Frontier is the dominant phone company in West Virginia.

The West Virginia Public Service Commission has ordered Frontier Communications to make significant improvements in its aging copper wire telephone network after a comprehensive investigation found the company’s landline phone service and broadband to be lacking.

The order comes two years after the state began investigating the phone company and six months after a service audit was completed. In the last year, 1,342 complaints about poor service were filed with the state’s Public Service Commission.

“Frontier customers in this state remain plagued with service problems even as the customer base – and the corresponding revenue – declines. The Focused Management Audit was designed to find the underlying service quality problems, and possible solutions, in the hopes of placing Frontier on a better path,” the report concluded.

Over the past two years, Frontier gradually implemented some of the recommendations made by the state, particularly a more robust tree-trimming program to pre-emptively reduce tree-related outages and an automated system that can detect service issues and outages before customers call to complain. But Frontier’s larger problem is its lack of investment in network upgrades, particularly related to replacing old copper wire infrastructure with fiber optics. The study identified the 25 worst exchanges in the state most plagued by service outages and complaints and demanded that Frontier rehabilitate or upgrade those areas to improve service. But the company has refused the Commission’s request to deploy fiber optic connections to every cross-box in the state, which connects Frontier’s network to neighborhood phone lines. Such an upgrade would dramatically reduce Frontier’s reliance on copper wiring and improve phone and internet service.

Frontier rejected the idea as “unfeasible,” claiming it would cost $100 million to complete fiber connections to each of Frontier’s 3,255 existing cross box locations. If the company moved to digital phone service across those fiber lines, the cost would rise to $200 million, according to Frontier, adding it would have no choice but to pass these costs onto customers in the state.

“Given the exorbitant expense associated with such a comprehensive endeavor, the cost of voice service would consequently increase to unsustainable levels,” the company claimed.

Yet earlier this spring, at the height of the pandemic and after declaring bankruptcy, Frontier paid out $38 million in retention bonuses to its top executives, urging the same people who presided over the company as it went bankrupt to remain on the payroll at least until the bankruptcy was discharged.

The state was given an early warning about Frontier’s decreasing performance in July 2019 after an auditing firm found the company financially troubled and had cut back dramatically on ongoing maintenance spending. The auditor also reported Frontier was likely losing customers fast and would soon feel the financial pressure of lost revenue. Just as bad, the auditor reported Frontier’s ability to stay ahead of its service problems could be compromised further by the likely retirement of more than half of the company’s most experienced service technicians in the next five years.

The auditor correctly predicted Frontier’s financial health. The company declared Chapter 11 bankruptcy in April and is reorganizing. The company claims it will exit bankruptcy in much better financial shape, with much of its debt discharged or renegotiated by creditors. In turn, Frontier has promised to boost investment in network fiber upgrades, but has not been specific about what areas it will target. A hearing to discuss some of these matters is scheduled for Oct. 28.

Even with Frontier’s imminent exit from bankruptcy, West Virginia officials remain concerned about the phone company’s commitments and whether the new management will continue to honor earlier agreements with state officials.

Windstream’s new logo

Windstream has emerged from Chapter 11 bankruptcy as a new privately held company controlled by Elliott Management Corporation, an activist hedge fund known for squeezing expenses out of companies and eventually selling its stake and exiting the business.

As a restructured company, Windstream shed almost two-thirds of its debt, amounting to more than $4 billion. The company will almost immediately tap $2 billion in new capital, targeting more spending on shedding copper wiring in several of its service areas, replaced by gigabit fiber that will primarily target its business customers. Windstream’s budget to upgrade residential customers is reportedly considerably less, but some customers will see upgrades in the future.

“Today marks the start of a new era for Windstream as an even stronger, more competitive company,” Windstream president & CEO Tony Thomas said in a statement released late Monday. “With the support of our new owners and current operational momentum, Windstream will continue advancing our long-term growth objectives while providing our customers with quality and reliable services.”

Thomas

The most immediate change most customers will notice is a new logo, which the company says aligns with the three segments of the business: consumer broadband, business customers, and wholesale/reseller clients.

Paul Sunu, who used to serve as the CEO of FairPoint Communications before it was sold to Consolidated Communications, is Windstream’s new chairman of the board.

“Tony and the Windstream team have made significant strides in the last 18 months to better position the company to compete for the long term,” Sunu said Monday. “The new board and I are confident that we have the right management team and right strategy to accelerate Windstream’s transformation, return to growth and drive sustainable value creation.”

Windstream was a publicly traded company since its 2006 spinoff from Alltel Corporation. As a private company, it will now answer primarily to its debt holders who acquired the company’s old debt in its bankruptcy.

A tropical storm that swept up the east coast of the United States took out Frontier Communications’ landline network, its backups, and 911 service for residents of Orange and Sullivan Counties, N.Y. for 13 hours last night, requiring a response from local fire officials after Frontier’s backup equipment also failed.

Tropical Storm Isaias brought significant, but not unprecedented wind and rain to the Hudson Valley of New York on Tuesday. While most of the damage and service outages were further east in the New York City, Long Island, and New Jersey areas, a general power failure in the City of Middletown started a chain of events that left two counties without Frontier phone, internet, or 911 service from 7:30 pm Tuesday night until 8:30 am Wednesday morning.

When the power failure began, Frontier’s switching network went down. Calls to 911 failed to connect, and customers reported no dial tone or internet access. Frontier’s backup battery system, designed to operate in the event of a power failure, itself failed and literally melted under the pressure, spilling enough toxic chemicals to force Frontier to request assistance from the Middletown Fire Department and Orange County Hazmat, which responded to contain the toxic material. Frontier had to drive in a replacement backup solution from another service area to get its network up and running again.

“There were several equipment failures there related to the power outage,” Brendan Casey, commissioner of emergency services told the Times Herald-Record. “Their backup system failed, their switch failed, battery issues that resulted in a minor hazmat issue. It was like everything just failed up there.”

After dealing with the failed battery equipment, county officials, firefighters, and Frontier technicians were left in the building’s parking lot cooling their heels until 2 am trying to figure out how to restore 911 service to the area, without success. Casey reported Frontier successfully restored 911 service later Wednesday morning.

Orange County, N.Y.

As Frontier technicians gradually restore service to individual customers affected by the storm, county officials are calling on the New York Public Service Commission to conduct a review of the incident and investigate if Frontier was adequately prepared to deal with the storm. Frontier will not be alone. Gov. Andrew Cuomo blasted utility companies across downstate New York, accusing them of being ill-prepared to handle the storm. Some customers are expected to be without power, phone, and internet service for up to a week.

“We know that severe weather is our new reality and the reckless disregard by utility companies to adequately plan for tropical storm Isaias left tens of thousands of customers in the dark, literally and figuratively. Their performance was unacceptable,” Cuomo said. Cuomo ordered the PSC to “launch an investigation into Verizon, PSEG Long Island, Con Edison, Central Hudson Gas & Electric, Orange and Rockland Utilities, and New York State Electric & Gas to understand how such a failure could have taken place. New Yorkers deserve answers and they deserve better. The large volume of outages and the utilities’ failure to communicate with customers in real-time proves they did not live up to their legal obligations. The fact that many customers still do not know when their power will be restored makes it even more unacceptable. The worst of this situation was avoidable, and it cannot happen again.”

Frontier was not the only telecommunications company embarrassed by the tropical storm. Along the Westchester-Putnam border, power outages knocked out cell service. At one location, a backup generator designed to provide backup power to the cell tower immediately caught fire, causing damage to the building at the base of the tower.

“While there was a fire at the cell tower in question, I have no information if all carriers on that tower are down or just one. What we do know is that cell services across the county are negatively impacted for all carriers. We had reports that cell towers in this region (Putnam, Orange, Rockland, Passaic) were damaged during the storms,” said Thomas Lannon, director of Putnam County’s technology office.

Frontier filed for bankruptcy protection in April 2020.

Frontier Communications filed for bankruptcy reorganization protection this week with more than $10 billion in debts and departing customers, despite retention efforts that cost the company more than $5 million a month.

The company had warned investors it was considering restructuring and failed to make a timely bond payment to cover a portion of its debts. Frontier had been in negotiations with debt holders for several months, attempting to secure a Restructuring Support Agreement that would reduce debt in return for an equity stake in the company. At least 75% of unsecured bondholders are reportedly on board with a deal that would free up money to spend on fiber optic upgrades.

Most of Frontier’s legacy customers are served by a deteriorating copper wire network designed for basic landline phone service. The company’s DSL internet service has been roundly criticized for being slow and unreliable. Instead of upgrading copper customers to fiber service, Frontier instead spent billions acquiring new territories from other phone companies, notably Verizon Communications and AT&T. The acquisitions did not deliver the financial returns the company expected, and customers canceled service after Frontier botched billing and service transitions that left some without service for weeks.

Today, Frontier has about four million customers, 3.5 million broadband subscribers and 18,300 employees operating in 29 states. The company has arranged a debtor-in-possession loan of $460 million from Goldman Sachs Bank to continue operating during the bankruptcy reorganization. It also expects to receive an additional $1.35 billion in cash later this month from the sale of its territories in Idaho, Montana, Oregon, and Washington to Northwest Fiber.

Frontier also divulged new details about its deteriorating business to the Bankruptcy Court:

• Frontier estimates it spends approximately $1,000 for each new residential customer and $2,500 for each new commercial customer.
• Almost all of its new customers sign up for service under a sales promotion. “On average, [Frontier] spends approximately $1.3 million per month on marketing campaigns.”
• Customer retention efforts are crucial for Frontier, which has been losing customers at an alarming rate. Frontier uses three enticements to convince customers to stay: “Save Offers,” “Roll-Off Offers,” and “Discretionary Credits.”
• “Save Offers” are a classic retention tool, offering enticements to customers threatening to cancel. Frontier offers free premium channels, reduced rates, and/or discounted service upgrades to convince customers not to leave. Frontier disclosed it pitches approximately 24,000 Save Offers each month, a sign many customers are prepared to cancel their accounts.
• “Roll-Off Offers” are made to customers calling to complain about their bill after their new customer promotion ends. Frontier regularly offers complaining, bill-shocked customers a new, less generous promotion going forward. For example, an expiring new customer discount of $60/month might be replaced with a $30/month discount if the customer agrees to stay. These offers typically last six months to a year and still leave the customer eventually paying regular prices. Frontier disclosed that it loses many more complaining customers than it keeps after promotions expire. About 16,000 customers per month (or roughly one-fourth of customers complaining about an expiring promotion) are retained as customers because of a roll-off offer.
• “Discretionary Credits” are one-time bill credits given when customers call with service complaints, reports of damage done to private property by Frontier, or missed time guarantees for service calls. Frontier admitted it is currently paying out an average of $3.9 million a month in Discretionary Credits to upset customers.

Post bankruptcy, Frontier has proposed undertaking a modest fiber upgrade program in its more profitable territories where a significant return on investment for fiber upgrades can be demonstrated. That is unlikely to include many of Frontier’s rural service areas.

Frontier Communications has revealed to investors what many probably realized long ago — the independent phone company chronically underinvested in network upgrades and repairs for years, giving customers an excuse to switch providers.

Remarkably, the phone company did not just underperform for its remaining voice and DSL internet customers. In a sprawling confidential “Presentation to Unsecured Bondholders” report produced by Frontier’s top executives, the company admits it was even unable to achieve significant growth in its fiber territories, where Frontier-acquired high-speed FiOS and U-verse fiber networks held out a promise to deliver urgently needed revenue.

Frontier’s bondholders were told the company’s ongoing losses and poor overall performance were unsustainable, despite years of executive “happy talk” about Frontier’s various rescue and upgrade plans. In sobering language, Frontier admitted its capital structure and efforts to deleverage the company’s massive debts were likely to cut the company off from future borrowing opportunities and deter future investment.

The presentation found multiple points of weakness in Frontier’s current business plan:

Voice landline service remains in perpetual decline. Like other companies, Frontier’s residential landline customers left first, but now business customers are also increasingly disconnecting traditional phone service.

About 51% of Frontier’s revenue comes from its residential customers. That number has been declining about 5% annually, year over year as customers leave. Frontier’s internet products are now crucial to the company’s ability to stay in business. Less than 30% of Frontier’s revenue comes from selling home phone lines. For Frontier to remain viable, the company must attract and keep internet customers. For the last several years, it has failed to do either.

Frontier customers are disconnecting the company’s low-speed DSL service in growing numbers, usually leaving for its biggest residential competitor: Charter Spectrum. Frontier remains saddled with a massive and rapidly deteriorating copper wire network. The company disclosed that 79% of its footprint is still served with copper-based DSL. Only 21% of Frontier’s service area is served by fiber optics, after more than a decade of promised upgrades. Frontier’s own numbers prove that where the company still relies on selling DSL, it is losing ground fast. Only its fiber service areas stand a chance. Just consider these numbers:

• Out of 11 million homes in Frontier’s DSL service area, only 1.5 million customers subscribe. That’s a market share of just 13 percent, and that number declines every quarter.
• Where Frontier customers can sign up for fiber to the home service, 1.2 million customers have done so, delivering Frontier a respectable 40 percent market share.

Frontier has been promising DSL speed upgrades for over a decade, but the company’s own numbers show a consistent failure to deliver speeds that can meet the FCC’s definition of “broadband,” currently 25 Mbps.

At least 30% of Frontier DSL customers receive between 0-12 Mbps download speed. Another 35% receive between 13-24 Mbps. Only 6% of Frontier customers get the “fast” DSL capable of exceeding 24 Mbps that is touted repeatedly by Frontier executives on quarterly conference calls.

Despite the obvious case for fiber to the home service, Frontier systematically “under-invested in fiber upgrades” in copper service areas at the same time consumers were upgrading broadband to acquire more download speed. Frontier’s report discloses that nearly 40% of consumers in its service area subscribe to internet plans offering 100 Mbps or faster service. Another 40% subscribe to plans offering 25-100 Mbps. In copper service areas, Frontier is speed-competitive in just 6% of its footprint. That leaves most speed-craving customers with only one path to faster speed: switching to another provider, typically the local cable company.

So why would a company like Frontier not immediately hit the upgrade button and start a massive copper retirement-fiber upgrade plan to keep the company in the black? In short, Frontier has survived chronic underinvestment because of a lack of broadband competition. Nearly two million Frontier customers have only one choice for internet access: Frontier. For another 11.3 million, there is only one other choice – a cable company that many detest. Frontier has enjoyed its broadband monopoly/duopoly for at least two decades. So long as its customers have fewer options, Frontier is under less pressure to invest in upgrades.

For years Frontier’s stock was primarily known for its generous dividend payouts to shareholders — money that could have been spent on network upgrades. But what hurt Frontier even more was an aggressive merger and acquisition strategy that acquired castoff landline customers from Verizon and AT&T in several states. In its most recent multi-billion dollar acquisition of Verizon customers in California, Texas, and Florida, Frontier did not achieve the desired financial results after alienating customers with persistent service and billing problems. The longer term legacy of these acquisitions is a huge amount of unpaid debt.

Frontier’s notorious customer service problems are now legendary. Frontier’s new CEO Bernie Han promises that customer service improvements are among his top four priorities. Improving the morale of employees that have been forced to disappoint customers on an ongoing basis is another.

Frontier executives are proposing to fix the company by deleveraging the company’s debt and restructuring it, freeing up capital that can be spent on long overdue network upgrades. Executives claim the first priority will be to scrap more of Frontier’s copper wire network in favor of fiber upgrades. That would be measurable progress for Frontier, which has traditionally relied on acquiring fiber networks from other companies instead of building their own.

But the company will also continue to benefit from a chronic lack of competition and Wall Street’s inherent dislike of large capital spending projects. The proposal does not come close to advocating the scrapping of all of Frontier’s copper service in favor of fiber. In fact, a rebooted Frontier would only incrementally spend $1.4 billion on fiber upgrades until 2024, $1.9 billion in all over the next decade. That would bring fiber to only three million additional Frontier customers, those the company is confident would bring the highest revenue returns. The remaining eight million copper customers would be stuck relying on Frontier’s existing DSL or potentially be sold off to another company.

Frontier seems more attracted to the prospect of introducing or upgrading service to approximately one million unserved or underserved rural customers where it can leverage broadband subsidy funding from the U.S. government. To quote from the presentation: Frontier plans to “invest in areas that are most appropriate and profitable and limit or cease investments in areas that are not.”

Another chronic problem for Frontier’s current business is its cable TV product, sold to fiber customers.

“High content/acquisition costs have made adding new customers to the Company’s video product no longer a profitable exercise,” the company presentation admits. If the company cannot raise prices on its video packages or successfully renegotiate expensive video contracts to a lower price, customers can expect a slimmed down video package, likely dispensing with regional sports networks and other high cost channels. Frontier may even eventually scrap its video packages altogether.

To successfully achieve its goals, Frontier is likely to put itself into Chapter 11 bankruptcy reorganization no later than April 14, 2020. The company’s earlier plans may have been impacted by the current economic crisis caused by the coronavirus pandemic, so the exact date of a bankruptcy declaration is not yet known.