UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

(Mark one)

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

For the fiscal year ended December 31, 2014

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)

 

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

 

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

 

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  X     No __

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2014 was $5,808,440,000 based on the closing price of $5.84 per share on such date.

 

The number of shares outstanding of the registrant's common stock as of February 13, 2015 was 1,002,469,000.

 

DOCUMENT INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Company's 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. 

 

 

 

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TABLE OF CONTENTS

 

 

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PART I

 

Item 1.   Business

 

Frontier Communications Corporation (Frontier) is the largest communications company providing services mainly to rural areas and small and medium-sized towns and cities in the United States. Frontier and its subsidiaries are referred to as the “Company,” “we,” “us” or “our” throughout this report. Frontier was incorporated in the state of Delaware in 1935, originally under the name of Citizens Utilities Company, and was known as Citizens Communications Company from 2000 until July 31, 2008.   

 

Our mission is to be the leader in providing communications services to residential and business customers in our markets. We are committed to delivering innovative and reliable products and solutions with an emphasis on convenience, service and customer satisfaction. We offer a variety of voice, data, and video services and products on a standalone basis and as bundled or packaged solutions. We believe that our local engagement structure, 100% U.S.–based workforce and innovative product positioning will continue to differentiate us from our competitors in the markets in which we compete.

 

Effective October 24, 2014, Frontier’s scope of operations and balance sheet capitalization changed materially as a result of the completion of the Connecticut Acquisition, as described below. 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 Connecticut operations from the date of acquisition on October 24, 2014.

 

Highlights for 2014

 

In 2014, we continued to improve our customer metrics and revenue trends while strengthening our financial profile as follows:

 

On October 24, 2014, the Company acquired the wireline properties of AT&T Inc. (AT&T) in Connecticut (the Connecticut Acquisition) for a purchase price of $2 billion in cash, excluding adjustments for working capital. Following the Connecticut Acquisition, Frontier now owns and operates the wireline broadband, voice and video business and statewide fiber network that provides services to residential, commercial and wholesale customers in Connecticut, making Connecticut our largest market. We also acquired AT&T’s U-verse® video and DISH satellite TV customers in Connecticut.

 

In September 2014, the Company completed a registered debt offering of $775 million aggregate principal amount of 6.250% senior unsecured notes due 2021, and $775 million aggregate principal amount of 6.875% senior unsecured notes due 2025. The Company used the net proceeds from the offering of these notes, together with borrowings of $350 million under a term loan agreement and cash on hand, to finance the Connecticut Acquisition.

 

During 2014, we added approximately 507,200 net broadband subscribers (an increase of approximately 27%),  bringing our total number of broadband subscribers to 2,373,900 as of December 31, 2014.  Excluding 398,600 broadband subscribers attributable to the Connecticut Acquisition,  we have added approximately 108,700 net broadband subscribers during 2014 and 220,900 net broadband subscribers since 2012.  The net increase in broadband subscribers contributed to our improved revenue performance.  

 

We continued to invest in network speed and capacity to support our goal of attracting additional customers and increasing broadband penetration. In 2014,  our broadband availability increased by over 1.4 million new households, which includes 1.3 million new households attributable to the Connecticut Acquisition, and we are now able to offer broadband to over 7.8 million households as of December 31, 2014. Since 2012, Frontier received a total of $72 million from the first round of the Federal Communications Commission’s (FCC) Connect America Fund (CAF) Phase I and $61 million related to the second round of CAF Phase I to support broadband deployment in unserved and underserved high-cost areas. We spent  $56 million of these funds on network expansion in 2014 and $94  million to date, enabling broadband for 164,000 unserved and underserved households.

 

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Total residential revenue for 2014 increased 3% as compared to 2013. Total residential revenue for 2014 included  $116 million of revenues attributable to the Connecticut Acquisition for the period from October 24, 2014 through December 31, 2014.  Excluding the Connecticut operations, total residential revenue declined 3%  as compared with 2013. Our average monthly residential revenue per customer during 2014 improved by 3%  as compared to the prior year. 

 

Total business revenue for 2014 decreased 1%  as compared to 2013. Total business revenue for 2014 included  $90 million of revenues attributable to the Connecticut Acquisition for the period from October 24, 2014 through December 31, 2014.  Excluding the Connecticut operations, total business revenue declined 5% as compared with 2013. Our average monthly business revenue per customer during 2014 improved by 1%  as compared to the prior year.   

 

Our residential customer losses, excluding the Connecticut operations, improved slightly in 2014.  We believe that this improvement in customer retention is principally due to investments in our network, our local engagement strategy, improved customer service and simplified products and pricing. In addition to our increase in broadband subscribers, we added approximately 201,300 net video subscribers during 2014,  substantially all of which were attributable to the Connecticut Acquisition. See “Customer Metrics” for additional information.

 

During 2014, we generated total revenue of $4,772 million, including customer revenue of $4,253 million and regulatory revenue of $520 million, and net cash provided by operating activities of $1,270  million. We have a well-balanced debt maturity schedule and we had available liquidity of over $1.4 billion as of December 31, 2014, comprised of cash and available credit on our $750 million revolving credit facility. 

 

Our operating results, prudent capital investments, and expense management provided a strong cash flow base and a solid financial platform for investing in our business, servicing our debt and maintaining our dividend payout in 2014. 

 

On September 10, 2014, we, along with our strategic partners DISH Network and CoBank,  launched America's Best Communities (ABC), a $10 million prize competition to stimulate growth and revitalization in small cities and towns across our footprint. The ABC contest was designed to help address the need for growth by identifying and investing in innovative ideas that small cities and towns can use to build and sustain their local economies. The winning ideas, which will be announced in 2017, will then be available as a roadmap for growth for all rural communities across the U.S. In creating this contest, we emphasize our commitment to supporting sustained economic success in small communities in the United States.

The Verizon Transaction

On February 5, 2015, the Company entered into an agreement with Verizon Communications Inc. (Verizon) to acquire Verizon’s wireline operations that provide services to residential, commercial and wholesale customers in California, Florida and Texas for a purchase price of $10.54 billion in cash (the Verizon Transaction).  As of the date of the announcement, these Verizon properties included 3.7 million voice connections, 2.2 million broadband connections, and 1.2 million FiOS® video connections.  The network being acquired is the product of substantial capital investments made by Verizon and is 54% FiOS® enabled.  Subject to regulatory approval, the transaction is expected to close in the first half of 2016.

Communications Services

 

As of December 31, 2014, we are the nation’s fourth largest Incumbent Local Exchange Carrier (ILEC), with 3.5 million customers, 2.4 million broadband subscribers and 17,400 employees.  Following consummation of the Connecticut Acquisition, we  now operate as an ILEC in 28 states.

 

We conduct business with both residential and business customers, and we provide the “last mile” of communications services to customers in these markets. During 2014, our customer revenue was $4,253 million, including residential revenue of $2,092 million and business revenue of $2,161 million.  At December 31, 2014, we had 2,373,900 broadband subscribers and 586,600 video subscribers.  Our services and products include:

 

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Company Strategies

The key elements of our strategy are as follows:

Lead with Broadband.    We focus on broadband as the core growth component of our service offering, either bundled with our voice and/or video services, or on a standalone basis. During 2014, we added approximately 507,200 net broadband subscribers, which include 398,600 broadband subscribers attributable to the Connecticut Acquisition, bringing our total number of broadband subscribers to 2,373,900 as of December 31, 2014. The increase in broadband subscribers contributed to our improved revenue performance.

 

We continue to expand and improve broadband availability and speed in our markets and view this investment as an opportunity to attract and retain a greater number of customers and increase average revenue per residential and business customer.  These capital expenditures include enhancing the existing outside plant by expanding fiber-based infrastructure throughout our network, upgrading network hardware and expanding transport capacity of our middle-mile and data backbone. 

 

As of December 31, 2014,  approximately 92% of the households throughout our territories had access to our wireline broadband products.  See “Network Architecture and Technology” for a table that summarizes our broadband availability to the households throughout the Company’s territories.  In addition, we have committed to federal and state regulatory authorities to expand broadband availability in certain areas and for expansion of broadband in unserved and underserved areas.  See “Regulatory Environment - Regulation of our business.” 

 

Drive Revenue Performance.  We tailor our services to the needs of our residential and business customers in the markets we serve and continually evaluate the introduction of new and complimentary products and services.  We are increasing broadband market share through innovative and simplified product packages and promotions, and we expect to improve subscription rates for broadband services.  We provide FiOS® video services in parts of three states, Frontier TV powered by U-verse® video services in Connecticut and direct broadcast satellite services from DISH in all of our markets.  We have implemented several growth initiatives, including new products and services, such as wireless broadband, satellite broadband,  satellite video and “Frontier Secure” computer security and premium technical support. We will continue to focus on growing those products and services, and review opportunities to offer new ones. Our marketing strategy includes the sale of voice, data and video services as standalone offerings and bundled packages and the selective use of promotions and incentives to drive market share through a variety of channels.  We believe these marketing strategies yield increased revenue per customer, strong customer relationships and improved customer retention. 

 

Keep our Customers.  Our strategy includes engaging our markets at the local level to ensure that we have a customer-driven sales and service focus that differentiates us from our competitors.  Our markets are operated by local managers responsible for the customer experience, as well as the financial results in these markets.  We invest in infrastructure improvements and enhancements each year, recognizing that the economic livelihood of the communities we serve will affect opportunities to grow the business. We are involved in these communities to create a competitive advantage through long-term customer loyalty.  We are committed to providing best-in-class service throughout our markets and, by doing so, we expect to maximize retention of current customers and gain new customers.    We continue to invest to provide an optimal customer experience to include enhancing our customer service operations,  efficiently provide service to new customers, and timely service resolutions for existing customers.

 

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Invest in Our Network.    In 2014, Frontier continued to expand the capacity and capability of its network. Frontier is in year two of a three-year program to deploy next generation Broadband Remote Access Servers throughout our network to facilitate the expansion of broadband and increase broadband speeds. Frontier continued to expand and upgrade its premium Ethernet service offerings across its network and also achieved Metro Ethernet Forum 2.0 certification. Driven by the Connecticut Acquisition, Frontier upgraded its VoIP platform with next generation Call Control and VoIP Application Feature servers, which Frontier intends to leverage across the entire footprint and also provide the capability to reach customers outside its existing markets.

 

Improve Productivity and Operational Efficiency.  We continue to engage in productivity initiatives in order to maintain and improve our profit margins.  We focus on simplifying our processes, eliminating redundancies and further reducing our cost structure while improving our customer service capabilities. 

 

Based on current estimates and assumptions, we expect to achieve synergies with respect to the operations acquired in the Connecticut Acquisition, principally (1) by leveraging the scalability of our existing corporate administrative functions and information technology and network systems, (2) by internalizing certain functions formerly provided by third-party service providers and (3) operating the business more efficiently.  We estimate that our annualized synergies resulting from our operation of the Connecticut operations versus its historical results will reach approximately $200 million by the end of 2017 as we implement our targeted list of initiatives.  As of December 31, 2014, we estimated that approximately $165 million of expected annualized synergies had been realized.

 

These future synergies are based on our current estimates and assumptions that, although we consider them reasonable, are inherently uncertain.  Significant business, economic, competitive and regulatory uncertainties and contingencies, all of which are difficult to predict and many of which are beyond our control, may affect these expected synergies. 

 

Evaluate Strategic Initiatives.  We selectively evaluate and may pursue strategic acquisitions that would enhance shareholder value.  On October 24, 2014, the Company acquired the wireline properties of AT&T in Connecticut. On February 5, 2015, the Company entered into an agreement with Verizon to acquire Verizon’s wireline operations in California, Florida and Texas.  We consider transactions that we believe present opportunities consistent with our overall business strategy, that complement or expand our product offerings or extend our geographic scope or customer base. We will continue to adhere to our selective criteria in any acquisition analysis. 

 

Services

We offer a broad portfolio of high-quality communications services for residential and business customers in each of our markets. Our product portfolio includes voice services, Internet access, broadband-enabled services and video services. We offer these services both on a standalone basis and as bundled packages that are purposely designed to simplify customer purchasing decisions and to provide the customer with premium value.  Periodically, we offer selective incentives and promotions to influence customers to purchase or retain certain services.  We are staffed locally with skilled technicians and supervisors, which enables us to provide an array of communications services to meet our customers’ needs.  Our call center operations and field technicians are staffed with 100% U.S.-based employees.

 

Revenue Generation

 

We generate revenue primarily by providing: (1) data and Internet services and wireless data services; (2) basic local and long distance voice wireline services to residential and business customers in our service areas; (3) network access to interexchange carriers for origination and termination of long distance voice and data traffic; (4) sales of our own and third party video services; and (5) sales of customer premise equipment.

 

Data and Internet services. We offer a wide range of broadband services to our residential, commercial and carrier customers. Residential services include fiber-to-the-home and fiber-to-the-node broadband, video and VoIP products, as well as traditional copper-based broadband products. Commercial services include Ethernet, Dedicated Internet, Multiprotocol Label Switching (MPLS), Time Division Multiplexing (TDM) data transport services and optical transport services. These services are all supported by a 24/7 help desk and an advanced network operations center.  Such services are generally offered on a contract basis and the service is billed on a fixed monthly recurring charge basis.  Data and Internet services are typically billed in advance.

 

We also offer our Frontier Secure suite of products aimed at managing the digital experience for our customers and designed to provide value and simplicity to meet customers’ ever-changing needs.  Frontier Secure offers products and services to protect key aspects of digital life, including computer security, cloud backup and sharing, identity protection, equipment insurance and 24/7 premium U.S.-based technical support. These products and services are sold nationwide directly to consumers and small

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businesses, and wholesale through strategic partnerships under either a private brand or the Frontier Secure brand. We also provide premium technical support and customer service to other companies on a contract basis.

 

We offer wireless broadband services (using unlicensed WiFi spectrum) in select markets utilizing networks that we own or operate.  Long-term contracts are generally billed in advance on an annual or semi-annual basis.  End-user subscribers are generally billed in advance on a monthly recurring basis and businesses, colleges and universities are billed on a monthly recurring basis for a fixed number of users.  Hourly, daily and weekly casual end-users are billed by credit card at the time of use.

 

Voice services.  We provide basic wireline services to residential and business customers in our service areas.  We also provide data based VoIP services and enhanced services to our customers by offering a number of unified messaging services, including call forwarding, conference calling, caller identification, voicemail and call waiting, all of which are capable of being managed via an Internet Portal. All of these local services are billed monthly in advance. Long distance network 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 either as unlimited/fixed number of minutes in advance or on a per minute-of-use basis.

 

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

Access services.  Our switched access services allow other carriers to use our facilities to originate and terminate their local and long distance voice traffic. These services are generally offered on a month-to-month basis and the service is billed primarily on a minutes-of-use basis. Switched access charges have been based on access rates filed with the FCC for interstate services and with the respective state regulatory agency for intrastate services. On November 18, 2011, the FCC released the USF/ICC Report & Order (the 2011 Order) that, beginning in July 2012, requested that we transition to terminating switched access rates over time to near zero by July 2017. The 2011 Order enables companies to recover part of the decline through increases in subscriber line fees charged to some residential and business wireline voice customers.  While the FCC has asserted jurisdiction over these terminating access rates, during the transition the charges will continue to be based on tariffs filed with both the FCC and state regulatory agencies. Monthly recurring access service fees are billed in advance.  We also receive subsidies from state and federal authorities based on the higher cost of providing wireline service to certain rural areas that are included in our access services revenue. Beginning in July 2012, the Company began receiving federal subsidies for the deployment of broadband in unserved and high-cost areas.

Video services.    We offer FiOS® video services on a limited basis in the states of Indiana, Oregon and Washington pursuant to franchises, permits and similar authorizations issued by local franchising authorities. In connection with the Connecticut Acquisition, we offer Frontier TV powered by U-verse® to our customers in Connecticut. We continue to offer satellite TV video service to our customers under an agency relationship with DISH in all of our markets.  We receive from DISH, and recognize as revenue, activation fees, other residual fees and nominal management, billing and collection fees.

 

Customer Premise Equipment.  We offer our small, medium and enterprise business customers a wide range of third-party communications equipment tailored to their specific business needs by partnering with Mitel, Cisco, Avaya and other equipment manufacturers.  Equipment sales are most often sold in conjunction with a variety of voice, data and Internet services; however, equipment may also be sold on a standalone basis.  We recognize revenue for these equipment sales in accordance with the contracts, and separately from any related maintenance agreements, generally at time of installation and acceptance by our customers.

 

Customer Metrics

 

Our Company, like others in the industry, utilizes reporting metrics focused on units. Consistent with our strategy to focus on the customer, we also utilize residential and business customer metrics that, when combined with unit counts, provide additional insight into the results of our strategic initiatives described above.

 

 

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(1)  Calculation excludes the operations of Mohave Cellular Limited Partnership, which was sold as of April 1, 2013.

During 2014, we gained 445,300 customers, net, as compared to a loss of 98,900 customers, net, in 2013 and a loss of 240,500 customers, net, in 2012. Excluding 526,900 customers attributable to the Connecticut Acquisition,  we lost 81,600 customers, net, in 2014. We believe the improved customer retention in 2014 as compared to prior years is principally due to our investments in our network, our local engagement strategy, improved customer service and simplified products and pricing.    

 

Total residential revenue for 2014 increased  $65 million, or 3%, as compared to 2013. Total residential revenue for 2014 included  $116 million attributable to the Connecticut operations. Total residential revenue excluding the Connecticut operations declined $51 million, or 3%, as compared with 2013, primarily as a result of decreases in voice services revenue and the sale of our interest in the Mohave partnership, partially offset by increases in data services revenue. We had approximately 3,214,800, 2,803,500 and 2,887,100 total residential customers as of December 31, 2014, 2013 and 2012, respectively.  Excluding 478,100 additional residential customers attributable to the Connecticut Acquisition in 2014, we lost approximately 66,800, 83,600 and 216,700 residential customers, net, during 2014, 2013 and 2012, respectively, principally driven by declines in voice customers. Our residential customer monthly churn was 1.73%, 1.69% and 1.62% for 2014, 2013 and 2012, respectively. Average monthly residential revenue per customer (residential ARPC) increased $1.88, or 3%, to $61.11 during 2014 as compared to 2013. The overall increase in residential ARPC is due to a higher percentage of the Company’s residential customers that subscribe to broadband services and Frontier Secure products, broadband customer migration to higher speeds and increases in our video services.  The Company expects continuing increases in residential data services revenue, primarily driven by increased broadband subscribers, increases in video services and increases in voice services revenue, primarily from the full year impact of the Connecticut operations.  

 

Total business revenue for 2014 decreased  $23 million, or 1%, as compared to 2013. Total business revenue for 2014 included  $90 million attributable to the Connecticut operations. Total business revenue excluding the Connecticut operations declined $113 million, or 5%, as compared with 2013, principally as a result of decreases in our voice services revenue and wireless backhaul revenue.  We had approximately 304,700, 270,800 and 286,100 total business customers as of December 31, 2014, 2013 and 2012, respectively. Excluding 48,800 additional business customers attributable to the Connecticut Acquisition in 2014,  we lost approximately 14,900, 15,300 and 23,800 business customers, net, during 2014, 2013 and 2012, respectively. Average monthly business revenue per customer (business ARPC) increased $7.11, or 1%, to $661.15 during 2014 as compared to 2013. The overall increase in business ARPC is primarily due to declining customer counts for our small business customers that generate a lower ARPC and the addition of certain medium and large-sized customers acquired during the Connecticut Acquisition.  On a comparable full year basis, the Company expects the declines in voice services revenue and wireless backhaul from business customers to continue in 2015, mitigated, in part, by increases in business data services and video services revenue.

 

During 2014, the Company added approximately 507,200 net broadband subscribers. Excluding 398,600 broadband subscribers attributable to the Connecticut Acquisition,  we added approximately 108,700 net broadband subscribers in 2014. During 2013 and 2012, the Company added approximately 112,250 and 23,400 net broadband subscribers, respectively. The Company had 2,373,900 broadband subscribers at December 31, 2014. As of December 31, 2014, approximately 68% of our residential broadband customers subscribed to a bundle of services. As of December 31, 2014, we were able to offer broadband to approximately 7.8 million households, or 92% of the 8.5 million households in our markets.  The increase in broadband subscribers contributed to our improved data services revenue performance.  We continue to invest in network speed and capacity to support

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our goal of increasing broadband penetration and market share. We expect to continue to increase broadband subscribers in 2015. We offer FiOS® video services in three states, Frontier TV powered by U-verse® in Connecticut and satellite video services through DISH throughout our territories.  In addition, we  gained 201,300 video subscribers, net during 2014, including 196,400 video subscribers attributable to the Connecticut Acquisition.  At December 31, 2014, we had 586,600 video customers.

 

The following table sets forth total residential customers by state  as of December 31, 2014:

 

 

(1) Includes Nevada, Iowa, Nebraska, Alabama, Utah, Georgia, Montana, Mississippi, New Mexico and Florida.

 

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 has 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. 

 

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

 

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As of December 31, 2014 and 2013, we had expanded our broadband availability to the households throughout the Company’s territories as follows:

 

 

 

Rapid and significant changes in technology are expected to continue to occur in the communications industry.  Our success will depend, in part, on our ability to anticipate and adapt to technological changes.  We believe that our existing network 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. In certain markets, we have begun to offer broadband services with 1 gigabit download speed capabilities.

 

Competition

 

Competition in the communications industry is intense. We experience competition from many communications service providers, including cable operators offering video, data and VoIP products, wireless carriers, long distance providers, competitive local exchange carriers, Internet providers, satellite video and broadband providers and other wireline carriers.  We believe that as of December 31, 2014,  approximately 96% of the households in our territories could receive voice, data and/or video services from a competitive provider.   

 

As a result of competition and economic conditions, some of our customers may discontinue our services.  These trends may continue and may result in a continued challenging business environment.

 

We employ a number of strategies to combat the competitive pressures and changes in customer behavior noted above.  Our strategies are focused on preserving and generating new revenues through customer retention, upgrading and up-selling services to existing customers, new customer growth, win-backs of former customers, new product deployment, and by managing our profitability and cash flow through operational productivity improvements and prudent capital expenditures. 

 

On the business side of our operations, we are focused on many of the same strategies and enhancements described above as well as providing transport services (wireless backhaul) to wireless cell towers in our territories and expanding the number of people selling to and servicing our medium, enterprise and government customers with sophisticated products and services (e.g., IP PBX, E911 equipment, Ethernet, SIP trunking).

 

We are focused on enhancing the customer experience to differentiate us from our competition.  Our commitment to customer service is demonstrated by our “customer first” company philosophy, how we empower our technicians and call center employees to serve customers, 100% U.S.-based workforce, our expanded customer service hours, shorter scheduling windows for in-home appointments, call reminders and follow-up calls for service appointments.  Additionally, we seek to achieve our customer retention goals by offering attractive packages of value-added services. Our bundled services include broadband, voice, and video offerings, including simplified messaging services, higher speed products and digital security products.  

 

We are also focused on increasing sales of existing products, including video and the Frontier Secure product suite, along with selling higher speeds of broadband.  We had a total of 514,000 Frontier Secure customers as of December 31, 2014,  or 22% penetration of our broadband base,  including the recently acquired Connecticut operations, as compared to 465,000 customers at December 31, 2013, or 25% penetration of our Frontier legacy broadband base.  The decline in our penetration percentage in 2014 is primarily due to the recent addition of our Connecticut customers, to whom we previously did not offer these services. Frontier Secure offers products and services to protect key aspects of digital life, including computer security, cloud backup and sharing, identity protection, equipment insurance and 24/7 premium U.S.-based technical support. These products and services are sold nationwide directly to consumers and small businesses, and wholesale through strategic partnerships under either a private brand or the Frontier Secure brand. Although we are optimistic about the opportunities to increase revenue and reduce customer churn (i.e., customer attrition) that are provided by each of these initiatives, we cannot provide assurance about their long term profitability or impact on revenue. 

 

We believe that offering multiple products and services to our customers, providing a single bill, on-line payment capability, providing superior customer service, and being active in our local communities will develop customer loyalty, which should help us generate new, and retain existing, customers.  

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For additional discussion of our competitive strategies, see “Company Strategies” above.

 

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 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 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 the local exchange companies that are operated by us operate as incumbent carriers in the states in which they operate and are certified in those states to provide local telecommunications services.  In addition, local governments often regulate the public rights-of-way necessary to install and operate networks, and may require service providers to obtain licenses or franchises regulating their use of public rights-of-way.  Municipalities and other local government agencies also may regulate other limited aspects of our business, by requiring us to obtain cable franchises and construction permits and to abide by building codes.

Many state regulatory agencies have substantial oversight over the provision by incumbent telephone companies, like our company, of interconnection and non-discriminatory network access to competitive providers. Under the Telecommunications Act of 1996 (the “1996 Act” or the “Telecommunications Act”), state regulatory commissions have jurisdiction to arbitrate and review interconnection disputes and agreements between incumbent telephone companies, like our company, and competitive local exchange carriers, in accordance with rules set by the FCC.  The FCC and State regulatory commissions also impose fees on providers of telecommunications services within their respective states 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.

 

The FCC and certain state regulatory commissions, in connection with granting their approvals of our acquisition of certain properties of Verizon Communications Inc. in 2010 (the 2010 Acquisition), specified certain capital expenditure and operating requirements for the territories acquired in the 2010 Acquisition for specified periods of time post-closing. These requirements focus primarily on certain capital investment commitments to expand broadband availability to at least 85% of the households throughout the territories acquired in the 2010 Acquisition with minimum download speeds of 3 Mbps by the end of 2013. We are required to provide download speeds of 4 Mbps to at least 75%, 80% and 85% of the households throughout the territories acquired in the 2010 Acquisition by the end of 2013, 2014 and 2015, respectively.  As of December 31, 2013 and 2014, we met our FCC requirement for these respective years, as discussed above.

 

In addition, in certain states we are subject to operating restrictions such as rate caps and minimum service quality standards (whereby the failure to meet may result in penalties, including, in one state, cash management limitations on certain of our subsidiaries in that state). We are also 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 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 15% of our total access lines at December 31, 2014 are in state jurisdictions under the rate of return regulatory model.  We will continue to advocate for no or reduced regulation with various regulatory agencies. In some of our states, we have already been successful in reducing or eliminating price regulation on end-user services.

 

Frontier, along with all telecommunications providers, is subject to FCC rules governing privacy of certain customer information. Among other things, these rules obligate carriers to implement procedures to: protect certain customer information from inappropriate disclosure; obtain customer permission to use certain 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 during the specified periods, including our ability to raise rates in a declining revenue environment and to manage cash transfers from our subsidiaries in two states if we do not meet certain operating service criteria. 

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Some legislation and regulations are, or could in the future be, the subject of judicial proceedings, legislative hearings and administrative proposals or challenges which 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. See “Risk Factors—Risks Related to Regulation—Changes in federal or state regulations may reduce the switched access charge revenues we receive.”

 

Recent and potential regulatory developments

 

The FCC, state regulators, and federal and state legislators are currently considering a number of proposals for changing the manner in which eligibility for federal and state subsidies are determined as well as the amounts of such subsidies.

 

The FCC continues to finalize its Connect America Fund (CAF) Phase II program, which is intended to provide long-term support for broadband in high-cost areas that were unserved or underserved by a competitor. The 2011 Order established that price cap carriers, such as Frontier, would have the right of first refusal to accept support across the high-cost footprint of their state in exchange for committing to provide broadband and voice services to those areas for a term of years.  On December 18, 2014, the FCC released a Report and Order (the 2014 Order) with final rules for the right of first refusal for price cap carriers, including increasing the broadband speed obligation to 10 Mbps download, extending the term of funding to six years, and providing flexibility in meeting deployment obligations.  In the 2014 Order, the FCC indicated that it will provide the CAF II offer of support to the price cap carriers by state in early 2015.  At that time, potential CAF II recipients will have the necessary information – in particular, the offers will include how much support is available to each provider by state and which locations are eligible to fulfill the broadband deployment obligations – to decide whether to accept the CAF II funding and associated obligations or decline the CAF II funding.  Also according to the 2014 Order, the FCC will conduct a competitive bidding process to distribute CAF II funding in areas that were exempt from the CAF II right of first refusal offer. Once finalized, the Company intends to apply to the FCC for support under the 2014 Order.      

 

On November 18, 2011, the FCC adopted the 2011 Order, which changed how federal subsidies are calculated and disbursed, with these changes being phased-in beginning in July 2012. These changes transition the Federal Universal Service High Cost Fund (USF), which supports voice services in high-cost areas, to the CAF, which supports broadband deployment in high-cost areas. CAF Phase I, which was implemented in 2012 to provide interim support while the FCC developed CAF Phase II, provided for ongoing USF support for price cap carriers capped at the 2011 amount. In addition, in the first round of CAF Phase I, the FCC made available for price cap ILECs an additional $300 million in incremental high-cost broadband support to be used for broadband deployment to unserved areas. In 2012 and early 2013,  we received $72 million in CAF Phase I funds and initially recorded such funds as increases to Cash and Other liabilities in the balance sheet. The $72 million in the first round of CAF Phase I support is expected to enable an incremental 92,877 households for broadband service and was accounted for as Contribution in Aid of Construction. We are required to spend the first round of CAF Phase I funds to enable these households no later than July 24, 2015. We spent $63 million of the first round of CAF Phase I  funds on network expansion through December 31, 2014, enabling 83,100 unserved households.

 

On May 21, 2013, the FCC released a Report and Order authorizing a second round of CAF Phase I (the 2013 Order).  As part of the 2013 Order, the FCC expanded the areas eligible for funding to include those that lack service of 3 Mbps download and 768 kbps upload. In 2013 and early 2014, we received $61 million in the second round of CAF Phase I funds. We are required to spend the second round of CAF Phase I funds to enable 101,714 households no later than March 14, 2017. The second round of CAF Phase I includes certain accompanying spending requirements from the Company, and our capital expenditure plans take this into account. We spent $31 million of the second round of CAF Phase I on network expansion through December 31, 2014, enabling 80,900 unserved and underserved households.

 

In the aggregate, we spent $56 million of the CAF Phase I funds received on network expansion and upgrades during 2014 and $94 million in total through December 31, 2014, enabling and/or upgrading 164,000 households.

 

The 2011 Order also reformed Intercarrier Compensation, which is the payment framework that governs how carriers compensate each other for the exchange of interstate traffic, and it began a multi-year transition in July 2012, with the second step implemented in July 2013 and the third step in July 2014. The transition will move terminating traffic to a near zero rate by 2017. Frontier expects to be able to recover a significant portion of those revenues through end user rates and other replacement support mechanisms. The 2011 Order has been challenged by certain parties in court and certain parties have also petitioned the FCC to reconsider various aspects of the 2011 Order. On May 23, 2014, the U.S. Court of Appeals for the 10th Circuit issued a decision denying all challenges to the 2011 Order. Certain parties have continued to appeal that decision. Accordingly, we cannot predict the long-term impact at this time but believe that the 2011 Order will provide a stable regulatory framework to facilitate our ongoing focus on the deployment of broadband into our rural markets.

 

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Effective December 29, 2011, the 2011 Order required providers to pay interstate access rates for the termination of VoIP toll traffic. On April 25, 2012, the FCC, in an Order on Reconsideration, specified that changes to originating access rates for VoIP traffic would not be implemented until July 2014. The 2011 Order has been challenged by certain parties in court and certain parties have also petitioned the FCC to reconsider various aspects of the 2011 Order. The net impact of the 2011 Order during the period from July 2012 through December 2014 was insignificant. The net effect of this change to originating access after July 1, 2014 is dependent upon the percentage of VoIP traffic.

 

Future reductions in our subsidy or switched access revenues may directly affect our profitability and cash flows. Switched access and subsidy revenues continued to decline in 2014, as compared to 2013, and are expected to decline further in 2015.

 

The FCC also has an ongoing proceeding considering whether to make changes to its regulatory regime governing special access services, including whether to mandate lower rates, change standards for deregulation and pricing flexibility, or to require changes to other terms and conditions.  When and how these proposed changes will be addressed is unknown and, accordingly, we are unable to predict the impact of future changes on our results of operations.   

 

Certain state regulatory commissions regulate some of the rates ILECs charge for intrastate services, including rates for intrastate access services paid by providers of intrastate long distance services.  The 2011 Order, however, removes much of the states’ authority to set terminating intrastate switched access rates. This aspect of the 2011 Order has been challenged by certain parties in court. Certain states also have their own open proceedings to address reform to intrastate access charges and other intercarrier compensation and state universal service funds. Although the FCC has pre-empted state jurisdiction on most access charges, many states could consider moving forward with their proceedings. We cannot predict when or how these matters will be decided or the effect on our subsidy or switched access revenues. 

 

Regulators at both the federal and state levels continue to address whether VoIP services are subject to the same or different regulatory and intercarrier compensation regimes as traditional voice telephony. The FCC has concluded that VoIP and facilities-based broadband Internet access providers must comply with the Communications Assistance for Law Enforcement Act, a decision that the United States Court of Appeals for the District of Columbia Circuit has upheld.  The FCC has also required VoIP providers to provide enhanced 911 emergency calling capabilities. In the 2011 Order, the FCC has determined that VoIP-originated traffic terminating on the Public Switched Telephone Network is subject to interstate access rates.  Additionally, the 2011 Order requires VoIP providers to pay interstate terminating interconnection charges and requires all carriers terminating traffic to provide appropriate call information, thus prohibiting so-called “phantom traffic.”  However,  the FCC declined to address other VoIP-related issues, and the FCC has stated its intent to address open questions regarding the treatment of VoIP services in its ongoing “IP-Enabled Services Proceeding.” Internet telephony may have an advantage in the marketplace over our traditional services if this service remains less regulated. 

 

Current and potential Internet regulatory obligations

 

In connection with our Internet access offerings, we could become subject to laws and regulations as they are adopted or applied to the Internet, including so-called “net neutrality” rules that are intended to preserve the openness of the Internet.  There is currently only limited regulation applicable to these services.    

 

The FCC has classified wireline broadband Internet access service (whether provided over cable or telecommunications facilities), mobile wireless based broadband Internet access service and other forms of broadband Internet access services as “information services” not subject to mandatory common carriage regulation.  Specifically, the FCC has determined that these information services are functionally integrated with any underlying telecommunications component, and that there is no obligation to separate out and offer that transmission component subject to common carriage regulation.  As the significance of the Internet expands, federal, state and local governments may pass laws and adopt rules and regulations, or apply existing laws and regulations to the Internet (including Internet access services), and related matters are under consideration in both federal and state legislative and regulatory bodies.  We cannot predict whether the outcome of pending or future proceedings will prove beneficial or detrimental to our competitive position.

 

In October 2009, the FCC issued a proposed rulemaking looking at rules to “Preserve a Free and Open Internet,” (i.e., net neutrality) including a reconsideration of the legal classification of broadband and proposed restrictions on broadband network management practices. On December 21, 2010, the FCC adopted an order imposing some regulations on Internet service providers. These regulations affect fixed and mobile broadband providers differently. These regulations became effective November 20, 2011, and we are in compliance with these regulations.  On January 14, 2014, the U.S. Court of Appeals for the D.C. Circuit vacated the portions of the FCC’s rules that prohibited blocking and required non-discriminatory treatment.  On May 15, 2014, the FCC adopted a Notice of Proposed Rulemaking which sought comment on how it can preserve the spirit of the vacated rules. The Notice also sought comment on what other regulatory actions the FCC could take to implement “Open

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Internet” policies, in particular reclassifying broadband as a Title II Telecommunications service. The future state of these regulations and their effect on us is unknown.

 

Video programming 

 

Federal, state and local governments extensively regulate the video services industry.  Our FiOS® and Frontier TV powered by U-verse® 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 certain of our markets in Oregon, Washington, Indiana and Connecticut 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 significant 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 only one reportable segment.

 

Financial Information about Foreign and Domestic Operations and Export Sales

 

We have no foreign operations.

 

General

 

Order backlog is not a significant consideration in our business.  We have no material contracts or subcontracts that may be subject to renegotiation of profits or termination at the election of the federal government. 

 

Intellectual Property

 

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

 

Employees

 

As of December 31, 2014, we had approximately 17,400 employees, as compared to approximately 13,650 employees as of December 31, 2013.  We added approximately 2,400 employees in connection with the Connecticut Acquisition, of which approximately 90%  are represented by unions.  Approximately 10,300 of our total employees are represented by unions.  The number of employees covered by collective bargaining agreements that expired in 2014, but have been extended and are still effective for 2015, is approximately 1,000. The number of employees covered by collective bargaining agreements that expire in 2015 is approximately 1,400.  We consider our relations with our employees to be good.

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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 the Company and other issuers that file electronically. 

 

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

 

We also make available on our website, as noted above, or in printed form upon request, free of charge, our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Specific Code of Business Conduct and Ethics Provisions for Certain Officers, and the charters for the Audit, Compensation, and Nominating and Corporate Governance committees of the Board of Directors.  Stockholders may request printed copies of these materials by writing to: 3 High Ridge Park, Stamford, Connecticut 06905 Attention: Corporate Secretary. 

 

Forward-Looking Statements

 

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

 

 

 

 

 

 

 

 

 

 

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Any of the foregoing events, or other events, could cause financial information 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 on Form 10-K or otherwise made by us or on our behalf.  The following information is unaudited and should be read in conjunction with the consolidated financial statements and related notes included in this report.  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 Form 10-K and our subsequent periodic filings with the SEC.  In particular, you should carefully consider the risk factors described below and the risks and uncertainties related to “Forward-Looking Statements”, any of which could materially adversely affect our business, operating results, financial condition and the actual outcome of matters as to which forward-looking statements are made in this annual report.   The risks and uncertainties described below are not the only ones facing our Company.  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 the Verizon Transaction

 

We may not consummate the Verizon Transaction on the terms or timeline currently contemplated or at all.

 

The consummation of the Verizon Transaction is subject to certain conditions, including (i) the absence of a court or other governmental order prohibiting consummation of the transaction, (ii) the receipt of applicable regulatory consents, (iii) the absence of a material adverse effect on the business to be acquired from Verizon and (iv) other customary closing conditions.  We can make no assurances that the Verizon Transaction will be consummated on the terms or timeline currently contemplated, or at all.  We have expended and will continue to expend a significant amount of capital and management’s time and resources on the Verizon Transaction, and a failure to consummate the Verizon Transaction as currently contemplated, or at all, could have an adverse effect on our business, our results of operations and cash flows.  In addition, we may choose to raise all or a portion of the financing required to complete the Verizon Transaction prior to the closing of such transaction.  If we do so, and if the Verizon Transaction is ultimately not consummated or is delayed for a significant period of time, we could be obligated to pay significant interest expense, dividends and other costs in connection with the financing without achieving the expected benefits of the Verizon Transaction.  The trading price of our securities could be adversely affected if the Verizon Transaction is not consummated as currently contemplated, or at all.

 

Our effort to combine our business and the business to be acquired from Verizon may not be successful.

 

The Company is devoting a significant amount of time and attention to the process of integrating the operations of our business and the business to be acquired from Verizon, which may decrease the time that management will have to serve existing customers, attract new customers and develop new services or strategies.  The size and complexity of the acquired business and the process of using our existing common support functions and systems to manage the acquired business after the acquisition, if not managed and completed successfully by management, may result in interruptions of the business activities of the Company that could have an adverse effect on the Company’s business, financial condition and results of operations.

 

We may not realize the cost synergies that are anticipated from the Verizon Transaction.

 

The success of the Verizon Transaction will depend, in part, on our ability to realize anticipated cost synergies.  The Company’s success in realizing these cost synergies, and the timing of this realization, depends on the successful integration of our business and operations with the acquired business and operations.  Even if the Company is able to integrate the acquired businesses and operations successfully, this integration may not result in the realization of the full benefits of the cost synergies that Frontier currently expects within the anticipated time frame or at all.

 

If the assets included in the business to be purchased from Verizon are insufficient to operate the acquired business, it could adversely affect the Company’s business, financial condition and results of operations.

 

Pursuant to the securities purchase agreement executed in connection with the Verizon Transaction, Verizon will contribute to the acquired business certain assets and liabilities of its local exchange business and related landline activities in California, Florida and Texas, including video, broadband internet and switched long distance services provided to designated customers located in those states.  However, the contributed assets may not be sufficient to operate all aspects of the acquired business and the Company may have to use assets or resources from our existing business or acquire additional assets in order to operate the acquired business, which could cost the Company more than we anticipate.

 

 

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The Company’s business, financial condition and results of operations may be adversely affected following consummation of the Verizon Transaction if the Company is not able to obtain requisite consents or enter into certain agreements.

 

The products and services of the acquired business are currently provided by Verizon to certain customers pursuant to master agreements, together with other Verizon products or services.  Pursuant to the securities purchase agreement, we and Verizon have jointly agreed to use our reasonable best efforts for six months following the consummation of the Verizon Transaction to obtain any consents required to separate from such master agreements and assign to Frontier the portion thereof related to the acquired business.  To the extent that the parties are not able to obtain any such required consent, such contracts will not be assigned to us and we may not be able to establish a direct relationship with such customers.

 

Regulatory agencies may delay approval of the Verizon Transaction, fail to approve it, or approve it in a manner that may diminish the anticipated benefits of the Verizon Transaction.

 

Completion of the Verizon Transaction is conditioned upon the receipt of certain government consents, approvals, orders and authorizations.  While we intend to pursue vigorously all required governmental approvals and do not know of any reason why we would not be able to obtain the necessary approvals in a timely manner, the requirement to receive these approvals before completion of the Verizon Transaction could delay its completion.  A lengthy delay in the completion of the Verizon Transaction could diminish the anticipated benefits and/or result in additional transaction and financing costs, loss of revenues or other effects associated with uncertainty about the transaction.  In addition, until the Verizon Transaction is completed, the attention of Frontier management may be unnecessarily diverted from ongoing business and regular business responsibilities.

 

Further, governmental agencies may decline to grant required approvals, or they may impose conditions on their approval of the Verizon Transaction that could have an adverse effect on the Company’s business, financial condition and results of operations.  If certain governmental agencies decline to grant any required approval for the Verizon Transaction, the Verizon Transaction may not be consummated.  In addition, conditions imposed by governmental agencies in connection with their approval of the Verizon Transaction (such as service quality or capital expenditure requirements) may restrict the Company’s ability to achieve anticipated synergies, revenues and cash flows.

 

The securities purchase agreement contains provisions that may discourage other companies from trying to acquire Frontier.

 

The securities purchase agreement for the Verizon Transaction contains provisions that may discourage a third party from submitting a business combination proposal to us prior to the closing of the Verizon Transaction that might result in greater value to our stockholders than the Verizon Transaction.  The securities purchase agreement provides that we may not sell all or substantially all of our assets unless the buyer assumes in writing our obligations, including the payment of the purchase price, under the securities purchase agreement.  This would represent an additional cost for a potential third party seeking a business combination with us.

 

Our stock price may be adversely affected if we are unable to consummate the Verizon Transaction.

 

If the Verizon Transaction is not completed for any reason, the trading price of Frontier’s common stock may decline to the extent that the market price of the common stock reflects positive market assumptions that the Verizon Transaction will be completed and the related benefits will be realized.  Frontier may also be subject to additional risks if the Verizon Transaction is not completed, including:

 

 

 

 

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The pendency of the Verizon Transaction could adversely affect the business and operations of Frontier and the acquired business.

 

In connection with the pending Verizon Transaction, some customers of the acquired business may delay or defer decisions or may end their relationships with Verizon prior to completion of the Verizon Transaction or with the Company after the Verizon Transaction closes.

 

Risks Related to Our Business 

 

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

 

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

 

We face intense competition.

 

The communications industry is extremely competitive. Through mergers and various service expansion strategies, service providers are striving to provide integrated solutions both within and across geographic markets.  Our competitors include competitive local exchange carriers, Internet service providers, wireless companies, VoIP providers and cable companies, some of whom may be subject to less regulation than we are, that may provide services competitive with the services that we offer or intend to introduce.  We also believe that wireless and cable telephony providers have increased their penetration of various services in our markets.  We expect that competition will remain robust.  Our revenue and cash flow will be adversely impacted if we cannot reverse our customer losses or continue to provide high-quality services.

 

We cannot predict which of the many possible future technologies, products or services will be important in order to maintain our competitive position or what expenditures will be required to develop and provide these technologies, products or services.  Our ability to compete successfully will depend on the success of capital expenditure investments in our properties, in addition to our new marketing efforts, our ability to anticipate and respond to various competitive factors affecting the industry, including a changing regulatory environment that may affect our business and that of our competitors differently, new services that may be introduced, changes in consumer preferences, demographic trends, economic conditions and pricing strategies by competitors.  Increasing competition may reduce our revenues and increase our marketing and other costs as well as require us to increase our capital expenditures and thereby decrease our cash flows.

 

We may not realize the expected cost synergies from the Connecticut Acquisition.

 

The Company is devoting a significant amount of time and attention to the Connecticut operations acquired from AT&T.  The success of the Connecticut Acquisition will depend, in part, on our ability to realize anticipated cost synergies. Even though the Company has integrated the acquired businesses and operations successfully, this integration may not result in the realization of the full benefits of the cost synergies that Frontier currently expects within the anticipated time frame or at all. 

 

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

 

Some of our competitors have market presence, engineering, technical, marketing and financial capabilities, substantially greater than ours.  In addition, some of these competitors are able to raise capital at a lower cost than we are able to. Consequently, some of these competitors may be able to develop and expand their communications and network infrastructures more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily and devote greater resources to the marketing and sale of their products and services than we will be able to.  Additionally, the greater brand name recognition of some competitors may require us to price our services at lower levels in order to retain or obtain customers. Finally, the cost advantages 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.

 

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

 

We must produce adequate revenues and cash flows that, when combined with cash on hand and funds available under our revolving credit facility and other financings, will be sufficient to service our debt, fund our capital expenditures, pay our taxes, fund our pension and other employee benefit obligations and pay dividends pursuant to our dividend policy. We have experienced revenue declines in 2014 and 2013 as compared to prior years for our Frontier legacy operations, and our recently acquired Connecticut operations have experienced similar revenue declines.  While we have identified some potential areas of opportunity and implemented several revenue initiatives, we cannot assure you that these opportunities will be successful or that these initiatives will improve our financial position or our results of operations.

 

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

 

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

 

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

 

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

 

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

 

We have substantial business relationships with other communications carriers for whom we provide service.  While bankruptcies of these carriers have not had a material adverse effect on our business in recent years, future bankruptcies in the industry could result in the loss of significant customers, as well as cause more price competition and an increased allowance for doubtful accounts receivable.  Such bankruptcies may be more likely in the future if economic conditions stagnate.  As a result, our revenues and results of operations could be materially and adversely affected.

 

A significant portion of our workforce is represented by labor unions.

 

As of December 31, 2014, we had approximately 17,400 employees. We added approximately 2,400 employees in connection with the Connecticut Acquisition, of which approximately 90% are represented by unions.  Approximately 10,300 of our total employees were represented by unions and were subject to collective bargaining agreements. As of December 31, 2014, we had approximately 1,000 employees covered by collective bargaining agreements that expired in 2014, but have been extended and are still effective for 2015. Of the union-represented employees as of December 31, 2014, approximately 1,400, or 13%, of the unionized workforce are covered by collective agreements that expire in 2015 and approximately 2,200, or 21%, of the unionized workforce are covered by collective bargaining agreements that expire in 2016.  

 

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.

 

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

 

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

 

We may 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, such as the Verizon Transaction.  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 all or substantially all of our assets.

 

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

 

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

 

Risks Related to Liquidity, Financial Resources and Capitalization

 

Volatility in asset values related to Frontier’s pension plan and/or changes in pension plan assumptions may require us to make additional unanticipated contributions to fund pension plan liabilities.

 

The Company made cash contributions of $83 million to its pension plan in 2014, and expects to make contributions of approximately $100 million in 2015.  Volatility in our asset values, liability calculations, or returns may require us to make additional contributions in future years. 

 

Substantial debt and debt service obligations may adversely affect us.

 

We have a significant amount of indebtedness, which amounted to $9.8 billion at December 31, 2014.  We have access to a $750 million revolving credit facility and may also take on additional long-term debt and working capital lines of credit to meet future financing needs, subject to certain restrictions under the terms of our existing indebtedness.

 

The potential significant negative consequences on our financial condition and results of operations that could result from our substantial debt include:

 

 

 

 

 

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

 

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

 

On December 11, 2014, our Board of Directors approved a 5% increase over the 2014 dividend rate in the planned quarterly cash dividend rate, commencing with the dividend for the first quarter of 2015. On an annual basis, this plan would increase the dividend from $0.40 to $0.42 per share.  However, the amount and timing of future dividend payments is subject to applicable law and will be made at the discretion of our Board of Directors based on factors such as cash flow and cash requirements, capital expenditure requirements, financial condition and other factors.

 

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

 

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

 

Risks Related to Regulation 

 

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

 

A portion of Frontier’s total revenues ($201 million, or 4%, in 2014 and $235 million, or 5%, in 2013) are derived from switched access charges paid by other carriers for services we provide in originating and terminating intrastate and interstate long distance traffic.  As a result, Frontier expects a portion of the Company’s revenues will continue to be derived from switched access charges paid by these carriers for services that the Company will provide in originating and terminating this traffic. The amount of switched access charge revenues that the Company will receive for these services is regulated by the FCC and state regulatory agencies and is expected to decline in 2015.

 

On November 18, 2011, the FCC adopted the 2011 Order regarding Intercarrier Compensation, which is the payment framework that governs how carriers compensate each other for the exchange of interstate traffic. The 2011 Order began a multi-year transition in July 2012, with the second step implemented in July 2013 and the third step in July 2014. The transition will move terminating traffic to a near zero rate by 2017.  Frontier is permitted to recover a significant portion of those revenues through end user rates and other replacement support mechanisms. Additionally, the 2011 Order requires VoIP providers to pay interstate terminating interconnection charges and requires all carriers terminating traffic to provide appropriate call information, thus prohibiting so-called “phantom traffic”.  The reform of the Universal Service Fund shifts the existing High-Cost portion of the fund from supporting voice services to supporting broadband deployment in high-cost areas.  The 2011 Order preempts the states with regard to the regulation of intrastate terminating access rates.  The 2011 Order has been challenged by certain parties in court and certain parties have also petitioned the FCC to reconsider various aspects of the 2011 Order. Accordingly, we cannot predict the long-term impact at this time but believe that the 2011 Order will provide a stable regulatory framework to facilitate our ongoing focus on the deployment of broadband into our rural markets.

 

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

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

 

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

 

A portion of Frontier’s total revenues ($319 million, or 7%, in 2014 and $317 million, or 7%, in 2013)  are derived from federal and state subsidies for rural and high-cost support, commonly referred to as USF.  Future reductions in the Company’s subsidy revenues may directly affect the Company’s profitability and cash flows. The FCC’s 2011 Order changed how federal subsidies are calculated and disbursed, with these changes being phased-in beginning in July 2012.  These changes transition the USF, which supports voice services in high-cost areas, to the CAF, which supports broadband deployment in high-cost areas. CAF Phase I, which was implemented in 2012 to provide interim support while the FCC developed CAF Phase II, provided for ongoing USF support for price cap carriers capped at the 2011 amount. In addition, the FCC in the first round of CAF Phase I made available for price cap ILECs an additional $300 million in incremental high-cost broadband support to be used for broadband deployment to unserved areas. In 2012 and early 2013,  we received a total of $72 million in CAF Phase I funds and initially recorded such funds as increases to Cash and Other liabilities in the balance sheet. The $72 million in the first round of CAF Phase I support is expected to enable an incremental 92,877 households for broadband service and was accounted for as Contributions in Aid of Construction.  We are required to spend the first round of CAF Phase I funds to enable these households no later than July 24, 2015. We spent $26 million on the first round of CAF Phase I funds on network expansion during 2014 and $63 million of these CAF Phase I funds to date through December 31, 2014, enabling 83,100 unserved households.

 

On May 21, 2013, the FCC released the 2013 Order authorizing a second round of CAF Phase I.  As part of the 2013 Order, the FCC expanded the areas eligible for funding to include those that lack service of 3 Mbps download and 768 kbps upload.  In 2013 and early 2014, we received $61 million in the second round of CAF Phase I funds. We are required to spend the second round of the CAF Phase I funds to enable 101,714 households no later than March 14, 2017. The second round of CAF Phase I includes certain accompanying spending requirements from the Company, and our capital expenditure plans take this into account. We spent $31 million of the second round of CAF Phase I funds on network expansion during 2014, enabling 80,900 unserved and underserved households.

 

Federal subsidies representing interstate access support, high-cost loop support and local switching support represented $162 million, or 3%, of Frontier’s total revenues in 2014 and $167 million, or 4%, of Frontier’s total revenues in 2013.  State subsidies represented $32 million, or 1%, of Frontier’s total revenues in 2014 and $32 million, or 1%, in 2013.  Surcharges to customers (local, long distance and interconnection) to recover universal service fund contribution fees which are remitted to the FCC and recorded as an expense in “Network related expenses”, represented $125 million, or 3%, of Frontier’s total revenues in 2014 and $118 million, or 2%, in 2013.  As a result, a significant decrease in these subsidies, or in our ability to recover such fees, could have a material adverse effect on our business or results of operations.

 

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

 

As an incumbent local exchange carrier, some of the services we offer are subject to significant regulation from federal, state and local authorities.  This regulation could impact our ability to change our rates, especially on our basic voice services and our access rates, and could impose substantial compliance costs on us.  Regulation could constrain our ability to compete and, in some jurisdictions, may restrict our ability to expand our service offerings.  In addition, changes to the regulations that govern our business (including any implementation of the 2011 Order or the 2013 Order) may have an adverse effect on our business by reducing the allowable fees that we may charge, imposing additional compliance costs, reducing the amount of subsidies or otherwise changing the nature of our operations and the competition in our industry. At this time it is unknown how these regulations will affect Frontier’s operations or ability to compete in the future.  This and other FCC rulemakings and state regulatory proceedings, including those relating to intercarrier compensation, universal service and broadband services, could have a substantial adverse impact on our operations.

 

In addition, in connection with our Internet access offerings, we could become subject to laws and regulations as they are adopted or applied to the Internet, including so-called “net neutrality” rules that are intended to preserve the openness of the Internet. There is currently only limited regulation applicable to these services. As the significance of the Internet expands, federal, state and local governments may pass laws and adopt rules and regulations, or apply existing laws and regulations to

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the Internet (including Internet access services), and related matters are under consideration in both federal and state legislative and regulatory bodies.  We cannot predict whether the outcome of pending or future proceedings will prove beneficial or detrimental to our competitive position.

 

We may not be able to deploy or upgrade broadband service to the unserved and underserved locations with the CAF funds received.

 

In 2012 and early 2013, we received $72 million from the first round of CAF Phase I, which supports broadband deployment in high-cost areas.  If we are unable to deploy to the 92,877 unserved locations with the CAF funds received to date in accordance with the FCC rules by July 2015, then the Company would need to incur additional capital expenditures or refund a portion of the CAF funds received in 2012 and 2013 to the FCC.

 

In 2013 and early 2014, we received $61 million in the second round of CAF Phase I funding to enable 101,714 households by March 2017. The second round of CAF Phase I includes certain accompanying spending requirements from the Company, and our capital expenditure plans take this into account.

 

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 communications industry is subject to significant changes in technology and replacing or upgrading our infrastructure to keep pace with such technological changes could result in significant capital expenditures.  If we do not replace or upgrade technology and equipment as necessary, we may be unable to compete effectively because we will not be able to meet the needs or expectations of our customers. 

 

In addition, enhancements to product offerings and the management of broadband speed and capacity issues may influence our customers to consider other service providers, like cable operators or wireless providers.  We may be unable to attract or retain new customers from cable companies due to their deployment of enhanced broadband and VoIP technology.  In addition, new capacity services for wireless broadband technologies may permit our competitors to offer broadband data services to our customers throughout most or all of our service areas. Any resulting inability to attract new or retain existing customers could adversely impact our business and results of operations in a material manner.

 

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

 

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

 

In addition, our Company or our customers using our network to access the Internet may become victim to malicious and abusive Internet activities, including unsolicited mass advertising (“spam”), peer-to-peer file sharing, distribution of viruses, worms and other destructive or disruptive software.  These activities could adversely affect our network, result in excessive call volume at our call centers and damage our or our customers’ equipment and data.  

 

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

 

Item 1B.  Unresolved Staff Comments

 

None.

 

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Item 2.     Properties

 

Our principal corporate offices are located in leased premises at 3 High Ridge Park, Stamford, Connecticut 06905.

 

Our principal operations support offices and call center support offices with over 200 employees are currently located in the following leased or owned premises: 

 

 

In addition, we lease and own additional space in our operating markets throughout the United States for operations support and call center support.

 

Our network properties include: connecting lines between customers' premises and the central offices; central office switching equipment; fiber optic and microwave radio facilities; buildings and land; and customer premise equipment. The connecting lines, including aerial and underground cable, conduit, poles, wires and microwave equipment, are located on public streets and highways or on privately owned land. We have permission to use these lands pursuant to local governmental consent or lease, permit, franchise, easement or other agreement.

 

The plants and properties (owned or leased) operated by us and our subsidiaries are maintained in good condition and are believed to be suitable and adequate for our present needs.

 

Item 3.   Legal Proceedings

 

See Note 18 of the Notes to Consolidated Financial Statements included in Part IV of this report.

 

We are party to various legal proceedings (including individual, class and putative class actions) arising in the normal course of our business covering a wide range of matters and types of claims including, but not limited to,  general contracts, billing disputes, rights of access, taxes and surcharges, consumer protection, trademark and patent infringement, employment, regulatory, tort, claims of competitors and disputes with other carriers.  Litigation is subject to uncertainty and the outcome of individual matters is not predictable.  However, we believe that the ultimate resolution of all such matters, after considering insurance coverage or other indemnities to which we are entitled, will not have a material adverse effect on our financial position, results of operations, or our cash flows.

 

Item 4.    Mine Safety Disclosures

 

Not applicable.

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PART II

 

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

 

Our common stock is currently traded on the NASDAQ Global Select Market under the symbol FTR. The amount and timing of dividends payable on our common stock are within the sole discretion of our Board of Directors. On December 11, 2014, our Board of Directors approved a 5% increase over the 2014 dividend rate in the planned quarterly cash dividend rate, commencing with the dividend for the first quarter of 2015. On an annual basis, this plan would increase the dividend from $0.40 to $0.42 per share.  Cash dividends paid to shareholders were $401 million and $400 million in 2014 and 2013, respectively.  There are no material restrictions on our ability to pay dividends. 

 

A portion of the dividends is classified as total ordinary dividends and represents qualified dividends, and a portion of the dividends is classified as non-dividend distributions and represents a return of capital. 

 

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

 

 

 

 

As of February 13, 2015, the approximate number of security holders of record of our common stock was 472,330. This information was obtained from our transfer agent, Computershare Inc.

 

 

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, 2009. 

 

 

The graph assumes that $100 was invested on December 31, 2009 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.

 

 

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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 2014.

 

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

 

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

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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, 2014 has been derived from Frontier’s historical consolidated financial statements.  The selected historical consolidated financial information as of December 31, 2014 and 2013 and for each of the three years ended December 31, 2014 is derived from the audited historical consolidated financial statements of Frontier included elsewhere in this Form 10-K.  The selected historical consolidated financial information as of December 31, 2012, 2011 and 2010 and for each of the years ended December 31, 2011 and 2010 is derived from the audited historical consolidated financial statements of Frontier not included in this Form 10-K. 

 

 

 

 

 

 

 

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

 

(a)  Results of Operations

 

Effective October 24, 2014, the Company’s scope of operations and balance sheet capitalization changed materially as a result of the completion of the Connecticut Acquisition. Historical financial and operating data presented for Frontier is not indicative of future results and includes the results of the Connecticut operations that were acquired in the Connecticut Acquisition from the date of acquisition on October 24, 2014. The financial discussion below includes a comparative analysis of our results of operations on a historical basis for our Frontier operations as of and for the years ended December 31, 2014, 2013 and 2012.  Unless otherwise noted, the variance explanations discussed below are based upon an analysis of the 2014 financial data for Frontier legacy operations (excluding the Connecticut operations) in comparison to 2013.

 

Prior period amounts for other operating expenses have been revised from the previously disclosed amounts to reflect the disaggregation of other operating expenses into network related expenses and selling, general and administrative expenses.  There has been no change to total operating expense as a result of this reclassification.

 

REVENUE

 

Revenue is generated primarily through the provision of voice services, data services, video services, network access, carrier services and other Internet services.  Such revenues are generated through either a monthly recurring fee or a fee based on usage, and revenue recognition is not dependent upon significant judgments by management, with the exception of a determination of a provision for uncollectible amounts.

 

Revenue for 2014  increased  $11 million to $4,772 million as compared to 2013. Excluding additional revenue of $216 million attributable to the Connecticut operations, our revenue for 2014 decreased $205 million, or 4%, as compared to 2013. This decline in 2014 is primarily the result of decreases in voice services revenues and lower switched and nonswitched access revenue, partially offset by an increase in data services revenue, each as described in more detail below.

 

Total company switched access and subsidy revenue of $520 million represented 11% of our revenues for 2014. Switched access revenue was $201 million in 2014, or 4% of our revenues, down from $235 million, or 5% of our revenues, in 2013. Subsidy revenue was $319 million in 2014, or 7% of our revenues,  which increased slightly from $317 million,  or 7% of our revenues, in 2013. We expect declining revenue trends in switched access revenue to continue in 2015. 

 

Revenue for 2013 decreased $250 million, or 5%, to $4,762 million as compared to 2012. The decline in 2013 was primarily the result of decreases in voice revenues and lower switched and nonswitched access revenue, partially offset by an increase in data services revenue, each as described in more detail below. Additionally, wireless revenue decreased by $32 million in 2013 due to the sale of our Mohave Cellular Limited Partnership (Mohave) interest on April 1, 2013.

 

During 2014, we gained 445,300 customers, net, as compared to a loss of 98,900 customers, net, in 2013 and a loss of 240,500 customers, net, in 2012. Excluding 526,900 customers attributable to the Connecticut Acquisition,  we lost 81,600 customers, net, in 2014. We believe the improved customer retention in 2014 as compared to prior years is principally due to our investments in our network, our local engagement strategy, improved customer service and simplified products and pricing.    

 

Total residential revenue for 2014 increased  $65 million, or 3%, as compared to 2013. Total residential revenue for 2014 included $116 million of revenue attributable to the Connecticut operations. Total residential revenue for our Frontier legacy operations declined $51 million, or 3%, as compared with 2013, primarily as a result of decreases in voice services revenue and the sale of our interest in the Mohave partnership, partially offset by increases in data services revenue. We had approximately 3,214,800, 2,803,500 and 2,887,100 total residential customers as of December 31, 2014, 2013 and 2012, respectively.  Excluding 478,100 total residential customers attributable to the Connecticut Acquisition in 2014,  we lost approximately 66,800, 83,600 and 216,700 residential customers, net, during 2014, 2013 and 2012, respectively, principally driven by declines in voice customers. Our residential customer monthly churn was 1.73%, 1.69%  and 1.62% for 2014, 2013 and 2012, respectively. Average monthly residential revenue per customer (residential ARPC) increased $1.88, or 3%, to $61.11 during 2014 as compared to 2013. The overall increase in residential ARPC is due to a higher percentage of the Company’s residential customers that take broadband services, Frontier Secure products, broadband customer migration to higher speeds and certain pricing actions. The Company expects continuing increases in data services revenue, primarily driven by increased broadband subscribers, and continuing declines in voice services revenue.

 

Total business revenue for 2014 decreased  $23 million, or 1%, as compared to 2013. Total business revenue for 2014 included  $90 million of revenue attributable to the Connecticut operations. Total business revenue for our Frontier legacy operations declined

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$113 million, or 5%, as compared with 2013, principally as a result of decreases in our voice services revenue and wireless backhaul revenue.  We had approximately 304,700, 270,800 and 286,100 total business customers as of December 31, 2014, 2013 and 2012, respectively. Excluding 48,800 total business customers attributable to the Connecticut Acquisition in 2014,  we lost approximately 14,900, 15,300 and 23,800 business customers, net, during 2014, 2013 and 2012, respectively. Average monthly business revenue per customer (business ARPC) increased $7.11, or 1%, to $661.15 during 2014 as compared to 2013. The overall increase in business ARPC is primarily due to declining customer counts for our small business customers that carry a lower ARPC. The Company expects the declines in voice services revenue and wireless backhaul from business customers to continue in 2015, mitigated, in part, by increases in data services revenue.

 

During 2014, the Company added approximately 507,200 net broadband subscribers. Excluding 398,600 broadband subscribers attributable to the Connecticut Acquisition,  we added approximately 108,700 net broadband subscribers in 2014. During 2013 and 2012, the Company added approximately 112,250 and 23,400 net broadband subscribers, respectively. As of December 31, 2014,  approximately 68% of our residential broadband customers subscribed to a bundle of services. As of December 31, 2014, we were able to offer broadband to approximately 7.8 million households, or 92% of the 8.5 million households in our markets. The increase in broadband subscribers contributed to our improved data services revenue performance.  We continue to invest in network speed and capacity to support our goal of increasing broadband penetration and market share. We expect to continue to increase broadband subscribers in 2015.

 

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

 

In the section  “Revenue and Customer Related Metrics” below is a table that presents customer counts, average monthly revenue per customer and customer churn.  It also categorizes revenue into customer revenue (residential and business) and regulatory revenue (switched access and subsidy revenue).  The decline in the number of customers was partially offset by increased penetration of additional higher revenue generating products sold to both residential and business customers, which has increased our average monthly revenue per customer. 

 

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REVENUE AND CUSTOMER RELATED METRICS

 

 

 

 

 

 

 

 

 

 

 

 

Note:  As stated in our report for the quarterly period ended March 31, 2014, prior period revenue and certain operating statistics have been revised from the previously disclosed amounts to reflect the insignificant reclassification of certain revenues from residential to business and the related impact on average monthly revenue per customer amounts.

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Voice Services

Voice services revenues for 2014 decreased $168 million, or 8%, as compared with 2013, primarily due to $150 million, or 9%, in lower local and enhanced services revenue. This decrease is primarily due to the continued loss of voice customers and, to a lesser extent, decreases in individual features packages, partially offset by increased local voice charges to residential and business end users.  Long distance services revenue decreased $17 million, or 5%, primarily due to an 8% decrease in minutes of use driven by fewer customers, partially offset by increased cost recovery surcharge rates.

 

Voice services revenues for 2013 decreased $198 million, or 9%, as compared with 2012, including $138 million, or 8%, in lower local and enhanced services revenue. This decrease was primarily due to the continued loss of voice customers and, to a lesser extent, decreases in individual features packages, partially offset by increased local voice charges to residential and business end users to the extent permitted by the 2011 Order.  Long distance services revenue decreased $60 million, or 14%, primarily due to lower minutes of use driven by fewer customers and the migration to bundled packages.

 

Data and Internet Services 

Data and Internet services revenues for 2014 decreased $7 million as compared with 2013.  Data and Internet services includes nonswitched access revenue from data transmission services to other carriers and high-volume business customers with dedicated high-capacity Internet and Ethernet circuits. These nonswitched access revenues  decreased $92 million, or 10%, primarily due to lower monthly recurring charges attributable to a reduction in wireless backhaul and other carrier service revenues. These decreases were mostly offset by increases in data services revenues of  $85 million, or 9%, primarily due to a 6% increase in the total number of broadband customers and sales of Frontier Secure products. 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, we expect to continue to experience declines in wireless backhaul revenue in 2015, as our carrier partners migrate to Ethernet solutions at lower price points and certain customers migrate to our competitors.

 

Data and Internet services revenues for 2013 increased $61 million, or 3%, as compared with 2012. Data services revenue increased $85 million, or 10%, primarily due to a 6% increase in the number of broadband customers and sales of Frontier Secure products. These increases were offset by a $24 million, or 3%, decrease in nonswitched access revenue, primarily due to a reduction in wireless backhaul.

 

Other  

Other revenues for 2014  increased  $11 million, or 4%, primarily due to lower bad debt expenses that are charged to other revenue and increased customer premise equipment revenues, partially offset by lower wireless revenue associated with the sale of our interest in the Mohave partnership and lower directory services revenues.  

 

Other revenues for 2013 decreased $58 million, or 16%, primarily due to lower wireless revenues associated with the sale of our interest in the Mohave partnership, lower directory services revenues  and the reduction in FiOS® video service customers,  partially offset by lower bad debt expenses.

 

Switched Access and Subsidy

Switched access and subsidy revenue for 2014  decreased $41 million, or 7%, to $511 million, as compared to 2013. Switched access revenue decreased $38 million, or 16%, and subsidy revenue decreased $3 million in 2014. The decrease in switched access revenue was primarily due to the impact of a decline in minutes of use related to access line losses and the displacement of minutes of use by wireless and other communications services combined with a reduction due to the impact of the lower rates enacted by the FCC’s intercarrier compensation reform in July 2013. The decrease in switched access revenues also included the impact of disputes with carriers and customer credits. The 2011 Order provided for the gradual elimination of terminating traffic charges by 2017. We have been able to recover a significant portion of these lost revenues through end user rates and other replacement support mechanisms, a trend we expect will continue through 2015. 

 

Switched access and subsidy revenue for 2013 decreased $55 million, or 9%, as compared with 2012. Switched access revenue accounted for  $48 million, or 17%, of this decrease, primarily due to the impact of a decline in minutes of use related to access line losses and the displacement of minutes of use by wireless, email and other communications services combined with a reduction due to the impact of the lower rates enacted by the FCC’s intercarrier compensation reform.  These decreases in switched access revenues were partially offset by the impact of disputes with carriers and lower customer credits. Subsidy revenues decreased $8 million, or 2%, primarily due to the lower contribution factor for end user USF in 2013.

 

The FCC has announced its CAF II model development and CAF II funding could be implemented during 2015.  We cannot determine whether we will accept or refuse any funding under the CAF Phase II support programs until all obligations associated with the funding have been determined.

 

 

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OPERATING EXPENSES

 

NETWORK ACCESS EXPENSES

 

 

 

 

 

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

 

Network access expenses for 2014  decreased $4 million, or 1%, primarily due to lower reciprocal compensation costs that are recorded in network access expenses, partially offset by higher joint pole rates and an increase in network access expenses related to higher broadband subscriber counts.

 

Network access expenses for 2013 decreased $11 million, or 2%, primarily due to lower long distance carriage costs, reduced content costs related to fewer FiOS® video service customers and a reduction in costs for our originating traffic associated with the implementation of the 2011 Order effective with the second half of 2012.

 

NETWORK RELATED EXPENSES

 

 

 

Network related expenses include certain 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, operation and maintenance of our network.  

 

Network related expenses for 2014 decreased $17 million, or 2%, primarily due to lower allocated costs for certain benefits, including pension and OPEB expense (as discussed below), and reduced installation and repair costs, partially offset by increased fleet and facilities costs.

 

Network related expenses for 2013 decreased $50 million, or 4%, primarily due to the full year impact from the elimination of redundant information technology costs associated with the completion of the systems conversion related to the 2010 Acquisition and the lower contribution factor for end user USF in 2013, partially offset by increased fleet costs.

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

 

 

Selling, general and administrative expenses (SG&A expenses) for 2014, which include the salaries, wages and related benefits and the related costs of corporate and sales personnel, travel, insurance, non-network related rent, advertising and other administrative expenses, increased $1 million. This increase was primarily due to higher agent commission costs, additional compensation costs related to our new partnership with Intuit, and an increase in certain litigation reserves in the first quarter of

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2014, mostly offset by lower allocated costs for certain benefits, including pension and OPEB expense (as discussed below), and lower facilities costs.

 

SG&A expenses for 2013 decreased $43 million, or 4%, primarily due to lower costs for compensation resulting from lower average employee headcount, lower severance costs and lower advertising costs, partially offset by higher agent commission costs.

 

Pension and OPEB Costs

Pension and OPEB costs for the Company are allocated costs and included in network related expenses and SG&A expenses. Pension and OPEB costs, excluding the impact of pension settlement costs, for 2014, 2013 and 2012 were approximately $59 million, $78 million and $66 million, respectively. Pension and OPEB costs include pension and OPEB expense of $74 million, $97 million and $82 million, less amounts capitalized into the cost of capital expenditures of $15 million, $19 million and $16 million, respectively. 

 

Based on current assumptions and plan asset values, we estimate that our 2015 pension and OPEB costs (which were $74 million in 2014, excluding the impact of amounts capitalized into the cost of capital expenditures) will be approximately $85 million to $105 million, excluding the impact of amounts capitalized into the cost of capital expenditures. 

 

DEPRECIATION AND AMORTIZATION

 

 

 

 

 

Depreciation and amortization expense for 2014  decreased  $89 million, or 8%, primarily due to the accelerated method of amortization related to the customer base that was acquired in the 2010 Acquisition and changes in the remaining useful lives of certain plant assets and a lower net asset base. We anticipate depreciation expense of approximately $960 million to $980 million and amortization expense of approximately $345 million for 2015, including a full year associated with the Connecticut operations.

 

Depreciation and amortization expense for 2013 decreased $97 million, or 8%, primarily due to the accelerated method of amortization related to the customer base that was acquired in the 2010 Acquisition and accelerated amortization for certain software licenses in 2012. 

 

PENSION SETTLEMENT COSTS

 

 

 

 

 

Our pension plan contains provisions that provide certain employees with the option of receiving a  lump sum payment upon retirement. We record these payments as a settlement only if, in the aggregate, they exceed the sum of the annual service and interest costs for the plan’s net periodic pension benefit cost. During 2013, lump sum pension settlement payments to terminated or retired individuals exceeded the settlement threshold and as a result, the Company was required to recognize a non-cash settlement charge of $44 million. This non-cash charge was required to accelerate the recognition of a portion of the previously unrecognized actuarial losses in the pension plan.  The amount of any future non-cash settlement charges will be dependent on the level of lump sum benefit payments.

 

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ACQUISITION AND INTEGRATION COSTS

 

 

 

 

NM – Not Meaningful

 

During the fourth quarter of 2013, the Company began to incur acquisition and integration costs in connection with the Connecticut Acquisition that closed on October 24, 2014. Acquisition costs include legal, financial advisory, accounting, regulatory and other related costs. Integration costs include expenses incurred to integrate the network and information technology platforms and to enable other integration initiatives. In 2014, the Company incurred $15 million in acquisition costs and $127 million of integration costs related to the Connecticut Acquisition. In 2013, the Company incurred $10 million of acquisition costs related to the Connecticut Acquisition. In 2012, the Company incurred $82 million of integration costs in connection with the 2010 Acquisition. All integration activities related to the 2010 Acquisition were completed as of the end of 2012. In 2014, we also invested  $116 million in capital expenditures related to the Connecticut Acquisition. 

 

GAIN ON SALE OF MOHAVE PARTNERSHIP INTEREST

 

 

 

 

 

 

On April 1, 2013, the Company sold its 33⅓% interest in the Mohave partnership, in which Frontier was the General Partner.  The Company received proceeds on sale of $18 million and recognized a gain on sale of $15 million.

 

INVESTMENT AND OTHER INCOME, NET / LOSSES ON EARLY EXTINQUISHMENT OF DEBT / 

INTEREST EXPENSE / INCOME TAX EXPENSE

 

 

 

 

Investment and Other Income, Net

Investment and other income, net for 2014  increased  $30 million primarily due to a $25 million gain on the sale of our minority interest in a wireless partnership and a $12 million gain on the sale of an intangible asset not part of our operations.

 

Investment and other income, net for 2013 decreased $11 million primarily due to an investment gain of $10 million in 2012.

 

Losses on Early Extinguishment of Debt

During 2013, we recognized a loss of $160 million on the early extinguishment of debt in connection with various debt tender offers, privately negotiated transactions and open market repurchases that resulted in the retirement of $1,002 million in senior notes.

 

Similarly, in 2012 we recognized a loss of $90 million on the early extinguishment of $713 million in senior notes.

 

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Interest expense

Interest expense for 2014  increased  $28 million, or 4%, primarily due to interest on the $1.9 billion debt financing completed in September and October 2014, as well as $23 million in commitment fees for the Bridge Facility (as defined below) related to the Connecticut Acquisition, partially offset by the lower average debt levels during the first nine months of the year resulting from the refinancing activities and early retirements in 2013. Our composite average borrowing rate as of December 31, 2014 was 7.62%.

 

Interest expense for 2013 decreased $21 million, or 3%, primarily due to lower average debt levels resulting from the debt refinancing activities and early retirements, partially offset by the registered debt offering of $750 million of senior unsecured notes due 2024.  Our composite average borrowing rate as of December 31, 2013 was 7.95%.

 

Income tax expense

Income tax expense for 2014  decreased  $17 million, or 35%,  and our effective tax rate was 18.7% as compared with 29.0% for 2013 and 33.0% for 2012.  The decrease was primarily due to a change in deferred taxes arising from the inclusion of the Connecticut operations in the state unitary filings.

 

Income tax expense for 2013 decreased $28 million, or 38%, primarily due to lower pretax income in 2013.  Income taxes for 2013 reflect the impact of a $7 million net benefit resulting from the adjustment of deferred tax balances, a $5 million benefit from federal research and development credits and a $2 million benefit from the net reversal of reserves for uncertain tax positions, partially offset by the impact of an expense of $5 million resulting from the settlement of the 2010 IRS audit, as well as an expense of $3 million resulting from non-deductible transaction costs.

 

We paid $70 million,  $94 million and $5 million in net cash taxes in 2014, 2013 and 2012, respectively.  Our 2014 cash taxes paid reflected the continued impact of bonus depreciation in accordance with the Tax Increase Prevention Act of 2014.  Absent any legislative changes in 2015, we expect that our cash tax payments will be in the range of approximately $175 million to $200 million for 2015.    

 

Net income attributable to common shareholders of Frontier 

Net income attributable to common shareholders of Frontier for 2014 was $133 million, or $0.13 per share, as compared to $113 million, or $0.11 per share, in 2013 and $137 million, or $0.14 per share, in 2012. 

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(b)  Liquidity and Capital Resources  

 

Analysis of Cash Flows

As of December 31, 2014, we had cash and cash equivalents aggregating $682 million.  Our primary source of funds continued to be cash generated from operations.  In 2014, we used cash flow from operations, cash on hand and debt issuance proceeds to principally fund all of our cash investing and financing activities, primarily the Connecticut Acquisition, capital expenditures, dividends and debt repayments.

 

As discussed below, on September 17, 2014, the Company completed a registered debt offering of $775 million aggregate principal amount of 6.250% senior unsecured notes due 2021, and $775 million aggregate principal amount of 6.875% senior unsecured notes due 2025. The Company used the net proceeds from the offering of the notes, together with borrowings of $350 million under the 2014 CoBank Credit Agreement, as defined below, and cash on hand to finance the Connecticut Acquisition,  which closed on October 24, 2014.

 

At December 31, 2014, we had a working capital deficit of $26 million,  as compared to a working capital surplus of $317 million at December 31, 2013. The decline in working capital is primarily due to a reduction in cash and cash equivalents of $198 million related to financing the Connecticut Acquisition and an increase in current liabilities of $210 million.

 

Cash Flows provided by Operating Activities

 

Cash flows provided by operating activities declined $226 million, or 15%, in 2014 as compared to 2013.  The decrease was primarily the result of higher acquisition and integration costs and lower adjusted net income before depreciation and amortization during 2014.

 

We paid $70 million in net cash taxes in 2014 as compared to $94 million and $5 million in net cash taxes in 2013 and 2012, respectively. Our 2014 cash taxes paid reflected the continued impact of bonus depreciation in accordance with the Tax Increase Prevention Act of 2014. Absent any legislative changes in 2015, we expect that our cash tax payments will be in the range of approximately $175 million to $200 million for 2015.

 

During 2013, the Company contributed four real estate properties with a fair value of $23 million to its qualified defined benefit pension plan. The pension plan obtained independent appraisals of the properties and, based on these appraisals, the pension plan recorded the contributions at their fair value.

 

In connection with the Connecticut Acquisition, the Company recognized $142 million and $10 million of acquisition and integration costs incurred in 2014 and 2013, respectively, and $23 million and $1 million of interest expense in 2014 and 2013, respectively, related to the Bridge Facility (as defined below).  The Company currently expects that it will incur approximately $450 million of operating expenses and capital expenditures in total related to acquisition and integration activities in 2015 and 2016 associated with the Verizon Transaction.

 

In connection with the 2010 Acquisition, the Company incurred $82 million of costs related to integration activities during 2012. All integration activities related to the 2010 Acquisition were completed as of the end of 2012.

 

Cash Flows used by Investing Activities

 

Capital Expenditures

In 2014, 2013 and 2012, our capital expenditures were, respectively, $688 million, $635 million and $803 million (including $116 million and $54 million, respectively, of integration-related capital expenditures in 2014 for the Connecticut Acquisition and in 2012 for the 2010 Acquisition).  From 2012 through 2014, Frontier received a total of $72 million from the first round of Connect America Fund (CAF) Phase I and $61 million related to the second round of CAF Phase I to support broadband deployment in unserved and underserved high-cost areas. In addition to the capital expenditures mentioned above, network expansion funded by the previously received CAF funds amounted to $56 million, $33 million and $5 million in 2014,  2013 and 2012, respectively, enabling and/or upgrading 164,000 households with broadband during that three year period. We anticipate capital expenditures for business operations to increase in 2015 as a result of the Connecticut Acquisition to approximately $650 million to $700 million,  as compared to $572 million in 2014.  

 

Acquisitions

On October 24, 2014, the Company acquired the wireline properties of AT&T in Connecticut for a purchase price of $2 billion in cash, excluding adjustments for working capital. Frontier now owns and operates the wireline business and statewide fiber network

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that provides services to residential, commercial and wholesale customers in Connecticut. After including working capital adjustments of $18 million, the total purchase price for the Connecticut Acquisition was  $2,018 million.

 

Cash Flows used by and provided from Financing Activities

 

Debt Financings 

 

Financing the Connecticut Acquisition 

On September 17, 2014, the Company completed a registered debt offering of $775 million aggregate principal amount of 6.250% senior unsecured notes due 2021 and $775 million aggregate principal amount of 6.875% senior unsecured notes due 2025. We received net proceeds, after deducting underwriting fees, of $1,519 million from the offering. The Company used the net proceeds from the offering of the notes, together with borrowings of $350 million under the 2014 CoBank Credit Agreement, as defined below, and cash on hand to finance the Connecticut Acquisition that closed on October 24, 2014.

 

During 2014, we also entered into secured financings totaling $11 million with four year terms and no stated interest rate for certain equipment purchases.

 

The 2024 Notes

On April 10, 2013, the Company completed a registered offering of $750 million aggregate principal amount of 7.625% senior unsecured notes due 2024 (the 2024 Notes), issued at a price of 100% of their principal amount.  We received net proceeds of $737 million from the offering after deducting underwriting fees.  The Company used the net proceeds from the sale of the notes, together with cash on hand, to finance the April 2013 debt tender offers discussed below.

 

The 2021 Notes

On May 17, 2012, the Company completed a registered offering of $500 million aggregate principal amount of 9.250% senior unsecured notes due 2021 (the 2021 Notes), issued at a price of 100% of their principal amount. We received net proceeds of $490 million from the offering after deducting underwriting fees and offering expenses. The Company also commenced a tender offer to purchase the maximum aggregate principal amount of its 8.250% Senior Notes due 2014 (the 2014 Notes) and its 7.875% Senior Notes due 2015 (the April 2015 Notes and, together with the 2014 Notes, the Notes) that it could purchase for up to $500 million in cash (the 2012 Debt Tender Offer).

 

The 2023 Notes

On August 15, 2012, the Company completed a registered offering of $600 million aggregate principal amount of 7.125% senior unsecured notes due 2023 (the 2023 Notes), issued at a price of 100% of their principal amount. We received net proceeds of $588 million from the offering after deducting underwriting fees and offering expenses. The Company used the net proceeds from the sale of the notes to repurchase or retire existing indebtedness in 2013.

 

On October 1, 2012, the Company completed a registered offering of $250 million aggregate principal amount of the 2023 Notes, issued at a price of 104.250% of their principal amount. We received net proceeds of $256 million from the offering after deducting underwriting fees and offering expenses. The notes are an additional issuance of, are fully fungible with and form a single series voting together as one class with the $600 million aggregate principal amount of the 2023 Notes issued by the Company on August 15, 2012. The Company used the net proceeds from the sale of the notes to repurchase or retire existing indebtedness in 2013.

 

Debt Reduction

During 2014,  2013 and 2012, we retired an aggregate principal amount of $260 million,  $1,563 million and $757 million, respectively, of debt consisting of $257 million,  $1,563 million and $756 million, respectively, of senior unsecured debt and $1 million in each period, of rural utilities service loan contracts, as discussed below. Additionally, we retired $2 million of other secured debt during 2014.

 

On April 10, 2013, the Company accepted for purchase $471 million aggregate principal amount of its senior notes tendered for total consideration of $532 million, consisting of $194 million aggregate principal amount of the Company’s 6.625% senior notes due 2015 (the March 2015 Notes), tendered for total consideration of $216 million, and $277 million aggregate principal amount of the Company’s 7.875% senior notes due 2015 (the April 2015 Notes), tendered for total consideration of $316 million.  On April 24, 2013, the Company accepted for purchase $1 million aggregate principal amount of the March 2015 Notes, tendered for total consideration of $1 million, $1 million of the April 2015 Notes, tendered for total consideration of $1 million, and $225 million aggregate principal amount of the Company’s 8.250% senior notes due 2017 (the 2017 Notes), tendered for total consideration of $268 million.  The repurchases in the debt tender offers for the senior notes resulted in a loss on the early extinguishment of debt of $105 million ($65 million or $0.06 per share after tax). 

 

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Additionally, in 2013, the Company repurchased $209 million of the 2017 Notes in a privately negotiated transaction, along with $17 million of its 8.125% senior notes due 2018 and $79 million of its 8.500% senior notes due 2020 in open market repurchases.  These transactions resulted in a loss on the early extinguishment of debt of $55 million ($34 million or $0.04 per share after tax).

   

Pursuant to the 2012 Debt Tender Offer, the Company accepted for purchase $400 million aggregate principal amount of 2014 Notes, tendered for total consideration of $446 million, and $50 million aggregate principal amount of April 2015 Notes, tendered for total consideration of $54 million. The Company used proceeds from the sale of its May 2012 offering of $500 million of the 2021 Notes, plus cash on hand, to purchase the Notes.

 

The repurchases in the 2012 Debt Tender Offer for the 2014 Notes resulted in a loss on the early extinguishment of debt of $69 million. We also recognized losses of $2 million during the second quarter of 2012 for $78 million in total open market repurchases of our 6.25% Senior Notes due 2013.

 

On October 1, 2012, the Company purchased $76 million and $59 million aggregate principal amount of the April 2015 Notes and the 2017 Notes, respectively, in open market repurchases for total consideration of $155 million. The repurchases resulted in a loss on the early retirement of debt of $19 million ($12 million or $0.01 per share after tax).

 

We may from time to time make additional repurchases of our debt in the open market, through tender offers, exchanges of debt securities, by exercising rights to call or in privately negotiated transactions.  We may also refinance existing debt or exchange existing debt for newly issued debt obligations. 

 

Capital Resources

We believe our operating cash flows, existing cash balances, and existing revolving credit facility will be adequate to finance our working capital requirements, fund capital expenditures, make required debt interest and principal payments, pay taxes, pay dividends to our stockholders, and support our short-term and long-term operating strategies for the next twelve months.  However, a number of factors, including but not limited to, losses of customers, pricing pressure from increased competition, lower subsidy and switched access revenues, and the impact of economic conditions may negatively impact our cash generated from operations. In addition, based on information available to us, we believe that the financial institutions syndicated under our revolving credit facility would be able to fulfill their commitments to us, but this could change in the future. As of December 31, 2014, we had $298 million and $383 million of debt maturing in 2015 and 2016, respectively.

 

Bridge Facility

On December 16, 2013, we signed a commitment letter for a bridge loan facility (the Bridge Facility) to finance the Connecticut Acquisition and recognized interest expense related to this commitment of $23 million and $1 million during the years ended December 31, 2014 and 2013, respectively.

 

On July 16, 2014, the Bridge Facility was reduced by $350 million following execution of the 2014 CoBank Credit Agreement, as defined below. On September 17, 2014, the Bridge Facility, which was undrawn, was terminated upon consummation of the registered debt offering referred to above.

 

Bank Financing

On June 2, 2014, the Company entered into a credit agreement with CoBank, ACB, as administrative agent, lead arranger and a lender, and the other lenders party thereto, for a $350 million senior unsecured delayed draw term loan facility (the 2014 CoBank Credit Agreement). The facility was drawn upon closing of the Connecticut Acquisition with proceeds used to partially finance the acquisition. The maturity date is October 24, 2019. Repayment of the outstanding principal balance will be made in quarterly installments in the amount of $9 million, commencing on March 31, 2015, with the remaining outstanding principal balance to be repaid on the maturity date. Borrowings under the 2014 CoBank Credit Agreement bear interest based on the margins over the Base Rate (as defined in the 2014 CoBank Credit Agreement) or LIBOR, at the election of the Company. Interest rate margins under the facility (ranging from 0.875% to 2.875% for Base Rate borrowings and 1.875% to 3.875% for LIBOR borrowings) are subject to adjustments based on the Total Leverage Ratio of the Company, as such term is defined in the 2014 CoBank Credit Agreement. The interest rate on this facility at December 31, 2014 was LIBOR plus 3.375%.

 

The Company has a credit agreement with CoBank, ACB, as administrative agent, lead arranger and a lender, and the other lenders party thereto, for a $575 million senior unsecured term loan facility with a final maturity of October 14, 2016 (the 2011 CoBank Credit Agreement). The entire facility was drawn upon execution of the 2011 CoBank Credit Agreement in October 2011. Repayment of the outstanding principal balance is made in quarterly installments of $14 million, which commenced on March 31, 2012, with the remaining outstanding principal balance to be repaid on the final maturity date.  Borrowings under the 2011 CoBank Credit Agreement bear interest based on the margins over the Base Rate (as defined in the 2011 CoBank Credit Agreement) or LIBOR, at the election of the Company.  Interest rate margins under the facility (ranging from 0.875% to

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2.875% for Base Rate borrowings and 1.875% to 3.875% for LIBOR borrowings) are subject to adjustments based on the Total Leverage Ratio of the Company, as such term is defined in the 2011 CoBank Credit Agreement.  The interest rate on this facility at December 31, 2014 was LIBOR plus 2.875%. 

 

Revolving Credit Facility

On June 2, 2014, the Company entered into a new revolving credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, the lenders party thereto and the other parties named therein (the Revolving Credit Agreement), for a $750 million revolving credit facility (the Revolving Credit Facility) with a scheduled termination date of May 31, 2018 and terminated its existing revolving credit facility (the Prior Revolving Credit Facility) under the Credit Agreement, dated as of May 3, 2013, among the Company, JPMorgan Chase Bank, N.A., as administrative agent, the lenders party thereto and the other parties named therein (the Prior Revolving Credit Agreement). As of December 31, 2014, the Revolving Credit Facility was fully available and no borrowings had been made thereunder. Associated commitment fees under the Revolving Credit Facility will vary from time to time depending on the Company’s debt rating (as defined in the Revolving Credit Agreement) and were 0.450% per annum as of December 31, 2014. During the term of the Revolving Credit Facility, the Company may borrow, repay and reborrow funds, and may obtain letters of credit, subject to customary borrowing conditions. Loans under the Revolving Credit Facility will bear interest based on the alternate base rate or the adjusted LIBO Rate (each as determined in the Revolving Credit Agreement), at the Company’s election, plus a margin based on the Company’s debt rating (ranging from 0.50% to 1.50% for alternate base rate borrowings and 1.50% to 2.50% for adjusted LIBO Rate borrowings). The interest rate on this facility at December 31, 2014 would have been 1.50% or 2.50%, respectively, as of December 31, 2014. Letters of credit issued under the Revolving Credit Facility will also be subject to fees that vary depending on the Company’s debt rating. The Revolving Credit Facility is available for general corporate purposes but may not be used to fund dividend payments.

 

Covenants

The terms and conditions contained in our indentures, the 2011 CoBank Credit Agreement, the 2014 CoBank Credit Agreement and the Revolving Credit Agreement include the timely payment of principal and interest when due, the maintenance of our corporate existence, keeping proper books and records in accordance with U.S. GAAP, restrictions on the incurrence of liens on our assets securing indebtedness and our subsidiaries’ assets,  restrictions on the incurrence of indebtedness by our subsidiaries and restrictions on asset sales and transfers, mergers and other changes in corporate control subject to important qualifications and exceptions. We are not subject to restrictions on the payment of dividends either by contract, rule or regulation, other than that imposed by the General Corporation Law of the State of Delaware. However, we would be restricted under the 2011 CoBank Credit Agreement, the 2014 CoBank Credit Agreement and the Revolving Credit Agreement from declaring dividends if an event of default occurred and was continuing at the time or would result from the dividend declaration.

 

The 2011 CoBank Credit Agreement, the 2014 CoBank Credit Agreement and the Revolving Credit Agreement each contain a maximum leverage ratio covenant. Under those covenants, we are required to maintain a ratio of (i) total indebtedness minus cash and cash equivalents in excess of $50 million to (ii) consolidated adjusted EBITDA (as defined in the agreements) over the last four quarters not to exceed 4.50 to 1. 

 

Certain indentures for our senior unsecured debt obligations limit our ability to create liens on our assets securing indebtedness and our subsidiaries’ assets or merge or consolidate with other companies, our subsidiaries’ ability to borrow funds and to engage in change of control transactions, subject to important exceptions and qualifications.

 

As of December 31, 2014, we were in compliance with all of our debt and credit facility covenants.

 

Dividends

We currently intend to continue to pay regular quarterly dividends. Our ability to fund a regular quarterly dividend will be impacted by our ability to generate cash from operations. On December 11, 2014, our Board of Directors approved a 5% increase over the 2014 dividend rate in the planned quarterly cash dividend rate, commencing with the dividend for the first quarter of 2015. On an annual basis, this plan would increase the dividend from $0.40 to $0.42 per share.  The declarations and payment of future dividends 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, applicable law, restrictions in agreements governing our indebtedness and other factors our Board of Directors deem relevant.

 

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial statements.

 

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Future Contractual Obligations and Commitments

A summary of our future contractual obligations and commercial commitments as of December 31, 2014 is as follows:

 

 

 

At December 31, 2014, we had outstanding performance letters of credit totaling $47 million.

 

In our normal course of business we have obligations under certain non-cancelable arrangements for services. During 2012, we entered into a “take or pay” arrangement for the purchase of future long distance and carrier services. Our remaining commitment under the arrangement is $141 million for the year ending December 31, 2015. As of December 31, 2014, we expect to utilize the services included within the arrangement and no liability for the “take or pay” provision has been recorded.

 

As of December 31, 2014, all capital investment commitment requirements of the three state regulatory commissions in connection with the 2010 Acquisition had been satisfied.  All funds had been released from escrow accounts and the Company had no restricted cash related to escrow accounts.

 

The FCC and certain state regulatory commissions, in connection with granting their approvals the 2010 Acquisition, specified certain capital expenditure and operating requirements for the territories acquired in the 2010 Acquisition for specified periods of time post-closing. These requirements focus primarily on certain capital investment commitments to expand broadband availability to at least 85% of the households throughout the territories acquired in the 2010 Acquisition with minimum download speeds of 3 Mbps by the end of 2013. We are required to provide download speeds of 4 Mbps to at least 75%, 80% and 85% of the households throughout the territories acquired in the 2010 Acquisition by the end of 2013, 2014 and 2015, respectively.  As of December 31, 2012, we met our FCC requirement to provide 4 Mbps coverage to 75% and 80% of the households in the territories acquired in the 2010 Acquisition by the end of 2013 and 2014, respectively. As of December 31, 2013, we also met our FCC requirement to provide 3 Mbps coverage to 85% of the households in the territories acquired in the 2010 Acquisition by the end of 2013. As of December 31, 2014, we expanded broadband availability in excess of 4 Mbps to 84.5% of the households throughout the territories acquired in the 2010 Acquisition.

 

Critical Accounting Policies and Estimates

The preparation of our financial statements requires management to make estimates and assumptions.   There are inherent uncertainties with respect to such estimates and assumptions; accordingly, it is possible that actual results could differ from those estimates and changes to estimates could occur in the near term.  The estimates which require the most significant judgment are listed below.

 

These critical accounting estimates have been reviewed with our independent registered public accounting firm and with the Audit Committee of our Board of Directors. For a discussion of these and other accounting policies, see Note 1 of the Notes to Consolidated Financial Statements.

 

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts based on our estimate of our ability to collect accounts receivable.  Our estimates are based on assumptions and other considerations, including payment history, customer financial performance, carrier billing disputes and aging analysis.  Our estimation process includes general and specific reserves and varies by customer segment.  In 2014 and 2013, we had no “critical estimates” related to bankruptcies of communications companies or any other significant customers. See Notes 1 and 4 of the Notes to Consolidated Financial Statements for additional discussion. 

 

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Indefinite-lived Intangibles

Our indefinite-lived intangibles consist of goodwill and trade name, which resulted from the purchase of ILEC properties.  We test for impairment of these assets annually as of December 31, or more frequently, as circumstances warrant using a two-step process.  The first step in the goodwill impairment test compares the carrying value of net assets of the reporting unit to its fair value. If the fair value exceeds the carrying value, no further testing is required.  However, if the fair value is less than the carrying value, an indication of impairment exists and a second step is performed.  These tests are performed at the reporting unit level, which for us is our five regional operating segments.

 

We use a market multiples approach to determine fair value. Marketplace company comparisons and analyst reports have historically supported a range of fair values of multiples between 5.5x and 7.5x annualized EBITDA.  For the purpose of the goodwill impairment test we define 2014 EBITDA as operating income, net of acquisition and integration costs, non-cash pension and OPEB costs, and severance costs, plus depreciation and amortization.  We estimated the enterprise fair value using a multiple of 6.25x EBITDA. Once determined, this estimate of enterprise fair value is then allocated to the reporting units based upon each unit’s relative share of consolidated EBITDA. The result of this first step indicated that fair values of each reporting unit exceed their carrying values. As a result, the second step of the goodwill impairment test was not required. Had we reduced the EBITDA multiple to 5.75x EBITDA, there still would be no indicator of impairment.  For more information on goodwill, see Note 6 of the Notes to Consolidated Financial Statements.

 

The Company monitors relevant circumstances, including general economic conditions, enterprise value EBITDA multiples for other rural ILEC properties, the Company’s overall financial performance, the market prices for the Company’s common stock, and the potential impact that changes in such circumstances might have on the valuation of the Company’s goodwill or other intangible assets.

 

Depreciation and Amortization

The calculation of depreciation and amortization expense is based upon the estimated useful lives of the underlying property, plant and equipment and identifiable finite-lived intangible assets.  Depreciation expense is principally based on the composite group method for substantially all of our property, plant and equipment assets. The estimates for remaining lives of the various asset categories are determined annually, based on an independent study. Among other considerations, these studies include models that consider actual usage, replacement history and assumptions about technology evolution for each category of asset. The latest study was completed in the fourth quarter of 2014 and did not result in any significant changes in remaining lives for any of our asset categories. A one year decrease in the estimated useful lives of our property, plant and equipment would result in an increase of approximately $100 million to depreciation expense.

 

Our finite-lived intangibles consist principally of customer base; $2.5 billion from the 2010 Acquisition and $590 million from the recently completed Connecticut Acquisition.  These customer bases are being amortized on an accelerated method because this method most closely resembles the projected underlying revenue streams. In assigning lives, which range from between nine and 12 years, a separate evaluation and determination is made for residential and business customers.

 

See Notes 5 and 6 of the Notes to Consolidated Financial Statements for additional discussion.

 

Asset Impairments

We review long-lived assets to be held and used, including customer lists, and long-lived assets to be disposed of for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of the asset to the estimated fair value, which is based on the future undiscounted net cash flows expected to be generated by the asset. Recoverability of assets held for sale is measured by comparing the carrying amount of the assets to their estimated fair market value. If any assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value.  Also, we periodically reassess the useful lives of our tangible and intangible assets to determine whether any changes are required.   

 

Pension and Other Postretirement Benefits

We sponsor a defined benefit pension plan covering a significant number of our current and former employees as well as other postretirement benefit plans that provide medical, dental, life insurance and other benefits for covered retired employees and their beneficiaries and covered dependents. As of December 31, 2014, the unfunded benefit obligation for these plans recorded on our consolidated balance sheet was $1.3 billion. During 2014, we contributed $95 million to these plans and recorded $74 million of expense before capitalization. Pension and other postretirement benefit costs and obligations are dependent upon various actuarial assumptions, the most significant of which are the discount rate and the expected long-term rate of return on plan assets. 

 

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Our discount rate assumption is determined annually with assistance from our actuaries based on the pattern of expected future benefit payments and the prevailing rates available on long-term, high quality corporate bonds with durations approximate to that of our benefit obligation.  As of December 31, 2014 and 2013, we utilized an estimation technique that is based upon a settlement model (Bond:Link) that permits us to closely match cash flows to the expected payments to participants. This rate can change from year-to-year based on market conditions that affect corporate bond yields.

 

We are utilizing a discount rate of 4.10% as of December 31, 2014 for our qualified pension plan, compared to rates of 4.90% and 4.00% in 2013 and 2012, respectively.  The discount rate for postretirement plans as of December 31, 2014 was a range of 4.10% to 4.20%  compared to a range of 4.90% to 5.20% in 2013 and 4.00% to 4.20% in 2012.

 

In the following table, we show the estimated sensitivity of our pension and other postretirement benefit plan liabilities to a 25 basis point change in the discount rate as of December 31, 2014:

 

 

In developing the expected long-term rate of return assumption, we considered published surveys of expected market returns, 10 and 20 year actual returns of various major indices, and our own historical 5 year, 10 year and 20 year investment returns. The expected long-term rate of return on plan assets is based on an asset allocation assumption of 35% to 55% in fixed income securities, 35% to 55% in equity securities and 5% to 15% in alternative investments. We review our asset allocation at least annually and make changes when considered appropriate. Our asset return assumption is made at the beginning of our fiscal year.  In 2012, 2013 and 2014, our expected long-term rate of return on plan assets was 7.75%, 8.00% and 7.75%, respectively.  Our actual return on plan assets in 2014 was 11.9%.  For 2015, we will assume a rate of return of 7.75%. Our pension plan assets are valued at fair value as of the measurement date.

 

We expect that our pension and other postretirement benefit expenses for 2015 will be approximately $85 million to $105 million before amounts capitalized into the cost of capital expenditures.  We expect to make contributions to our pension plan of approximately $100 million in 2015. 

 

For additional information regarding our pension and other postretirement benefits see Note 16 to the Notes to Consolidated Financial Statements.

 

Income Taxes    

We file a consolidated federal income tax return. We utilize the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recorded for the tax effect of temporary differences between the financial statement basis and the tax basis of assets and liabilities using tax rates expected to be in effect when the temporary differences are expected to reverse. Actual income taxes could vary from these estimates due to future changes in governing law or review by taxing authorities.

 

We use a “more likely than not” threshold to the recognition and derecognition of uncertain tax positions either taken or expected to be taken in the Company’s income tax returns. The total amount of our gross tax liability for tax positions that may not be sustained under a “more likely than not” threshold amounts to $19.7 million as of December 31, 2014 including interest of $0.4 million. For additional information regarding our accounting for income taxes see Note 11 of the Notes to Consolidated Financial Statements.

 

Business Combinations

We allocate the total cost of an acquisition to the underlying net assets based on their respective estimated fair values. As part of this allocation process, we identify and attribute values and estimated lives to the intangible assets acquired. These determinations involve significant estimates and assumptions about several highly subjective variables, including future cash flows, discount rates, and asset lives. There are also different valuation models for each component, the selection of which requires considerable judgment. Our estimates and assumptions may be based, in part, on the availability of listed market prices or other transparent market data. These determinations will affect the amount of amortization expense recognized in future

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periods. We base our fair value estimates on assumptions we believe are reasonable, but recognize that the assumptions are inherently uncertain. Depending on the size of the purchase price of a particular acquisition and the mix of intangible assets acquired, the purchase price allocation could be materially impacted by applying a different set of assumptions and estimates.

 

The Company allocated $2.0 billion in total consideration to the “fair market value” of the assets and liabilities acquired in the Connecticut Acquisition. The estimates of the fair values assigned to property, plant and equipment, customer list and goodwill, are more fully described in Note  3 of the Notes to Consolidated Financial Statements.

 

Recent Accounting Pronouncements

See Note 2 of the Notes to Consolidated Financial Statements included in Part IV of this report for additional information related to recent accounting literature. 

 

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to market risk in the normal course of our business operations due to ongoing investing and funding activities, including those associated with our pension plan assets. Market risk refers to the potential change in fair value of a financial instrument as a result of fluctuations in interest rates and equity prices. We do not hold or issue derivative instruments, derivative commodity instruments or other financial instruments for trading purposes. As a result, we do not undertake any specific actions to cover our exposure to market risks, and we are not party to any market risk management agreements other than in the normal course of business. Our primary market risk exposures from interest rate risk and equity price risk are as follows:

 

Interest Rate Exposure

 

Our exposure to market risk for changes in interest rates relates primarily to the interest-bearing portion of our pension investment portfolio and related obligations, as well as our floating rate indebtedness. As of December 31, 2014,  92% of our long-term debt had fixed interest rates.  We had no interest rate swap agreements related to our fixed rate debt in effect at December 31, 2014 and 2013. The Company believes that its exposure to interest rate changes is minimal.

 

Our objectives in managing our interest rate risk are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, only $753 million of our outstanding borrowings at December 31, 2014 have floating interest rates. In addition, our undrawn $750 million revolving credit facility has interest rates that float with the LIBO Rate, as defined. Consequently, we have limited material future earnings or cash flow exposures from changes in interest rates on our debt. An adverse change in interest rates would increase the amount that we pay on our variable rate obligations and could result in fluctuations in the fair value of our fixed rate obligations. Based upon our overall interest rate exposure at December 31, 2014, a near-term change in interest rates would not materially affect our consolidated financial position, results of operations or cash flows.

 

At December 31, 2014, the fair value of our long-term debt was estimated to be approximately $10 billion, based on our overall weighted average borrowing rate of 7.62% and our overall weighted average maturity of approximately eight years.  As of December 31, 2014, there has been no significant change in the weighted average maturity applicable to our obligations since December 31, 2013.  

 

Equity Price Exposure

 

Our exposure to market risks for changes in equity security prices as of December 31, 2014 is limited to our pension plan assets.  We have no other security investments of any significant amount.

 

The Company’s pension plan assets increased from $1,217 million at December 31, 2013 to $1,673 million at December 31, 2014, an increase of $456 million, or 38%. This increase is a result of asset transfers from the AT&T pension plan trusts of $343 million related to the Connecticut Acquisition, including approximately $35 million that represents a receivable of the Plan as of December 31, 2014, positive investment returns of $140 million and cash contributions of $83 million,  partially offset by benefit payments of $110 million. Our 2014 total contributions reflect the impact of the extension of funding relief included in the Highway and Transportation Funding Act of 2014. We expect that we will make contributions to our pension plan of approximately $100 million in 2015.

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Item 8.Financial Statements and Supplementary Data

 

The following documents are filed as part of this Report:

 

1. Financial Statements - See Index on page F-1.

 

2. Supplementary Data - Quarterly Financial Data is included in the Financial Statements (see 1. above).

 

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

 

None.

 

Item 9A.Controls and Procedures

 

(i)Evaluation of Disclosure Controls and Procedures

We  carried  out  an  evaluation, under  the  supervision  and  with  the participation of our management,  including our principal executive officer and principal financial officer, regarding the effectiveness of our disclosure controls and  procedures (as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934, as amended).  Based upon this evaluation, our principal executive officer and principal financial officer concluded, as of the end of the period covered by this report, December 31, 2014, that our disclosure controls and procedures were effective. 

 

(ii)  Internal Control Over Financial Reporting

      (a)   Management’s annual report on internal control over financial reporting

Our management report on internal control over financial reporting appears on page F-2.

      (b)   Report of registered public accounting firm

The report of KPMG LLP, our independent registered public accounting firm, on internal control over financial reporting appears on page F-4.

      (c)   Changes in internal control over financial reporting

We reviewed our internal control over financial reporting at December 31, 2014. 

 

There have been no changes in our internal control over financial reporting identified in an evaluation thereof that occurred during the last fiscal quarter of 2014 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

In May 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued its updated Internal Control – Integrated Framework (the 2013 Framework) and related illustrative documents. The original COSO Framework was published in 1992 and was recognized as the leading guidance for designing, implementing and conducting internal controls over external financial reporting and assessing its effectiveness. The 2013 Framework is expected to help organizations design and implement internal control in light of many changes in business and operating environments since the issuance of the original Framework, broaden the application of internal control in addressing operations and reporting objectives, and clarify the requirements for determining what constitutes effective internal control. We adopted the 2013 Framework during 2014, which did not have a significant impact on the Company.

 

Item 9B.     Other Information

 

None.

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PART III

 

Item 10.      Directors, Executive Officers and Corporate Governance

 

Certain of the information required by this Item is incorporated by reference from our definitive proxy statement for the 2015 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A within 120 days after December 31, 2014. 

 

Executive Officers of the Registrant

 

Our Executive Officers as of February 13, 2015 were:

 

 

There is no family relationship between the directors or executive officers. The term of office of each of the foregoing officers of Frontier will continue until the next annual meeting of the Board of Directors and until a successor has been elected and qualified.

 

KATHLEEN Q. ABERNATHY joined Frontier’s management team in March 2010, after serving as a member of Frontier’s Board of Directors from April 2006 to March 2010.  She is currently Executive Vice President, External Affairs.  Previously, she was Chief Legal Officer and Executive Vice President, Regulatory and Government Affairs from March 2010 to June 2012.  From October 2008 to March 2010, Ms. Abernathy was a partner at the law firm of Wilkinson Barker Knauer, LLP.  Prior to that time, she was a partner at the law firm of Akin Gump Strauss Hauer & Feld LLP from March 2006 to October 2008.  From June 2001 to December 2005, she served as a Commissioner at the Federal Communications Commission. 

 

DONALD DANIELS joined Frontier in July 2014 as Senior Vice President and Controller.  From October 2002 to July 2014 he held various positions with JetBlue Airways Corporation, including Corporate Controller, Chief Accounting Officer, Vice President and Controller, Assistant Controller, and Director of Financial Reporting.  Prior to that Mr. Daniels held various positions of increasing responsibility at Delta Air Lines and Deloitte and Touche, LLP.  Mr. Daniels is a veteran of the United States Army and a certified public accountant. 

 

JOHN M. JURELLER joined Frontier in January 2013 as Executive Vice President and Chief Financial Officer-Elect and became Chief Financial Officer on February 27, 2013.  Mr. Jureller was Senior Vice President, Finance & Operations for the Resources Group of General Atlantic LLC from April 2008 to October 2012.  Previously, he was Chief Financial Officer of WestPoint International, Inc. from March 2006 to March 2008.  Prior to that, Mr. Jureller was a member of the Corporate Turnaround & Restructuring practice of AlixPartners, LLC from April 2003 to February 2006.  Before joining AlixPartners, LLC, Mr. Jureller was Chief Financial Officer of Trans-Resources, Inc., Senior Vice President, Corporate Development of Gartner, Inc. and Senior Vice President, Finance and Corporate Development at Caribiner International Inc. 

 

DANIEL J. McCARTHY has been with Frontier since December 1990. He has served as a Director of Frontier since May 2014. He is currently President and Chief Operating Officer. Previously, he was Executive Vice President and Chief Operating Officer from January 2006 to April 2012 and Senior Vice President, Field Operations from December 2004 to December 2005.  Prior to that, he was Senior Vice President, Broadband Operations from January 2004 to December 2004, President and Chief Operating Officer of Electric Lightwave from January 2002 to December 2004, President and Chief Operating Officer, Public Services Sector from November 2001 to January 2002, Vice President and Chief Operating Officer, Public Services Sector from March 2001 to November 2001 and Vice President, Citizens Arizona Energy from April 1998 to March 2001.

 

CECILIA K. McKENNEY has been with Frontier since February 2006.  She is currently Executive Vice President, Human Resources and Administrative Services.  Previously, she was Executive Vice President, Human Resources and Sales Operations from May 2012 to January 2013, Executive Vice President, Human Resources and Call Center Sales & Service from February 2008 to May 2012 and Senior Vice President, Human Resources from February 2006 to February 2008.  Prior to joining Frontier, she was Group Vice President, Headquarters Human Resources, of The Pepsi Bottling Group (PBG) from 2004 to 2005.  Previously at PBG Ms. McKenney was Vice President, Headquarters Human Resources from 2000 to 2004.

 

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MARK D. NIELSEN joined Frontier in March 2014 as Senior Vice President, General Counsel, and Secretary.  Prior to this, he was Associate General Counsel and Chief Compliance Office for Praxair Inc.  From 2007 to 2009, he was Vice President and Assistant General Counsel of Raytheon Company.  Before that, Mr. Nielsen served as Chief Legal Counsel, and then Chief of Staff, to Massachusetts Governor Mitt Romney (2004-2007).

 

MARY AGNES WILDEROTTER has been with Frontier since November 2004.  She is currently Chairman of the Board and Chief Executive Officer.  She was elected President and Chief Executive Officer in November 2004 and Chairman of the Board in December 2005.  She was President of Frontier until April 2012.  Prior to joining Frontier, she was Senior Vice President - Worldwide Public Sector of Microsoft Corp. from February 2003 to November 2004 and Senior Vice President - Worldwide Business Strategy of Microsoft Corp. from 2002 to 2004.  Before that she was President and Chief Executive Officer of Wink Communications from 1997 to 2002.

 

Item 11.     Executive Compensation

 

The information required by this Item is incorporated by reference from our definitive proxy statement for the 2015 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A within 120 days after December 31, 2014.

 

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

 

The information required by this Item is incorporated by reference from our definitive proxy statement for the 2015 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A within 120 days after December 31, 2014.

 

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

 

The information required by this Item is incorporated by reference from our definitive proxy statement for the 2015 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A within 120 days after December 31, 2014.

 

Item 14.      Principal Accountant Fees and Services

 

The information required by this Item is incorporated by reference from our definitive proxy statement for the 2015 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A within 120 days after December 31, 2014.

 

 

PART IV

 

Item 15.Exhibits and Financial Statement Schedules

List of Documents Filed as a Part of This Report:

 

(1)    Index to Consolidated Financial Statements:

 

Reports of Independent Registered Public Accounting Firm 

 

Consolidated Balance Sheets as of December 31, 2014 and 2013

 

Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012 

 

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014, 2013 and 2012

 

Consolidated Statements of Equity for the years ended December 31, 2014, 2013 and 2012 

 

Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012 

 

Notes to Consolidated Financial Statements

 

All other schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or not required.

 

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 (2) Index to Exhibits: 

 

All documents referenced below were filed pursuant to the Securities Exchange Act of 1934 by the Company, file number 001-11001, unless otherwise indicated.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

 

                 

                  

                                                            

 

      

 

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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 24th day of February 2015.