UNITED STATES SECURITIES AND EXCHANGE COMMISSION



WASHINGTON, D.C.  20549



FORM 10-Q

(Mark One)

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



For the quarterly period ended March 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



FRONTIER COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)



(203) 614-5600

(Registrant's telephone number, including area code)



N/A

(Former name, former address and former fiscal year, if changed since last report)



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 Web site, 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 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 X   



The number of shares outstanding of the registrant’s Common Stock as of May 1, 2017 was 1,178,069,000

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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES



Index





 

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PART I.  FINANCIAL INFORMATION



Item 1.Financial Statements



FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

($ in millions and shares in thousands, except for per-share amounts)





The accompanying Notes are an integral part of these Consolidated Financial Statements.

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PART I.  FINANCIAL INFORMATION (Continued)



FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

($ in millions and shares in thousands, except for per-share amounts)

(Unaudited)







CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

($ in millions)

(Unaudited)







The accompanying Notes are an integral part of these Consolidated Financial Statements. 



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PART I.  FINANCIAL INFORMATION (Continued)



FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2017

($ in millions and shares in thousands)

(Unaudited)



































































The accompanying Notes are an integral part of these Consolidated Financial Statements.

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PART I.  FINANCIAL INFORMATION (Continued)



FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

($ in millions)

(Unaudited)







The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

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(1)   Summary of Significant Accounting Policies:

(a)   Basis of Presentation and Use of Estimates:

Frontier Communications Corporation and its subsidiaries are referred to as “we,” “us,” “our,” “Frontier,” or the “Company” in this report. Our interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2016. Certain reclassifications of amounts previously reported have been made to conform to the current presentation, as described in Note 2 – Recent Accounting Literature.  All significant intercompany balances and transactions have been eliminated in consolidation. These interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring accruals) considered necessary, in the opinion of Frontier’s management, to present fairly the results for the interim periods shown. Revenues, net loss and cash flows for any interim periods are not necessarily indicative of results that may be expected for the full year. For our interim financial statements as of and for the period ended March 31, 2017, we evaluated subsequent events and transactions for potential recognition or disclosure through the date that we filed this Form 10-Q with the Securities and Exchange Commission (SEC). 



Effective April 1, 2016, Frontier’s scope of operations and balance sheet changed materially as a result of the completion of the CTF Acquisition, as described in Note 3 – Acquisitions. Historical financial data presented for Frontier is not indicative of the future financial position or operating results for Frontier, and includes the results of the CTF Operations, as defined in Note 3 – Acquisitions, from the date of acquisition on April 1, 2016.



The preparation of our interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities at the date of the financial statements, (ii) the disclosure of contingent assets and liabilities, and (iii) the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. Estimates and judgments are used when accounting for the allowance for doubtful accounts, asset impairments, indefinite-lived intangibles, depreciation and amortization, income taxes, business combinations, and pension and other postretirement benefits, among others.



We operate in one reportable segment. Frontier provides both regulated and unregulated voice, data and video services to residential, business and wholesale customers and is typically the incumbent voice services provider in its service areas.



(b)  Revenue Recognition:

Revenue is recognized when services are provided or when products are delivered to customers. Revenue that is billed in advance includes monthly recurring network access services (including data services), special access services and monthly recurring voice, video and related charges. The unearned portion of these fees is initially deferred as a component of “Advanced billings” on our consolidated balance sheet and recognized as revenue over the period that the services are provided. Revenue that is billed in arrears includes non-recurring network access services (including data services), switched access services and non-recurring voice and video services. The earned but unbilled portion of these fees is recognized as revenue in our consolidated statements of operations and accrued in “Accounts receivable” on our consolidated balance sheet in the period that the services are provided. Excise taxes are recognized as a liability when billed. Installation fees and their related direct and incremental costs are initially deferred and recognized as revenue and expense over the average term of a customer relationship. We recognize as current period expense the portion of installation costs that exceeds installation fee revenue.



Frontier collects various taxes from its customers and subsequently remits these taxes to governmental authorities. Substantially all of these taxes are recorded through the consolidated balance sheet and presented on a net basis in our consolidated statements of operations. We also collect Universal Service Fund (USF) surcharges from customers (primarily federal USF) that we have recorded on a gross basis in

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our consolidated statements of operations and included within “Revenue” and “Network related expenses” of $53 million and $39 million for the three months ended March 31, 2017 and 2016, respectively.



In 2015, we accepted the FCC’s Connect America Fund (CAF) Phase II offer of support, which is a successor to and augments the USF frozen high cost support that we had been receiving pursuant to a 2011 FCC order.  Upon completion of the CTF Acquisition, Frontier assumed the CAF Phase II support and related obligations that Verizon had previously accepted with regard to California and Texas.  CAF Phase II funding is a program intended to subsidize the high cost of establishing and delivering communications services to certain unserved or underserved areas.  We are recognizing these subsidies into revenue on a straight line basis, which is consistent with how the costs related to these subsidies are being and are expected to be incurred. CAF Phase II is a multi-year program which requires us to deploy broadband to a specified number of households in each of the states where funding was accepted. Failure to meet our deployment obligations at the end of the program in 2020 will result in a return of a portion of the funding received. We regularly evaluate our ability to meet our broadband deployment obligations and adjust revenue accordingly.



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











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The following table provides a summary of revenues from external customers by the categories of Frontier’s products and services:





(c)   Goodwill and Other Intangibles:

Goodwill represents the excess of purchase price over the fair value of identifiable tangible and intangible net assets acquired. We have undertaken studies to determine the fair values of assets and liabilities acquired as well as to allocate the purchase price to assets and liabilities, including property, plant and equipment, goodwill and other identifiable intangibles. We examine the carrying value of our goodwill and trade name annually as of December 31, or more frequently, as circumstances warrant, to determine whether there are any impairment losses. We test for goodwill impairment at the “operating segment” level, as that term is defined in GAAP.



We determined that we have one operating segment based on a number of factors that our management uses to evaluate and run our business operations, including similarities of customers, products and technology.  We tested goodwill for impairment as of March 31, 2017 as a result of a) the changes in organizational structure and the corresponding changes in management reporting to the chief operating decision makers during the first quarter of 2017 and b) the decline in share price of our common stock from December 31, 2016.  There was no indication of impairment as a result of our testing.  Significant changes in the assumptions or estimates used in our impairment analyses, such as a reduction in profitability and/or cash flows, could result in a non-cash goodwill and indefinite-lived intangible asset impairment charge and materially affect our operating results. If the assumptions for either of our EBITDA (defined as operating income, net of acquisition and integration costs, non-cash pension and OPEB costs, pension settlement costs, and restructuring costs and other charges, plus depreciation and amortization) or EBITDA multiple were to decrease by 10% there would be an indication of impairment.   Further declines in our stock price could also indicate impairment.



Frontier amortizes finite-lived intangible assets over their estimated useful lives on the accelerated method of sum of the years digits. We review such intangible assets at least annually as of December 31 to assess whether any potential impairment exists and whether factors exist that would necessitate a change in useful life and a different amortization period.    





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(2) Recent Accounting Literature:



Recent Accounting Pronouncements Not Yet Adopted



Revenue Recognition

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers.” This standard, along with its related amendments, requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which Frontier expects to be entitled in exchange for those goods or services. This new standard will be adopted by Frontier for annual and interim reporting periods beginning with the first quarter of 2018. 



The FASB allows two adoption methods under ASC 606. Companies are permitted to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. We currently plan to adopt the standard in the first quarter of 2018, using the “modified retrospective method.” Under that method, we will apply the rules to all contracts existing as of January 1, 2018, recognizing in beginning retained earnings, a cumulative-effect adjustment to include the establishment of contract asset and contract liability accounts with a corresponding adjustment to retained earnings and providing additional disclosures comparing revenue recognized under ASC 606 to revenue reported under the previous accounting standards.



Upon initial evaluation, we believe the key changes in the standard that impact our revenue recognition relate to the allocation of contract revenues among various services and equipment, and the timing of when those revenues are recognized. Additionally, the new standard will impact the timing of recognizing costs to obtain contracts. This includes a change in our existing policy related to the way we account for customer incentives, upfront non-recurring charges, commission payments, customer disputes and the allocation of discounts.



We have established a cross-functional team to implement the standard and are in the process of identifying and implementing changes to our systems, processes, policies and internal controls to meet the standard’s reporting and disclosure requirements.



Leases

In February 2016, the FASB issued ASU No. 2016 – 02, “Leases (Topic 842).” This standard establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. Upon implementation, lessees will need to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. It will be critical to identify leases embedded in a contract to avoid misstating the lessee’s balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. Existing sale-leaseback guidance, including guidance for real estate, is replaced with a new model applicable to both lessees and lessors. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Frontier is currently evaluating the impact of adopting the new standard, but has not yet determined the impact of adoption on its consolidated financial statements.



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Compensation – Retirement Benefits

In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”.  This standard was established to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost by requiring that an employer disaggregate the service cost component of periodic benefit cost from the other components of net benefit cost.  The amendments in the update also provide explicit guidance on how to present the service cost component and other components of net benefit cost in the income statement and allow only the service cost components of net benefit cost to be eligible for capitalization.  The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Frontier is currently evaluating the impact of adopting the new standard and has not yet determined the impact of adoption on its consolidated financial statements.



Intangibles – Goodwill

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” This standard was established to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Frontier is currently evaluating the impact of adopting the new standard and has not yet determined the impact of adoption on its consolidated financial statements.



Recently Adopted Accounting Pronouncements



Compensation – Stock Compensation

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” to amend ASC Topic 718, “Compensation – Stock Compensation.” The ASU is part of the FASB’s ongoing simplification initiative, which is designed to reduce cost and complexity while maintaining or improving the usefulness of the information provided to the users of financial statements. The simplifications address a variety of areas for public entities, including the following: 1) accounting for income taxes, 2) classification of excess tax benefits on the statement of cash flows, 3) forfeitures, 4) minimum statutory tax withholding requirements, 5) classifications of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes, and 6) classification of awards with repurchase features. This guidance was effective for Frontier as of the first quarter of 2017.  During the three months ended March 31, 2017 Frontier recognized $2 million of income tax expense and recorded a cumulative effect adjustment to beginning accumulated deficit of $1 million to recognize all unrecognized deferred tax benefits recorded as of January 1, 2017.  For the three months ended March 31, 2016, Frontier reclassified $10 million of taxes paid on behalf of employees related to shares withheld from “Cash flows provided from (used by) operations” to “Cash flows used by financing activities” in accordance with the new standard. 



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(3)   Acquisitions:



The CTF Acquisition

On April 1, 2016, Frontier 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 (the CTF Acquisition), pursuant to the February 5, 2015 Securities Purchase Agreement, as amended.  In addition, Frontier and Verizon settled the working capital and net debt adjustments with $15 million paid to Frontier in October 2016. As a result of the CTF Acquisition, Frontier now operates these former Verizon properties, which included approximately 2.5 million total customers, 2.1 million broadband subscribers, and 1.2 million FiOS video subscribers as of April 1, 2016 (the CTF Operations).



Our consolidated statement of operations for the three months ended March 31, 2017 includes $1,087  million of revenue and $100 million of operating income related to the operating results of the CTF Operations.

   

The final allocation of the purchase price presented below represents the effect of recording the fair value of assets acquired and liabilities assumed as of the date of the CTF Acquisition, based on the total transaction cash consideration of $9,871 million. 





The fair value estimates related to the allocation of the purchase price to Other intangibles were revised and updated during the first quarter of 2017 from the previous estimates as of December 31, 2016.  The allocation that was reported as of December 31, 2016 for Other intangibles increased $100 million, from $2,162 million to $2,262 million.  These measurement period adjustments resulted in $20 million of amortization expense during the first quarter of 2017 that would have been recorded in 2016 if the adjustments had been recognized as of the acquisition date. Other adjustments to the allocation of the purchase price for the CTF Acquisition during the first quarter of 2017 resulted in a $140 million decrease in Property, plant & equipment, a $61 million increase in Current liabilities, and a $98 million increase in Goodwill.



The total consideration exceeded the net estimated fair value of the assets acquired and liabilities assumed by $2,606 million, which we recognized as goodwill. This goodwill is attributable to strategic benefits, including enhanced financial and operational scale, market diversification and leveraged combined networks that we expect to realize. This amount of goodwill associated with the CTF Acquisition will be deductible for income tax purposes.



The Securities Purchase Agreement provides for a post-closing adjustment for both pension liabilities and pension assets. Frontier and Verizon have not completed the results of these calculations related to the final transfer of assets from Verizon to Frontier.

   

The following unaudited pro forma financial information presents the combined results of operations of Frontier and the CTF Operations as if the CTF Acquisition had occurred as of January 1, 2016. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the CTF Acquisition been completed as of January 1, 2016. In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the future financial position or operating results of Frontier. The unaudited pro forma financial information excludes acquisition and

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integration costs and does not give effect to any estimated and potential cost savings or other operating efficiencies that may result from the CTF Acquisition.  





Acquisition and Integration Costs

Acquisition costs include legal, financial advisory, accounting, regulatory and other related costs.  Integration costs include expenses that are incremental and directly related to the acquisition, which were incurred to integrate the network and information technology platforms.  Integration costs also include costs to achieve synergies and operational efficiencies directly associated with the acquisition. 



Frontier incurred operating expenses related to the CTF Acquisition as follows:





We also invested $1 million and $52 million in capital expenditures related to the CTF Acquisition during the three months ended March 31, 2017 and 2016, respectively.     

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(4)   Accounts Receivable:

The components of accounts receivable, net are as follows:







We maintain an allowance for doubtful accounts based on our estimate of our ability to collect accounts receivable. Bad debt expense, which is recorded as a reduction to revenue, was as follows:











(5)  Property, Plant and Equipment:

Property, plant and equipment, net is as follows:







Depreciation expense is principally based on the composite group method. Depreciation expense was as follows:







We adopted new estimated remaining useful lives for certain plant assets as of October 1, 2016, as a result of an annual independent study of the estimated remaining useful lives of our plant assets, with an insignificant impact to depreciation expense.



In March 2017, we sold and leased back certain properties, generating $70 million in net proceeds. We have deferred $52 million in gains, which are included in Other liabilities on our consolidated balance sheet as of March 31, 2017 and are being amortized over the related lease terms. 





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(6)  Goodwill and Other Intangibles:  

The activity in goodwill from January 1, 2017 to March 31, 2017 was as follows:  







The components of other intangibles are as follows:







Amortization expense was as follows:









Amortization expense primarily represents the amortization of our customer base acquired as a result of the CTF Acquisition, the Connecticut Acquisition in 2014 and the acquisition of certain Verizon properties in 2010 with each based on a useful life of 8 to 12 years on an accelerated method. 



(7)  Fair Value of Financial Instruments:

The following table summarizes the carrying amounts and estimated fair values for long-term debt at March 31, 2017 and December 31, 2016. For the other financial instruments including cash, accounts receivable, long-term debt due within one year, accounts payable and other current liabilities, the carrying amounts approximate fair value due to the relatively short maturities of those instruments.



The fair value of our long-term debt is estimated based upon quoted market prices at the reporting date for those financial instruments.









(8)













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(8)   Long-Term Debt: 

       The activity in our long-term debt from January 1, 2017 through March 31, 2017 is summarized as follows:













* Interest rate includes amortization of debt issuance costs and debt premiums or discounts. The interest rates at March 31, 2017 represent a weighted average of multiple issuances.



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Additional information regarding our senior unsecured debt, senior secured debt and subsidiary debt is as follows:







(1)    Represents borrowings under the 2014 CoBank Credit Agreement, as defined below.

(2)    Represents borrowings under the JPM Credit Agreement, as defined below.

(3)  Represents borrowings under the 2016 CoBank Credit Agreement, as defined below.

(4)    Interest rate represents a weighted average of the stated interest rates of multiple issuances.

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On April 17, 2017, Frontier used cash available on hand to retire $210 million of 8.25% Senior Notes that matured on such date. 



On February 27, 2017, Frontier entered into a first amended and restated credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto (the JPM Credit Agreement), pursuant to which Frontier combined its revolving credit agreement, dated as of June 2, 2014, and its term loan credit agreement, dated as of August 12, 2015.  The JPM Credit Agreement provides Frontier with more flexible terms, increases the revolving credit facility from $750 million to $850 million and extends the maturity of the revolving credit facility from 2018 to 2022, subject to acceleration clauses related to the repayment of various unsecured senior notes maturing from 2020 through 2021.  The determination of interest rates remains unchanged, and is based on margins over the Base Rate (as defined in the JPM Credit Agreement) or LIBOR, at the election of Frontier.  Interest rate margins (ranging from 0.75% to 1.75% for Base Rate borrowings and 1.75% to 2.75% for LIBOR borrowings) remain subject to adjustment based on Frontier’s Total Leverage Ratio (as defined in the JPM Credit Agreement).  The most significant change in the covenants is an increase of the maximum Leverage Ratio (as defined in the JPM Credit Agreement) to 5.25 to 1.0 initially, migrating to 5.0 to 1.0 beginning in the second quarter of 2018, 4.75 to 1.0 in the second quarter of 2019, and 4.5 to 1.0 in the second quarter of 2020.  In addition, under the JPM Credit Agreement, Frontier will be expanding the security package to include pledges of the equity interests in certain Frontier subsidiaries and guaranties by certain Frontier subsidiaries. As of March 31, 2017, the revolving credit facility was fully available and no borrowings had been made thereunder. The revolving credit facility is available for general corporate purposes but may not be used to fund dividend payments.

   

Upon completion of the CTF Acquisition on April 1, 2016, we also assumed additional debt of $600 million, including $200 million aggregate principal amount of 6.75% Senior Notes due May 15, 2027,  $300 million aggregate principal amount of 6.86% Senior Notes due February 1, 2028 and $100 million aggregate principal amount of 8.50% Senior Notes due November 15, 2031.



On September 25, 2015, Frontier completed a private offering of $6,600 million aggregate principal amount of unsecured Senior Notes, as follows: $1,000 million of 8.875% Senior Notes due 2020;  $2,000 million of 10.500% Senior Notes due 2022; and $3,600 million of 11.000% Senior Notes due 2025. Each was issued at a price equal to 100% of its principal amount. Frontier used the net proceeds from the offering (after deducting underwriting fees) to finance a portion of the cash consideration paid in connection with the CTF Acquisition and to pay related fees and expenses. In June 2016, we completed an exchange offer of registered senior notes for the privately placed senior notes. 



On February 5, 2015, we entered into a commitment for a bridge loan facility (the Verizon Bridge Facility) and recognized related interest expense of $10 million during the three months ended March 31, 2016.



Frontier has two senior secured credit agreements with CoBank, ACB, as administrative agent, lead arranger and a lender, and the other lenders party thereto: the first, for a $350 million senior term loan facility drawn in 2014 (the 2014 CoBank Credit Agreement), matures on October 24, 2019, and the second, for a $315 million senior term loan facility drawn in October 2016 (the 2016 CoBank Credit Agreement), matures on October 12, 2021. We refer to the 2014 CoBank Credit Agreement and the 2016 CoBank Credit Agreement collectively as the CoBank Credit Agreements.



Repayment of the outstanding principal balance under each of the CoBank Credit Agreements is being made in quarterly installments ($9 million, with respect to the 2014 CoBank Credit Agreement, and $8 million, with respect to the 2016 CoBank Credit Agreement), in each case with the remaining outstanding principal balance to be repaid on the applicable maturity date.  Borrowings under each of the CoBank Credit Agreements bear interest based on the margins over the Base Rate (as defined in the applicable CoBank Credit Agreement) or LIBOR, at the election of Frontier.



On March 29, 2017, Frontier amended the 2014 and 2016 CoBank Credit Agreements. The amendments provide that interest rate margins under each of these facilities will range from 0.875% to 3.875% for Base Rate borrowings and 1.875% to 4.875% for LIBOR borrowings, subject to adjustment based on our Total Leverage Ratio, as defined in each credit agreement. The interest rate on each of the facilities as of March 31, 2017 was

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LIBOR plus 3.875%. In addition, the amendments provide for increases in the maximum Leverage Ratio and expansion of the security package identical to those contained in the JPM Credit Agreement.



As of March 31, 2017, we were in compliance with all of our indenture and credit facility covenants.



Our scheduled principal payments are as follows as of March 31, 2017:





(9) Restructuring Costs

As of March 31, 2017, restructuring related liabilities of $9 million pertaining to employee separation charges were included in “Other current liabilities” in our consolidated balance sheet.



Restructuring costs and other charges, primarily consisting of severance and other employee-related costs of $12 million in connection with workforce reductions, are included in “Restructuring costs and other charges” in our consolidated statement of operations for the three months ended March 31, 2017.



The following is a summary of the changes in the liabilities established for restructuring programs at March 31, 2017:





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(10) Investment and Other Income, Net:

       The components of investment and other income, net are as follows:





For the three months ended March 31, 2016 we received interest and dividend income of $11 million, primarily due to interest earned on restricted cash during the first quarter of 2016.

















(11)  Income Taxes: 

The following is a reconciliation of the provision for income taxes computed at the federal statutory rate to income taxes computed at the effective rate: 







Income taxes for the three months ended March 31, 2017 include the impact of $2 million of income tax expense resulting from the adoption of ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.”



Amounts pertaining to income tax related accounts of $51 million and $55 million are included in “Income taxes and other current assets” in the consolidated balance sheets as of March 31, 2017 and December 31, 2016, respectively.



In February 2017, we received a state income tax refund of $3 million. 



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(12)  Net Loss Per Share:

The reconciliation of the net loss per share calculation is as follows:







In calculating diluted net loss per common share for the three months ended March 31, 2017 and 2016, the effect of all common stock equivalents is excluded from the computation as the effect would be antidilutive.



Stock Options

For the three months ended March 31, 2017 and 2016, options to purchase 40,000 and 50,000 shares, respectively, issuable under employee compensation plans were excluded from the computation of diluted earnings (loss) per share (EPS) for those periods because the exercise prices were greater than the average market price of our common stock and, therefore, the effect would be antidilutive.



Stock Units

At March 31, 2017 and 2016, we had 2,095,000 and 1,537,000 stock units, respectively, issued under the Non-Employee Directors’ Deferred Fee Equity Plan (Deferred Fee Plan), the Non-Employee Directors’ Equity Incentive Plan (Directors’ Equity Plan) and the 2013 Equity Incentive Plan. These securities have not been included in the diluted EPS calculation because their inclusion would have an antidilutive effect. Compensation costs associated with the issuance of stock units were $(2) million and $2 million for the three months ended March 31, 2017 and 2016, respectively.



Mandatory Convertible Preferred Stock

The impact of the common share equivalents associated with the 19,250,000 shares of Series A Preferred stock were not included in the diluted EPS calculation as of March 31, 2017 and 2016, as their impact was antidilutive.

 



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(13)Stock Plans:

At March 31, 2017, we had six stock-based compensation plans under which grants were made and awards remained outstanding. No further awards may be granted under five of the plans: the 1996 Equity Incentive Plan (the 1996 EIP), the Amended and Restated 2000 Equity Incentive Plan (the 2000 EIP), the 2009 Equity Incentive Plan (the 2009 EIP), the Deferred Fee Plan and the Directors’ Equity Plan. At March 31, 2017, there were 20,000,000 shares authorized for grant and 295,000 shares available for grant under the 2013 Equity Incentive Plan (the 2013 EIP and together with the 1996 EIP, the 2000 EIP and the 2009 EIP, the EIPs). Our general policy is to issue treasury shares upon the grant of restricted shares and the exercise of options.



Performance Shares

On February 16, 2017, the Compensation Committee of our Board of Directors granted approximately 2,361,000 performance shares under the Frontier Long Term Incentive Plan (the LTIP) and set the operating cash flow performance goal for 2017, which applies to the first year in the 2017-2019 measurement period, the second year of the 2016-2018 measurement period and the third year of the 2015-2017 measurement period.



The following summary presents information regarding LTIP target performance shares as of March 31, 2017 and changes during the three months then ended with regard to LTIP shares awarded under the 2009 EIP and the 2013 EIP:







For purposes of determining compensation expense, the fair value of each performance share is measured at the end of each reporting period and, therefore, will fluctuate based on the price of Frontier common stock as well as performance relative to the targets. For the three months ended March 31, 2017 and 2016, we recognized compensation expense, reflected in “Selling, general and administrative expenses,” of $(1) million and $1 million, respectively, for the LTIP.



Restricted Stock

The following summary presents information regarding unvested restricted stock as of March 31, 2017 and changes during the three months then ended with regard to restricted stock granted under the 2009 EIP and the 2013 EIP:







For purposes of determining compensation expense, the fair value of each restricted stock grant is estimated based on the average of the high and low market price of a share of our common stock on the date of grant. Total remaining unrecognized compensation cost associated with unvested restricted stock awards that is

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deferred at March 31, 2017 was $41 million, and the weighted average vesting period over which this cost is expected to be recognized is approximately 2 years.



Shares of restricted stock granted during the first three months of 2016 totaled 4,617,000. The total fair value of shares of restricted stock granted and vested at March 31, 2016 was approximately $26 million and $20 million, respectively. The total fair value of unvested restricted stock at March 31, 2016 was $45 million. The weighted average grant date fair value of restricted shares granted during the three months ended March 31, 2016 was $4.17 per share.



We have granted restricted stock awards to employees in the form of our common stock. None of the restricted stock awards may be sold, assigned, pledged or otherwise transferred, voluntarily or involuntarily, by the employees until the restrictions lapse, subject to limited exceptions. The restrictions are time-based. Compensation expense, recognized in “Selling, general and administrative expenses,” of $4 million for each of the three month periods ended March 31, 2017 and 2016, has been recorded in connection with these grants.  



(14)Comprehensive Income (Loss):

Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting shareholders’ investment and pension/postretirement benefit (OPEB) liabilities that, under GAAP, are excluded from net loss.



The components of accumulated other comprehensive loss, net of tax at March 31, 2017 and 2016, and changes for the three months then ended, are as follows:





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As a result of the pension settlement accounting discussed in Note 15, the Frontier Communications Pension Plan (the Pension Plan) was remeasured as of March 31, 2017.  Frontier recorded a remeasurement charge of $48 million to Other Comprehensive Income primarily due to the increase in the market value of the assets after remeasurement.  The discount rate after remeasurement remained 4.10% at March 31, 2017. Additionally, the Company recorded a pension settlement charge of $43 million to Other Comprehesive Income.  Refer to Note 15 for details about the settlement accounting.



The significant items reclassified from each component of accumulated other comprehensive loss for the three months ended March 31, 2017 and 2016 are as follows:





(a) Amounts in parentheses indicate losses.

(b) These accumulated other comprehensive loss components are included in the computation of net periodic pension and OPEB costs (see Note 15 - Retirement Plans for additional details).







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(15)  Retirement Plans: 

The following tables provide the components of total benefit cost:











During the first three months of 2017 and 2016, we capitalized $7 million and $6 million, respectively, of pension and OPEB expense into the cost of our capital expenditures, as the costs relate to our engineering and plant construction activities.



The Pension Plan contains provisions that provide certain employees with the option of receiving a  lump sum payment upon retirement.  Frontier’s accounting policy is to record these payments as a settlement only if, in the aggregate, they exceed the sum of the annual service and interest costs for the Pension Plan’s net periodic pension benefit cost. During the three months ended March 31, 2017, lump sum pension settlement payments to terminated or retired individuals amounted to $255 million, which exceeded the settlement threshold of $234 million, and as a result, Frontier recognized a non-cash settlement charge of $43 million during the first quarter of 2017. The non-cash charge accelerated the recognition of a portion of the previously unrecognized actuarial losses in the Pension Plan. This non-cash charge increased our recorded net loss and accumulated deficit, with an offset to accumulated other comprehensive loss in shareholders’ equity. Additional pension settlement charges will be required in each subsequent quarter of 2017, the amount of which will be dependent on the lump sum benefit payments made during the applicable quarter. As a result of the recognition of the settlement charge in the first quarter of 2017, the net pension plan liability was remeasured as of March 31, 2017 to be $665 million, as compared to the $699 million measured and recorded at December 31, 2016.  The remeasured funded status of the Pension Plan was 80%, as of March 31, 2017, similar to December 31, 2016.  Frontier did not record any adjustment to the pension plan liability, beyond the settlement charge, as a result of this remeasurement.



Our Pension Plan assets decreased from $2,766 million at December 31, 2016 to $2,608 million at March 31, 2017, a decrease of $158 million, or 6%. This decrease was a result of benefit payments of $269 million, partially offset by positive investment returns of $98 million, net of investment management and administrative fees,

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increased receivable from Verizon and the Verizon pension plan trusts of $7 million related to the CTF Acquisition, and Frontier contributions of $6  million during the first three months of 2017. 



(16)Commitments and Contingencies:

Although from time to time we make short-term purchasing commitments to vendors with respect to capital expenditures, we generally do not enter into firm, written contracts for such activities.



In June 2015, Frontier accepted the Federal Communications Commission’s (FCC) offer of support to price cap carriers under the Connect America Fund (CAF) Phase II program, which is intended to provide long-term support for broadband in high cost unserved or underserved areas. This program provides $332 million in annual support, including $49 million in annual support related to the properties acquired in the CTF Acquisition, through 2020 to make available 10 Mbps downstream/1 Mbps upstream broadband service to approximately 774,000 households across certain of the 29 states where we now operate. To the extent we do not enable the required number of households with 10 Mbps downstream/1 Mbps upstream broadband service by the end of the CAF Phase II term, we will be required to return a portion of the funds previously received.



On April 20, 2017, the FCC issued an Order that will significantly alter how Business Data Services are regulated once the rules go into effect.  Specifically, the Order adopted a test to determine, on a county-by-county basis, whether price cap ILECs’, like Frontier’s, DS1 and DS3 services will continue to be regulated.  The test is likely to result in deregulation in a substantial number of our markets.  Once implemented, the deregulation will allow Frontier to offer its DS1 and DS3 services in a manner that better responds to the competitive marketplace and allows for commercial negotiation.  The areas that remain regulated may be subject to price fluctuations depending upon the price cap formula that year.  Frontier cannot predict how these regulatory changes will result in changes to revenues at this time. 

 

We are party to various legal proceedings (including individual, class and putative class actions) arising in the normal course of our business covering a wide range of matters and types of claims including, but not limited to, general contracts, billing disputes, rights of access, taxes and surcharges, consumer protection, trademark and patent infringement, employment, regulatory, tort, claims of competitors and disputes with other carriers. 



In October 2013, the California Attorney General’s Office notified certain Verizon companies, including one of the subsidiaries that we acquired in the CTF Acquisition, of potential violations of California state hazardous waste statutes primarily arising from the disposal of electronic components, batteries and aerosol cans at certain California facilities. We are cooperating with this investigation. We have accrued an amount for potential penalties that we deem to be probable and reasonably estimated, and we do not expect that any potential penalties, if ultimately incurred, will be material in comparison to the established accrual. 



We accrue an expense for pending litigation when we determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Legal defense costs are expensed as incurred.  None of our existing accruals for pending matters, after considering insurance coverage, is material. We monitor our pending litigation for the purpose of adjusting our accruals and revising our disclosures accordingly, when required. Litigation is, however, subject to uncertainty, and the outcome of any particular matter is not predictable. We will vigorously defend our interests in pending litigation, and as of this date, 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 consolidated financial position, results of operations, or our cash flows.