(1)  

(a)  Basis of Presentation and Use of Estimates:

Frontier Communications Corporation and its subsidiaries are referred to as “we,” “us,” “our,” “Frontier,” or the “Company” in this report. Our interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2016.2017. Certain reclassifications of amounts previously reported have been made to conform to the current presentation, as described in Note 2 – Recent Accounting Literature.  presentation. All significant intercompany balances and transactions have been eliminated in consolidation. These interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring accruals) considered necessary, in the opinion of Frontier’s management, to present fairly the results for the interim periods shown. Revenues, net loss and cash flows for any interim periods are not necessarily indicative of results that may be expected for the full year. For our interim financial statements as of and for the period ended March 31, 2017,2018, we evaluated subsequent events and transactions for potential recognition or disclosure through the date that we filed this Form 10-Q with the Securities and Exchange Commission (SEC).

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



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



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



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

(b)Accounting Changes:

Except for the changes discussed below, Frontier has consistently applied the accounting policies to all periods presented in these unaudited consolidated financial statements.

Effective January 1, 2018, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers,” as modified (ASC 606). Frontier applied ASC 606 using the modified retrospective method – i.e., by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of equity at January 1, 2018. The historical periods have not been adjusted and continue to be reported under ASC 605 “Revenue Recognition.” See Note 3 for additional details.

The table below summarizes the impact of the adoption of ASC 606 on revenue, operating expenses, and operating income for the three months ended March 31, 2018:

(c)  Revenue Recognition:

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



Frontier collects various taxes from its customers and subsequently remits these taxes to governmental authorities. Substantially all of these taxes are recorded through the consolidated balance sheet and presented on a net basis in our consolidated statements of operations. We also collect Universal Service Fund (USF) surcharges from customers (primarily federal USF),  $57 million and $53 million for the three months ended March 31, 2018 and 2017, respectively, and video franchise fees of $12 million and $14 million for the three months ended March 31, 2018 and 2017, respectively, that we have recorded on a gross basis in

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



In 2015, we accepted the FCC’s Connect America Fund (CAF) Phase II offer of support, which is a successor to and augments the USF frozen high cost support that we had been receiving pursuant to a 2011 FCC order. Upon completion of the CTF Acquisition,2016 acquisition of properties in California, Texas, and Florida with Verizon (CTF Acquisition), Frontier assumed the CAF Phase II support and related obligations that Verizon had previously accepted with regard to California and Texas.  CAF Phase II funding is a program intended to subsidize the high cost of establishing and delivering communications services to certain unserved or underserved areas.  We are recognizing these subsidies into revenue on a straight line basis, which is consistent with how the costs related to these subsidies are being and are expected to be incurred. CAF Phase II is a multi-year program which requires us to deploy broadband to a specified number of households in each of the states where funding was accepted. Failure to meet our deployment obligations at the end of the program in 2020 will result in a return of a portion of the funding received. We regularly evaluate our ability to meet our broadband deployment obligations and adjust revenue accordingly.straight-line basis.



We categorizeFor additional information about our products, servicesrevenue policies and other revenues among the following five categories:required disclosures in accordance with ASC 606, refer to Note 3.



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



(c)(d)   Goodwill and Other Intangibles:

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



We determined that we have one operating segment based on a number of factors that our management uses to evaluate and run our business operations, including similarities of customers, products and technology. We tested goodwill for impairmentNo triggering events were identified as of March 31, 2017 as a result of a) the changes in organizational structure and the corresponding changes in management reporting to the chief operating decision makers during the first quarter of 2017 and b) the decline in share price of our common stock from December 31, 2016.  There was no indication of impairment as a result of our testing.  Significant changes in the assumptions or estimates used in our impairment analyses, such as a reduction in profitability and/or cash flows, could result in a non-cash goodwill and indefinite-lived intangible asset impairment charge and materially affect our operating results. If the assumptions for either of our EBITDA (defined as operating income, net of acquisition and integration costs, non-cash pension and OPEB costs, pension settlement costs, and restructuring costs and other charges, plus depreciation and amortization) or EBITDA multiple were to decrease by 10% there would be an indication of impairment.   Further declines in our stock pricecould also indicate impairment.2018.



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



(2)  Recent Accounting Literature:



RecentRecently Adopted Accounting Pronouncements Not Yet Adopted



Revenue Recognition

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

The FASB allows two adoption methods under ASC 606. Companies are permitted to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. We currently plan to adopt the standard induring the first quarter of 2018, using the “modifiedmodified retrospective method.” Under that method we will apply– i.e., by recognizing the rulescumulative effect of initially applying Accounting Standards Codification Topic (ASC) 606 as an adjustment to all contracts existing asthe opening balance of shareholders’ equity at January 1, 2018. The comparative information for historical periods has not been adjusted and continues to be reported under ASC 605. See Note 3 for additional details and disclosures.

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

Effective January 1, 2018, recognizing in beginning retained earnings, a cumulative-effect adjustmentwe adopted FASB ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This standard was established to includeimprove the establishmentpresentation of contract assetnet periodic pension cost and contract liability accounts with a corresponding adjustment to retained earnings and providing additional disclosures comparing revenue recognized under ASC 606 to revenue reported undernet periodic postretirement benefit cost by requiring that an employer disaggregate the previous accounting standards.

Upon initial evaluation, we believeservice cost component of periodic benefit cost from the key changesother components of net benefit cost. The amendments in the standard that impact our revenue recognition relateupdate also provide explicit guidance on how to present the allocationservice cost component and other components of contract revenues among various services and equipment, and the timing of when those revenues are recognized. Additionally, the new standard will impact the timing of recognizing costs to obtain contracts. This includes a change in our existing policy related to the way we account for customer incentives, upfront non-recurring charges, commission payments, customer disputes and the allocation of discounts.

We have established a cross-functional team to implement the standard and arenet benefit cost in the processincome statement and allow only the service cost components of identifying and implementingnet benefit cost to be eligible for capitalization. For adoption, Frontier retrospectively applied changes to our systems, processes, policiespresentation of pension settlement costs and internal controls to meetcertain other benefit costs.

The following table summarizes the standard’s reporting and disclosure requirements.impacts of adopting ASU No. 2017-07. 

Recent Accounting Pronouncements Not Yet Adopted



Leases

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



Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

Compensation – Retirement Benefits

In March 2017, theFebruary 2018, FASB issued ASU No. 2017-07, “Improving2018-02, which allows for the Presentationreclassification of Net Periodic Pension Costcertain income tax effects related to the Tax Cuts and Net Periodic Postretirement Benefit Cost”.Jobs Act (the “Tax Act”) between “Accumulated other comprehensive income” and “Retained earnings.” This standard was establishedASU relates to improve the presentation of net periodic pension costrequirement that adjustments to deferred tax liabilities and net periodic postretirement benefit cost by requiring that an employer disaggregateassets related to a change in tax laws or rates to be included in “Income from continuing operations,” even in situations where the service cost component of periodic benefit costrelated items were originally recognized in “Other comprehensive income” (rather than in “Income from the other components of net benefit cost.continuing operations”). The amendments in the update also provide explicit guidance on how to present the service cost component and other components of net benefit cost in the income statement and allow only the service cost components of net benefit cost to be eligible for capitalization.  The new guidance isthis ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Frontier is currently evaluating the impact of adopting the new standard and has not yet determined the impact of adoption on its consolidated financial statements.

Intangibles – Goodwill

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” This standard was established to simplify how an entity is required to test goodwill for impairment by eliminating Step 2from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance is effectiveentities for fiscal years beginning after December 15, 2019, including2018, and interim periods within those fiscal years. Earlyyears, with early adoption permitted. Adoption of this ASU is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Frontier is currently evaluatingto be applied either in the impact of adopting the new standard and has not yet determined the impactperiod of adoption or retrospectively to each period in which the effect of the change in the tax laws or rates were recognized. We are still evaluating certain aspects of this ASU as well as the related impacts it may have on its consolidatedour financial statements.



Recently Adopted Accounting Pronouncements



Compensation

(3)ASC 606 Adoption and Revenue Recognition:

Frontier applied ASC 606 using the modified retrospective method – Stock Compensation

In March 2016,i.e., by recognizing the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” to amendcumulative effect of initially applying ASC Topic 718, “Compensation – Stock Compensation.” The ASU is part of the FASB’s ongoing simplification initiative, which is designed to reduce cost and complexity while maintaining or improving the usefulness of the information provided606 as an adjustment to the usersopening balance of financial statements. The simplifications address a variety of areas for public entities, including the following: 1) accounting for income taxes, 2) classification of excess tax benefits on the statement of cash flows, 3) forfeitures, 4) minimum statutory tax withholding requirements, 5) classifications of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes, and 6) classification of awards with repurchase features. This guidance was effective for Frontier as of the first quarter of 2017.  During the three months ended March 31, 2017 Frontier recognized $2 million of income tax expense and recorded a cumulative effect adjustment to beginning accumulated deficit of $1 million to recognize all unrecognized deferred tax benefits recorded as ofequity at January 1, 2017.  For the three months ended March 31, 2016, Frontier reclassified $10 million of taxes paid on behalf of employees related2018. The historical periods have not been adjusted and continue to shares withheld from “Cash flows provided from (used by) operations” to “Cash flows used by financing activities” in accordance with the new standard. be reported under ASC 605 “Revenue Recognition.”



(3)   Acquisitions: