Takeaways
- Frontier reported continued declines across revenue, profits and subscribers.
- Frontier reported a Fiber to the Home pilot program for 2020 along with a post-bankruptcy plan for investment in fiber in select geographic areas.
- Frontier filed an incentive compensation proposal with the bankruptcy court for the top eight management positions (CEO, COO, etc.) totalling $8.7 - $16.1m over 2020. Opposition filings are due on June 22nd and the court will rule on this program at the June 29th hearing.
- Over the past few weeks, Frontier has initiated proceedings across state PUCs for approval of their anticipated bankruptcy plan. The California and the Minnesota PUCs have scheduled comment deadlines (CA: June 29, MN: July 10) and Frontier has proposed a comment timeline for the West Virginia PSCthat has not yet been approved.
Q1 2202 Earnings Report Summary
On May 6, Frontier released an earnings report covering the first quarter of 2020 and the fourth quarter of 2019, its first financial report released in 2020. For the first quarter, management reported continued declines across important measures - revenue (-8.0% Year over Year), Adjusted EBITDA (-10.3% YoY), Broadband subscribers (-5.9% YoY), and Telephone subscribers (-7.6% YoY). The company reported a net loss of $186 million, compared to $87 million in Q1 2019. These results include the northwest states that were sold to Wave Division on May 1st.
Management articulated a post-bankruptcy plan to shift business from legacy products to fiber, with a reported goal of fiber products representing 67% of total revenue by 2031, up from 22% in 2019. This will be accomplished through new investment in fiber deployment.
The company also reported an effort to “selectively and proactively identify and seek to monetize states that may be less strategic.” This is the first time Frontier has explicitly discussed asset sales, but it aligns with management presentations to bondholders, disclosed in the bankruptcy, which described a “virtual separation” of the company into areas identified for investment in fiber (“InvestCo”) and areas where legacy products will remain along with initiatives to improve operations (“ImproveCo”).
A Fiber to the Home pilot program is underway for 2020 with a goal of passing 40-60k new locations at a cost of $50 - $60m. Management identified Connecticut, California, Florida and Texas as example areas that will be targeted for new investment. This pilot is intended to inform plans for more investment in fiber in 2021.
Management also identified various operational initiatives in progress, including Labor and OpEx cost reductions intended to improve profits by $130m in 2022. These included:
- Automate / streamline provisioning and assignment
- Certain successful contract negotiations and eliminations of excess headcount
- Initiatives to reduce call rates and reduce truck roll rates
- Bring certain outsourced technology services in-house
Management reported a reduction of 880 total employees over the first three months of the year (down to 17,437 total), driven by early retirements ahead of the bankruptcy filing. Overall employment has decreased by 43% (a loss of 12,921 employees) in the three and half years since the acquisition of Verizon properties in California, Texas and Florida.
Bankruptcy Update
On June 8th, Frontier filed a proposal with the bankruptcy court for a new Key Employee Incentive Program (KEIP) aimed at providing additional incentive-based compensation for eight top management employees through the rest of 2020. The eight top management are Executive VP or higher, including CEO Bernie Han, COO Ken Arndt, Chief Human Resources Officer Elisa Bannon-Jones, and Chief Legal Officer Mark Nielsen.
This program will pay a minimum of $8.6m and a maximum of $16.1m total across all participants. Payout will be calculated based on predetermined benchmarks of company performance, as measured by revenue, adjusted EBITDA, and broadband subscribers.
The proposal is currently being evaluated by CWA’s legal counsel as well as the unsecured creditor committee. The deadline for objections to be filed with the bankruptcy court is June 22. The court will hear the motion on June 29th.
State PUC Tracking
Frontier has begun filing with state regulatory agencies in the 25 states it provides landline voice services.[1] Principally, state laws require regulatory approval when a change in ownership and control of telecommunications companies that provide regulated services occur. The filings request approval of the proposed bankruptcy reorganization plan pending before the U.S. Bankruptcy Court for the Southern District of New York.
The state regulatory filings appear to closely mirror each other, which state that Frontier does not intend to modify collective bargaining agreements. The dockets show that, with the exception of Connecticut and California, the state proceedings are in early stages of review without any activity. The California Public Utilities Commission and the Minnesota Public Utilities Commission have scheduled a comment timeline and Frontier has proposed a comment timeline for the West Virginia PSC.
New York Public Services Commission (NYPSC) (No: 20-00866) - A docket has been created but there is no update yet.
California Public Utilities Commission (CPUC) (No. A2005010) - The CPUC has made an initial determination that there will be a hearing. The deadline to file protest in the docket is June 29, 2020. The Utility Reform Network (TURN) is hiring a consultant to draft a protest. The CPUC Public Advocates’ Office also plans to file a protest.
Minnesota Public Utilities Commission (No. 20-504, 5-22-20 Initial filing, Notice of Comment Period) - Initial comment period closes July 10, 2020 at 4:30pm. Reply comment period closes July 24, 2020 at 4:30pm.
Ohio Public Utility Commission - No docket yet
Pennsylvania PUblic Utility Commission - No docket yet but here’s the application
Connecticut Public Utility Regulatory Authority (PURA) (No. 20-04-31) - On June 3, 2020, the Office of Consumer Counsel filed a motion to “extend the statutory deadline set forth in General Statutes § 16-47 in order to ensure that both the Authority and each party is afforded an ample opportunity for pre-hearing discovery and an in-person hearing can be held, with adequate precautions.”
On June 9, 2020, PURA closed the docket without prejudice. PURA did not deny or approve Frontier's restructuring plan because it is not yet "ripe for review” as Frontier’s plan could change due to its ongoing bankruptcy proceeding.[2] Frontier can file a new petition once its restructuring plan is firmed up. Frontier has filed an objection to the decision.
Public Service Commission of West Virginia (No. 20-0400-T-PC, Frontier’s initial filing, Consumer Advocates’ petition to intervene) - The Consumer Advocates office has submitted several data requests.
Frontier has requested the Commission to establish the following procedural order which the Commission has not approved yet: Initial Comments of Staff and Intervenor(s) July 1, 2020, Reply Comments of Frontier July 15, 2020.
Selected CEO Quotes from Frontier Quarterly Earnings Call
CEO Bernie Han on Frontline Employee Feedback:
“While it's important to keep an eye on the business via reports and dashboards, it's just as important to be in touch with our frontline employees. After all, they're the ones that have thousands of interactions every single day with our customers, either by phone or in person. They know which of our policies, which of our promotions, which of our practices make sense and which ones don't. And we, as a company, haven't utilized this very much in the past. Prior to the COVID shutdowns, we had instituted dozens of roundtables and town hall meetings with various employee groups in some of our larger cities. We learned a ton about what was not working and why they weren't working. With the COVID shutdown, that practice stopped for a while. But in the new work-at-home environment, we've recently resumed this practice using Microsoft Teams. And this may be a case where the practice that we've learned through COVID actually works somewhat better than even the practice before. We're able to do more frequent interactions now. We can reach employees at far reaches of our network that would have otherwise been hard to get in front of us.”
CEO Bernie Han on Frontier Costs Savings Opportunities:
“And for the most part, I think Frontier, we're pretty leanly run. I don't think we have tons of fat sitting around. We will go through a more detailed budget process this year than we have in the past. But I think there's 2 pockets of cost opportunity.
One is just simply running better operations. A lot of our costs are things like phone calls and trouble tickets and other truck rolls. And oftentimes, we have repeats. We have transfer call, people bouncing back and forth. And if we can reduce repeat calls, repeat truck rolls, unnecessary calls, unnecessary truck rolls, there's some pretty significant dollars there.
The other opportunity for cost reduction is probably on the video side. We have high COGS (cost of goods sold) business on video and have not been as aggressive in the past at managing that bucket of spending. And we have some initiatives that we've already taken early this year, and we'll continue to try to work those costs down going forward.”
[1]FierceTelecom, Frontier winds its way through state utility approvals as part of its Chapter 11 bankruptcy proceedings (June 11, 2020), https://www.fiercetelecom.com/telecom/frontier-winds-its-way-through-state-utility-approvals-as-part-its-chapter-11-bankruptcy?utm_source=sendgrid&utm_medium=email&utm_campaign=Newsletters
[2] Hartford Business Journal, PURA: Too soon to rule on Frontier’s $10B restructuring plan (June 10, 2020), https://www.hartfordbusiness.com/article/pura-too-soon-to-rule-on-frontiers-10b-restructuring-plan.
