elsewhere in this Annual Report. The selected historical consolidated financial information as of December 31, 2015, 2014 and 2013 and for each of the years ended December 31, 2014 and 2013 is derived from the audited historical consolidated financial statements of Frontier not included in this Annual Report.









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Year Ended December 31, (1)

($ in millions, except per share amounts)

 

2017

 

2016

 

2015

 

2014

 

2013



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

9,128 

 

8,896 

 

$

5,576 

 

4,772 

 

4,762 

Operating Income (loss)

 

(1,568)

 

888 

 

$

745 

 

820 

 

981 

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

 

(1,804)

 

(373)

 

$

(196)

 

133 

 

115 

Net income (loss) attributable to Frontier

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common shareholders (2) (3) (4) (5) (6)

 

(2,018)

 

(587)

 

$

(316)

 

133 

 

113 

Net income (loss) attributable to Frontier

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common  shareholders per basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share (2) (3) (4) (5) (6)

 

$

(25.99)

 

$

(7.61)

 

$

(4.41)

 

$

1.93 

 

$

1.67 

Net income (loss) attributable to Frontier

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common shareholders per diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

share (2) (3) (4) (5) (6)

 

(25.99)

 

(7.61)

 

$

(4.41)

 

1.93 

 

1.67 

Cash dividends declared (and paid) per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common share

 

3.42 

 

6.35 

 

$

6.31 

 

6.05 

 

6.04 

Cash dividends declared (and paid) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of Series A Preferred Stock

 

11.125 

 

11.125 

 

6.24 

(7)

 -

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

As of December 31,

($ in millions)

 

2017

 

2016

 

2015

 

2014

 

2013



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

24,884 

 

$

29,013 

 

$

27,084 

 

$

18,810 

 

$

16,540 

Long-term debt

 

16,970 

 

$

17,560 

 

$

15,508 

 

$

9,393 

 

$

7,810 

Total shareholders' equity of Frontier

 

2,274 

 

$

4,519 

 

$

5,614 

 

$

3,658 

 

$

4,056 







(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 $88 million ($58 million after tax) and $160 million ($99 million after tax) for 2013, respectively.

(3)

Operating results include pre-tax acquisition and integration costs of $25 million ($16 million after tax), $436 million ($283 million after tax), $236 million ($133 million after tax), $142 million ($91 million after tax) and $10 million ($6 million after tax) for 2017, 2016, 2015, 2014 and 2013, respectively.

(4)

Operating results include pre-tax restructuring costs and other charges of $82 million ($52 million after tax), $91 million ($59 million after tax), $2 million ($1 million after tax), $2 million ($1 million after tax) and $12 million ($7 million after tax) for 2017, 2016, 2015, 2014 and 2013, respectively.

(5)

Operating results include pre-tax pension settlement costs of $83 million ($53 million after tax) and $44 million ($27 million after tax) for 2017 and 2013, respectively.

(6)

Operating results include pre-tax goodwill impairment charges of $2,748 million ($2,354 million after tax) for 2017.

(7)

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





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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 



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

            Introduction



(a)  Results of Operations



2017 Compared to 2016



On April 1, 2016, we completed our acquisition of Verizon’s wireline properties in California, Texas, and Florida (the CTF Acquisition, of the CTF Operations). 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. As a result our financial results for 2017 include CTF Operations for the full year of 2017, while financial results for 2016 only included CTF Operations for the final nine months of 2016.



On July 10, 2017, we effected a one for fifteen reverse stock split of our common stock. The reverse stock split reduced the number of common shares issued (which includes outstanding shares and treasury shares) from approximately 1,193,000,000 shares to 80,000,000 shares, and reduced shares outstanding from 1,178,000,000 shares to 79,000,000 shares. In addition, and at the same time, the total number of shares of common stock that Frontier is authorized to issue changed from 1,750,000,000 shares to 175,000,000 shares. There was no change in the par value of the common stock, and no fractional shares were issued. All share and per share amounts in the financial discussion below have been retroactively adjusted for all periods presented to give effect to the reverse stock split. As a result of our reverse stock split the conversion rates of our Series A Preferred Stock were proportionately adjusted.





The sections below include tables that present customer counts, average monthly consumer revenue per customer (ARPC) and consumer customer churn. We define churn as the number of consumer customer deactivations during the month divided by the number of consumer customers at the beginning of the month and utilize the average of each monthly churn in the period.  



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



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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

The following should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2017.







 

 

 

 

 

 

 

 

 



 

As of or for the year ended



 

December 31, 2017

 

December 31, 2016

 

% Increase (Decrease)



 

 

 

 

 

 

 

 

 

Customers (in thousands)

 

 

4,850 

 

 

5,393 

 

(10)

%



 

 

 

 

 

 

 

 

 

Consumer customer metrics

 

 

 

 

 

 

 

 

 

Customers (in thousands)

 

 

4,397 

 

 

4,891 

 

(10)

%

Net customer additions/(losses)

 

 

(494)

 

 

1,767 

(1)

(128)

%

Average monthly consumer

 

 

 

 

 

 

 

 

 

   revenue per customer

 

$

80.96 

 

$

77.47 

 

%

Customer monthly churn

 

 

2.17% 

 

 

1.98% 

 

10 

%



 

 

 

 

 

 

 

 

 

Commercial customer metrics

 

 

 

 

 

 

 

 

 

Customers (in thousands)

 

 

453 

 

 

502 

 

(10)

%



 

 

 

 

 

 

 

 

 

Broadband subscriber metrics

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Broadband subscribers

 

 

3,938 

 

 

4,271 

 

(8)

%

Net subscriber additions/(losses)

 

 

(333)

 

 

1,809 

(2)

(118)

%



 

 

 

 

 

 

 

 

 

Video (excl. DISH) subscriber metrics

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Video subscribers (in thousands)

 

 

961 

 

 

1,145 

 

(16)

%

Net subscriber additions/(losses)

 

 

(184)

 

 

903 

(2)

(120)

%



 

 

 

 

 

 

 

 

 

DISH subscriber metrics

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

DISH subscribers (in thousands)

 

 

235 

 

 

274 

 

(14)

%

Net subscriber additions/(losses)

 

 

(39)

 

 

(38)

(2)

%



 

 

 

 

 

 

 

 

 

Employees (3)

 

 

22,736 

 

 

28,332 

 

(20)

%



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



(1)

2,283,000 consumer customers, 250,000 commercial 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.

(3)

At December 31, 2016, we had approximately 1,900 employees in our Frontier Secure Strategic Partnerships business, which was sold in May 2017.



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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

Customer Trends and Revenue Performance



We provide service and product options in our consumer and commercial offerings in each of our markets. As of December 31, 2017, 67% of our consumer broadband customers were subscribed to at least one other service offering.  



We had approximately 4.4 million and 4.9 million total consumer customers as of December 31, 2017 and 2016, respectively. Our average monthly consumer customer churn was 2.17% for the year ended December 31, 2017 (1.91% for Frontier legacy and 2.56% for CTF Operations) compared to 1.98% (1.76% for Frontier legacy and 2.46% for CTF Operations) for 2016. The consolidated average monthly consumer revenue per customer (consumer ARPC) increased by $3.49 or 5% to $80.96 during 2017 compared to the prior year. The overall increase in consumer ARPC is a result of the increased revenue provided by a full year of CTF operations in 2017 compared to only nine months in 2016. This increase was partially offset by a decrease in video services.



We had approximately 453,000 and 502,000 total commercial customers as of December 31, 2017 and 2016, respectively. We lost approximately 49,000 commercial customers during the year ended December 31, 2017 compared to an increase of 213,000 customers for the prior year. Frontier expects the declines in voice services revenue and wireless backhaul revenues from commercial customers to continue in 2018. Our Ethernet product revenues from our SME (small business, medium business and larger enterprise customers) and carrier customers grew 11% for the Frontier legacy operations during 2017, compared to the prior year period. The prior year increase in customers was driven by 250,000 new customers acquired from Verizon in the CTF Acquisition.



We had approximately 3.9 million and 4.3 million broadband subscribers as of December 31, 2017 and 2016, respectively. During the year ended December 31, 2017, we lost approximately 333,000 net broadband subscribers compared to an increase of 1,809,000 for the prior year. The prior year increase in subscribers was driven by 2,052,000 new subscribers acquired from Verizon in the CTF Acquisition. 



We offer video services to certain of our customers under the FiOS® brand in portions of California, Texas, Florida, Indiana, Oregon, and Washington, and under the Vantage brand in portions of Connecticut, North Carolina, South Carolina,  Minnesota, Illinois, New York, and Ohio. We also offer satellite TV video service to our customers under an agency relationship with DISH® in all of our markets. For the year ended December 31, 2017, we lost approximately 223,000 net video subscribers across all markets. At December 31, 2017, we had 961,000 linear video subscribers that are served with FiOS or Vantage video service. In addition to our linear video subscribers, we have approximately 235,000 DISH satellite video customers.



30

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

REVENUE





 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the year ended December 31,

 

$ Increase

 

 

% Increase

($ in millions)

 

2017

 

2016

 

(Decrease)

 

 

(Decrease)



 

 

 

 

 

 

 

 

 

 

 

 

 

Data and Internet services (1)

 

$

3,862 

 

$

3,693 

 

$

169 

 

 

%

Voice services

 

 

2,864 

 

 

2,886 

 

 

(22)

 

 

(1)

%

Video services

 

 

1,304 

 

 

1,244 

 

 

60 

 

 

%

Other

 

 

322 

 

 

276 

 

 

46 

 

 

17 

%

Customer revenue (1)

 

 

8,352 

 

 

8,099 

 

 

253 

 

 

%

Switched access and

 

 

 

 

 

 

 

 

 

 

 

 

 

subsidy

 

 

776 

 

 

797 

 

 

(21)

 

 

(3)

%

Total revenue (1)

 

$

9,128 

 

$

8,896 

 

$

232 

 

 

%



 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the year ended December 31,

 

$ Increase

 

 

% Increase

($ in millions)

 

2017

 

2016

 

(Decrease)

 

 

(Decrease)



 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

$

4,476 

 

$

4,383 

 

$

93 

 

 

%

Commercial(1)

 

 

3,876 

 

 

3,716 

 

 

160 

 

 

%

Customer revenue (1)

 

 

8,352 

 

 

8,099 

 

 

253 

 

 

%

Switched access and

 

 

 

 

 

 

 

 

 

 

 

 

 

subsidy

 

 

776 

 

 

797 

 

 

(21)

 

 

(3)

%

Total revenue (1)

 

$

9,128 

 

$

8,896 

 

$

232 

 

 

%



 

 

 

 

 

 

 

 

 

 

 

 

 



(1)  Includes revenue from Frontier Secure Strategic Partnerships business, which was sold in May of 2017, of $40 million and $84 million for the year ended December 31, 2017 and 2016, respectively.



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



The increase of $232 million in consolidated total revenue was primarily due to the additional revenue provided by a full year of CTF Operations in 2017 compared to only nine months in 2016.  This increase was partially offset by decreased voice and data and Internet services revenues driven by a decline in customers.



Consolidated customer revenue increased $93 million due to consumer customer revenue and $160 million due to commercial customer revenues. The increase in consumer customer revenue was primarily due additional revenue provided by a full year of CTF Operations in 2017 compared to only nine months in 2016. This increase was partially offset by decreases in voice, data and internet, and video services revenue.  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 increase in consolidated commercial customer revenue was primarily driven by additional revenue provided by a full year of CTF Operations in 2017 compared to only nine months in 2016. This increase was partially offset by decreases in our voice services revenue and nonswitched revenue including wireless backhaul revenue and decreased revenues related to our Frontier Secure Strategic Partnerships business which was sold in May 2017.



Consolidated switched access and subsidy revenue represented 9% of our revenues for the year ended December 31, 2017. Switched access revenue was $165 million for the year ended December 31, 2017, or 2% of our revenues, which decreased from $170 million, or 2% of our revenues, in the prior year period. The decrease was driven by reduced rates which were mandated by the 2011 Order with a related decline in operating expenses. Subsidy revenue, including CAF Phase II subsidies, was $611 million for the year ended December 31, 2017, or 7% of our revenues, which decreased from $626 million, or 7% of our revenues, in the prior year period.



31

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

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



Data and Internet Services 

Data and internet services include broadband services for consumer and commercial customers. We also provide data transmission services to high volume commercial customers and other carriers with dedicated high capacity circuits (“nonswitched access”) including services to wireless providers (“wireless backhaul”).



Consolidated data and Internet services revenue for the year ended December 31, 2017 increased $169 million as compared with 2016. Consolidated data services revenue for the year ended December 31, 2017 increased $81 million, or 4%, to $2,240 million due to the additional revenue provided by a full year of CTF Operations in 2017 compared to only nine months in 2016. This increase was partially offset by a reduction in revenue as a result of the sale of the Frontier Secure Strategic Partnerships business in May 2017 and a decrease in the total number of broadband subscribers. Consolidated nonswitched access revenues for the year ended December 31, 2017 increased $88 million, or 6%, to $1,622 million as compared with 2016 due to additional revenue provided by a full year of CTF Operations in 2017 compared to only nine months in 2016. This increase was partially offset by lower monthly recurring revenue 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 consolidated total revenues) will continue to decline in 2018, as our carrier customers migrate to Ethernet solutions at lower price points or migrate to our competitors.



Voice Services

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



The decrease of $22 million in voice services revenue was primarily due to the continued loss of voice customers and decreases in long-distance revenue among those customers that do not have a bundled long-distance plan, which was partially offset by additional revenues resulting from a full year of CTF Operations in 2017 compared to only nine months in 2016.



Video Services

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



The increase of $60 million in video services revenue was primarily due to additional revenue provided by a full year of CTF Operations in 2017 compared to only nine months in 2016. The increase was partially offset by reduced revenue resulting from a decrease in the total number of video subscribers.



Other 

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



The increase of $46 million in other revenue was primarily due to a decrease in uncollectibles, which was partially offset by a decrease in maintenance contracts.



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.



The decrease of $21 million in switched access and subsidy revenue was primarily due to decreases in subsidies from the state high cost, offset by additional revenue provided by a full year of CTF Operations in 2017 compared to 2016. We expect that switched access revenue will continue to decline in 2018.



32

 


 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

2017 OPERATING EXPENSES COMPARED TO 2016



NETWORK ACCESS EXPENSE









 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the year ended December 31,

 

$ Increase

 

% Increase

 

($ in millions)

 

2017

 

2016

 

(Decrease)

 

(Decrease)

 



 

 

 

 

 

 

 

 

 

 

 

 

Network access expenses

 

$

1,597 

 

$

1,470 

 

$

127 

 

%

 



 

 

 

 

 

 

 

 

 

 

 

 

 



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.



The increase in network access expenses was primarily due to additional expenses resulting from a full year of CTF Operations in 2017 compared to only nine months in 2016. These increases were partially offset by lower video content costs.

 

NETWORK RELATED EXPENSES









 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the year ended December 31,

 

$ Increase

 

% Increase

 

($ in millions)

 

2017

 

2016

 

(Decrease)

 

(Decrease)

 



 

 

 

 

 

 

 

 

 

 

 

 

Network related expenses

 

$

1,959 

 

$

1,887 

 

$

72 

 

%

 



 

 

 

 

 

 

 

 

 

 

 

 

 



Network related expenses include expenses associated with the delivery of services to customers and the operation and maintenance of our network, such as facility rent, utilities, maintenance and other costs, as well as salaries, wages and related benefits associated with personnel who are responsible for the delivery of services, and the operation and maintenance of our network.



The increase in network related expenses was primarily due to additional expenses resulting from a full year of CTF Operations in 2017 compared to only nine months in 2016 and an increase in outside services (primarily related to storm-related costs) which was partially offset by reduced compensation costs related to lower employee headcount and certain benefits, including pension and OPEB expense (as discussed below). There was also a reduction in rent expense as a result of more of the vehicle fleet being financed under capital leases than operating leases.



SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES









 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the year ended December 31,

 

$ Increase

 

% Increase

 

($ in millions)

 

2017

 

2016

 

(Decrease)

 

(Decrease)

 



 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and