UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172020
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)
Delaware | 06-0619596 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
401 Merritt 7 | ||
Norwalk, Connecticut | 06851 | |
(Address of principal executive offices) | (Zip Code) | |
(203) 614-5600
(Registrant's telephone number, including area code)code: (203) 614-5600
N/ASecurities registered pursuant to Section 12(b) of the Act:
(Former name, former address
Title of each class | Ticker Symbol | Name of each exchange on which registered | ||
Common Stock, par value $0.25 per share (1) | FTRCQ | None(1) | ||
Preferred Stock Purchase Rights | N/A | None |
(1)On April 29, 2020, the NASDAQ Stock Market filed a Form 25 with the Securities and former fiscal year, if changed since last report)Exchange Commission to delist the common stock, par value $0.25 per share, of Frontier Communications Corporation (the “common stock”) from the NASDAQ Global Select Market. The delisting was effective 10 days after the Form 25 was filed. The deregistration of the common stock under Section 12(b) of the Securities Exchange Act of 1934 was effective 90 days after filing of the Form 25. The common stock remains registered under Section 12(g) of the Securities Exchange Act of 1934. Trading of Frontier’s common stock now occurs on the OTC Pink market under the symbol “FTRCQ.”
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 x No ___¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X x No ___¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☒¨ Accelerated filer ☐x Non-accelerated filer ☐¨
Smaller reporting company ☐x Emerging growth company ☐¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act☐¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No X x
The number of shares outstanding of the registrant’s Common Stock as of October 27, 2017July 31, 2020 was 78,458,000.104,988,000.
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
IndexTable of Contents
Page | |
Part I. Financial Information (Unaudited) | |
Item 1. Financial Statements | |
Consolidated Balance Sheets as of | 2 |
Consolidated Statements of Operations for the three and | 3 |
Consolidated Statements of Comprehensive Loss for the three and | 4 |
Consolidated | 5 |
Consolidated Statements of Cash Flows for the | 6 |
Notes to Consolidated Financial Statements | 7 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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Item 4. Controls and Procedures |
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Part II. Other Information | |
Item 1. Legal Proceedings |
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Item 1A. Risk Factors |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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Item |
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PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
(DEBTOR-IN-POSSESSION)
($ in millions and shares in thousands, except for per-share amounts)
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| September 30, 2017 |
| December 31, 2016 | ||
ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 286 |
| $ | 522 |
Accounts receivable, less allowances of $69 and $131, respectively |
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| 780 |
|
| 938 |
Prepaid expenses |
|
| 98 |
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| 88 |
Income taxes and other current assets |
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| 98 |
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| 108 |
Total current assets |
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| 1,262 |
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| 1,656 |
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Property, plant and equipment, net |
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| 14,375 |
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| 14,902 |
Goodwill |
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| 9,102 |
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| 9,674 |
Other intangibles, net |
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| 2,223 |
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| 2,662 |
Other assets |
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| 114 |
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| 119 |
Total assets |
| $ | 27,076 |
| $ | 29,013 |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Long-term debt due within one year |
| $ | 166 |
| $ | 363 |
Accounts payable |
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| 509 |
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| 698 |
Advanced billings |
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| 277 |
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| 301 |
Accrued content costs |
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| 130 |
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| 164 |
Accrued other taxes |
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| 177 |
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| 134 |
Accrued interest |
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| 205 |
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| 437 |
Pension and other postretirement benefits |
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| 23 |
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| 23 |
Other current liabilities |
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| 306 |
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| 324 |
Total current liabilities |
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| 1,793 |
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| 2,444 |
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Deferred income taxes |
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| 2,253 |
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| 2,516 |
Pension and other postretirement benefits |
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| 1,647 |
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| 1,602 |
Other liabilities |
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| 369 |
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| 372 |
Long-term debt |
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| 17,604 |
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| 17,560 |
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Equity: |
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Preferred stock, $0.01 par value (50,000 authorized shares, |
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11.125%, Series A, 19,250 shares issued and outstanding) |
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| - |
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| - |
Common stock, $0.25 par value (175,000 authorized shares, |
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79,532 issued and 78,462 and 78,170 outstanding, |
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at September 30, 2017 and December 31, 2016, respectively) |
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| 20 |
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| 20 |
Additional paid-in capital |
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| 5,124 |
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| 5,561 |
Accumulated deficit |
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| (1,234) |
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| (460) |
Accumulated other comprehensive loss, net of tax |
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| (349) |
|
| (387) |
Treasury common stock |
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| (151) |
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| (215) |
Total equity |
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| 3,410 |
|
| 4,519 |
Total liabilities and equity |
| $ | 27,076 |
| $ | 29,013 |
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(Unaudited) | ||||||||
June 30, 2020 | December 31, 2019 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,290 | $ | 760 | ||||
Accounts receivable, less allowances of $114 and $120, respectively | 602 | 629 | ||||||
Contract acquisition costs | 101 | 105 | ||||||
Prepaid expenses | 147 | 89 | ||||||
Assets held for sale | - | 1,401 | ||||||
Income taxes and other current assets | 79 | 53 | ||||||
Total current assets | 3,219 | 3,037 | ||||||
Property, plant and equipment, net | 12,845 | 12,963 | ||||||
Other intangibles, net | 838 | 1,020 | ||||||
Other assets | 565 | 468 | ||||||
Total assets | $ | 17,467 | $ | 17,488 | ||||
LIABILITIES AND EQUITY (DEFICIT) | ||||||||
Current liabilities: | ||||||||
Long-term debt due within one year | $ | 6,446 | $ | 994 | ||||
Accounts payable | 534 | 437 | ||||||
Advanced billings | 234 | 219 | ||||||
Accrued other taxes | 216 | 206 | ||||||
Accrued interest | 17 | 407 | ||||||
Pension and other postretirement benefits | 43 | 43 | ||||||
Liabilities held for sale | - | 123 | ||||||
Other current liabilities | 322 | 375 | ||||||
Total current liabilities | 7,812 | 2,804 | ||||||
Deferred income taxes | 311 | 462 | ||||||
Pension and other postretirement benefits | 2,438 | 1,896 | ||||||
Other liabilities | 406 | 412 | ||||||
Long-term debt | - | 16,308 | ||||||
Liabilities subject to compromise | 11,597 | - | ||||||
Total liabilities | 22,564 | 21,882 | ||||||
Equity (Deficit): | ||||||||
Common stock, $0.25 par value (175,000 authorized shares, | ||||||||
106,025 issued, and 104,911 and 105,131 outstanding | ||||||||
at June 30, 2020 and December 31, 2019, respectively) | 27 | 27 | ||||||
Additional paid-in capital | 4,816 | 4,815 | ||||||
Accumulated deficit | (8,940) | (8,573) | ||||||
Accumulated other comprehensive loss, net of tax | (987) | (650) | ||||||
Treasury common stock | (13) | (13) | ||||||
Total equity (deficit) | (5,097) | (4,394) | ||||||
Total liabilities and equity (deficit) | $ | 17,467 | $ | 17,488 | ||||
The accompanying Notes are an integral part of these unaudited Consolidated Financial Statements.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND
NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20172020 AND 2016
($ in millions and shares in thousands, except for per-share amounts)
(Unaudited)
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| For the three months ended |
| For the nine months ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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Revenue |
| $ | 2,251 |
| $ | 2,524 |
| $ | 6,911 |
| $ | 6,487 |
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Operating expenses: |
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Network access expenses |
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| 390 |
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| 440 |
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| 1,209 |
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| 1,053 |
Network related expenses |
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| 497 |
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| 527 |
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| 1,468 |
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| 1,399 |
Selling, general and administrative expenses |
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| 486 |
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| 582 |
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| 1,561 |
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| 1,535 |
Depreciation and amortization |
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| 539 |
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| 578 |
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| 1,670 |
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| 1,469 |
Goodwill impairment |
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| - |
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| - |
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| 670 |
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| - |
Acquisition and integration costs |
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| 1 |
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| 122 |
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| 15 |
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| 387 |
Pension settlement costs |
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| 15 |
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| - |
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| 77 |
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| - |
Restructuring costs and other charges |
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| 14 |
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| 11 |
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| 55 |
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| 11 |
Total operating expenses |
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| 1,942 |
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| 2,260 |
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| 6,725 |
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| 5,854 |
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Operating income |
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| 309 |
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| 264 |
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| 186 |
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| 633 |
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Investment and other income, net |
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| 2 |
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| 3 |
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| 5 |
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| 14 |
Loss (gain) on extinguishment of debt and debt exchanges |
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| (1) |
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| 7 |
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| 89 |
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| 7 |
Interest expense |
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| 381 |
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| 386 |
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| 1,157 |
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| 1,145 |
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Loss before income taxes |
|
| (69) |
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| (126) |
|
| (1,055) |
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| (505) |
Income tax benefit |
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| (31) |
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| (46) |
|
| (280) |
|
| (212) |
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Net loss |
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| (38) |
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| (80) |
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| (775) |
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| (293) |
Less: Dividends on preferred stock |
|
| 54 |
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| 54 |
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| 161 |
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| 161 |
Net loss attributable to |
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Frontier common shareholders |
| $ | (92) |
| $ | (134) |
| $ | (936) |
| $ | (454) |
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Basic net loss per share |
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attributable to Frontier common shareholders |
| $ | (1.19) |
| $ | (1.73) |
| $ | (12.06) |
| $ | (5.87) |
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Diluted net loss per share |
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attributable to Frontier common shareholders |
| $ | (1.19) |
| $ | (1.73) |
| $ | (12.07) |
| $ | (5.87) |
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Total weighted average shares outstanding - basic |
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| 77,797 |
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| 77,612 |
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| 77,714 |
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| 77,608 |
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Total weighted average shares outstanding - diluted |
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| 77,797 |
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| 77,612 |
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| 77,875 |
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| 77,608 |
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For the three months ended | For the six months ended | |||||||||||||
June 30, | June 30, | |||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||
Revenue | $ | 1,801 | $ | 2,067 | $ | 3,734 | $ | 4,168 | ||||||
Operating expenses: | ||||||||||||||
Network access expenses | 255 | 318 | 541 | 656 | ||||||||||
Network related expenses | 430 | 445 | 874 | 901 | ||||||||||
Selling, general and administrative expenses | 407 | 445 | 851 | 901 | ||||||||||
Depreciation and amortization | 397 | 454 | 812 | 938 | ||||||||||
Goodwill impairment | - | 5,449 | - | 5,449 | ||||||||||
Loss on disposal of Northwest Operations | 136 | 384 | 160 | 384 | ||||||||||
Restructuring costs and other charges | 36 | 31 | 84 | 59 | ||||||||||
Total operating expenses | 1,661 | 7,526 | 3,322 | 9,288 | ||||||||||
Operating income (loss) | 140 | (5,459) | 412 | (5,120) | ||||||||||
Investment and other loss, net | (20) | (9) | (15) | (18) | ||||||||||
Pension settlement costs | 56 | - | 159 | - | ||||||||||
Loss on extinguishment of debt | - | - | - | (20) | ||||||||||
Reorganization items, net | (142) | - | (142) | - | ||||||||||
Interest expense (contractual interest for the | ||||||||||||||
three and six months ended were $372 million | ||||||||||||||
and $744 million, respectively) | 160 | 383 | 543 | 762 | ||||||||||
Loss before income taxes | (238) | (5,851) | (447) | (5,920) | ||||||||||
Income tax benefit | (57) | (534) | (80) | (516) | ||||||||||
Net loss | (181) | (5,317) | (367) | (5,404) | ||||||||||
Basic and diluted net loss per share | ||||||||||||||
attributable to Frontier common shareholders | $ | (1.73) | $ | (51.07) | $ | (3.51) | $ | (51.97) | ||||||
Total weighted average shares outstanding | ||||||||||||||
- basic and diluted | 104,525 | 104,118 | 104,437 | 103,987 | ||||||||||
The accompanying Notes are an integral part of these unaudited Consolidated Financial Statements.
PART I. FINANCIAL INFORMATION (Continued)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
($ in millions)
(Unaudited)
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| For the three months ended |
| For the nine months ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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Net loss |
| $ | (38) |
| $ | (80) |
| $ | (775) |
| $ | (293) |
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Pension settlement costs, net of tax |
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| 12 |
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| - |
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| 48 |
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| - |
Other comprehensive income (loss), net of tax |
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| (32) |
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| (61) |
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| (10) |
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| (50) |
Net current-period other comprehensive income (loss) |
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| (20) |
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| (61) |
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| 38 |
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| (50) |
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Comprehensive loss |
| $ | (58) |
| $ | (141) |
| $ | (737) |
| $ | (343) |
For the three months ended | For the six months ended | |||||||||||||
June 30, | June 30, | |||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||
Net loss | $ | (181) | $ | (5,317) | $ | (367) | $ | (5,404) | ||||||
Other comprehensive income (loss), net of tax | (423) | 9 | (337) | 17 | ||||||||||
Comprehensive loss | $ | (604) | $ | (5,308) | $ | (704) | $ | (5,387) | ||||||
The accompanying Notes are an integral part of these unaudited Consolidated Financial Statements.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED
(DEFICIT)STATEMENTSTATEMENTS OF EQUITY
(DEBTOR-IN-POSSESSION)
FOR THE
NINETHREE AND SIX MONTHS ENDED SEPTEMBERJUNE 30, 2017
($ in millions and shares in thousands)
(Unaudited)
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| For the nine months ended September 30, 2017 | |||||||||||||||||||||||||
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| Accumulated |
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| Additional |
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| Other |
| Treasury |
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| Preferred Stock |
| Common Stock |
| Paid-In |
| Accumulated |
| Comprehensive |
| Common Stock |
| Total | |||||||||||||
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| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Loss |
| Shares |
| Amount |
| Equity | |||||||
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Balance January 1, 2017 (See Note 1) |
| 19,250 |
| $ | - |
| 79,532 |
| $ | 20 |
| $ | 5,561 |
| $ | (460) |
| $ | (387) |
| (1,362) |
| $ | (215) |
| $ | 4,519 |
Cumulative-effect adjustment from adoption of ASU 2016-09 |
| - |
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| - |
| - |
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| - |
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| - |
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| 1 |
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| - |
| - |
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| - |
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| 1 |
Stock plans |
| - |
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| - |
| - |
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| - |
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| (57) |
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| - |
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| - |
| 292 |
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| 64 |
|
| 7 |
Dividends on common stock |
| - |
|
| - |
| - |
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| - |
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| (219) |
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| - |
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| - |
| - |
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| - |
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| (219) |
Dividends on preferred stock |
| - |
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| - |
| - |
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| - |
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| (161) |
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| - |
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| - |
| - |
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| - |
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| (161) |
Net loss |
| - |
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| - |
| - |
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| - |
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| - |
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| (775) |
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| - |
| - |
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| - |
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| (775) |
Pension settlement costs, net of tax |
| - |
|
| - |
| - |
|
| - |
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| - |
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| - |
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| 48 |
| - |
|
| - |
|
| 48 |
Other comprehensive income, net of tax |
| - |
|
| - |
| - |
|
| - |
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| - |
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| - |
|
| (10) |
| - |
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| - |
|
| (10) |
Balance September 30, 2017 |
| 19,250 |
| $ | - |
| 79,532 |
| $ | 20 |
| $ | 5,124 |
| $ | (1,234) |
| $ | (349) |
| (1,070) |
| $ | (151) |
| $ | 3,410 |
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|
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|
|
|
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|
|
Accumulated | |||||||||||||||||||||||
Additional | Other | Treasury | Total | ||||||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive | Common Stock | Equity | ||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Shares | Amount | (Deficit) | ||||||||||||||||
Balance at January 1, 2020 | 106,025 | $ | 27 | $ | 4,815 | $ | (8,573) | $ | (650) | (894) | $ | (13) | $ | (4,394) | |||||||||
Stock plans | - | - | 1 | - | - | (143) | - | 1 | |||||||||||||||
Net loss | - | - | - | (186) | - | - | - | (186) | |||||||||||||||
Other comprehensive | |||||||||||||||||||||||
income, net of tax | - | - | - | - | 86 | - | - | 86 | |||||||||||||||
Balance at March 31, 2020 | 106,025 | 27 | 4,816 | (8,759) | (564) | (1,037) | (13) | (4,493) | |||||||||||||||
Stock plans | - | - | - | - | - | (77) | - | - | |||||||||||||||
Net loss | - | - | - | (181) | - | - | - | (181) | |||||||||||||||
Other comprehensive | |||||||||||||||||||||||
loss, net of tax | - | - | - | - | (423) | - | - | (423) | |||||||||||||||
Balance at June 30, 2020 | 106,025 | $ | 27 | $ | 4,816 | $ | (8,940) | $ | (987) | (1,114) | $ | (13) | $ | (5,097) | |||||||||
Accumulated | |||||||||||||||||||||||
Additional | Other | Treasury | |||||||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive | Common Stock | Total | ||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Shares | Amount | Equity | ||||||||||||||||
Balance at January 1, 2019 | 106,025 | $ | 27 | $ | 4,802 | $ | (2,752) | $ | (463) | (489) | $ | (14) | $ | 1,600 | |||||||||
ASC 842 transition | |||||||||||||||||||||||
adjustment, net of tax | - | - | - | 11 | - | - | - | 11 | |||||||||||||||
Impact of adoption of | |||||||||||||||||||||||
ASU 2018-02 | - | - | - | 79 | (79) | - | - | - | |||||||||||||||
Stock plans | - | - | 3 | - | - | (229) | - | 3 | |||||||||||||||
Net loss | - | - | - | (87) | - | - | - | (87) | |||||||||||||||
Other comprehensive | |||||||||||||||||||||||
income, net of tax | - | - | - | - | 8 | - | - | 8 | |||||||||||||||
Balance at March 31, 2019 | 106,025 | 27 | 4,805 | (2,749) | (534) | (718) | (14) | 1,535 | |||||||||||||||
Stock plans | - | - | - | - | - | 68 | 2 | 2 | |||||||||||||||
Net loss | - | - | - | (5,317) | - | - | - | (5,317) | |||||||||||||||
Other comprehensive | |||||||||||||||||||||||
income, net of tax | - | - | - | - | 9 | - | - | 9 | |||||||||||||||
Balance at June 30, 2019 | 106,025 | $ | 27 | $ | 4,805 | $ | (8,066) | $ | (525) | (650) | $ | (12) | $ | (3,771) | |||||||||
The accompanying Notes are an integral part of these unaudited Consolidated Financial Statements.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20172020 AND 20162019
($ in millions)
(Unaudited)
For the six months ended June 30, | ||||||||
2020 | 2019 | |||||||
Cash flows provided from (used by) operating activities: | ||||||||
Net loss | $ | (367) | $ | (5,404) | ||||
Adjustments to reconcile net loss to net cash provided from (used by) | ||||||||
operating activities: | ||||||||
Depreciation and amortization | 812 | 938 | ||||||
Loss on extinguishment of debt | - | 20 | ||||||
Pension settlement costs | 159 | - | ||||||
Stock-based compensation expense | 2 | 7 | ||||||
Amortization of deferred financing costs | 11 | 15 | ||||||
Non-cash reorganization items, net | 85 | - | ||||||
Other adjustments | 2 | 1 | ||||||
Deferred income taxes | (92) | (519) | ||||||
Goodwill impairment | - | 5,449 | ||||||
Loss on disposal of Northwest Operations | 160 | 384 | ||||||
Change in accounts receivable | 23 | (1) | ||||||
Change in accounts payable and other liabilities | 278 | (14) | ||||||
Change in prepaid expenses, income taxes and other assets | (123) | (19) | ||||||
Net cash provided from operating activities | 950 | 857 | ||||||
Cash flows provided from (used by) investing activities: | ||||||||
Capital expenditures | (511) | (580) | ||||||
Proceeds from sale of Northwest Operations | 1,131 | - | ||||||
Proceeds on sale of assets | 5 | 74 | ||||||
Other | 3 | 1 | ||||||
Net cash provided from (used by) investing activities | 628 | (505) | ||||||
Cash flows provided from (used by) financing activities: | ||||||||
Long-term debt principal payments | (5) | (1,999) | ||||||
Proceeds from long-term debt borrowings | - | 1,650 | ||||||
Proceeds from revolving debt | - | 450 | ||||||
Repayment of revolving debt | - | (475) | ||||||
Financing costs paid | (19) | (44) | ||||||
Finance lease obligation payments | (13) | (17) | ||||||
Other | - | (4) | ||||||
Net cash used by financing activities | (37) | (439) | ||||||
Increase (Decrease) in cash, cash equivalents, and restricted cash | 1,541 | (87) | ||||||
Cash, cash equivalents, and restricted cash at January 1, | 809 | 404 | ||||||
Cash, cash equivalents, and restricted cash at June 30, | $ | 2,350 | $ | 317 | ||||
Supplemental cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 427 | $ | 712 | ||||
Income tax payments, net | $ | 1 | $ | 5 | ||||
Reorganization items, net | $ | 34 | $ | - | ||||
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| 2017 |
| 2016 | ||
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|
|
|
Cash flows provided from (used by) operating activities: |
|
|
|
|
|
|
Net loss |
| $ | (775) |
| $ | (293) |
Adjustments to reconcile net loss to net cash provided from (used by) |
|
|
|
|
|
|
operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
| 1,670 |
|
| 1,469 |
Loss on extinguishment of debt and debt exchanges |
|
| 89 |
|
| 7 |
Pension settlement costs |
|
| 77 |
|
| - |
Pension/OPEB costs |
|
| 22 |
|
| 59 |
Stock-based compensation expense |
|
| 10 |
|
| 21 |
Amortization of deferred financing costs |
|
| 26 |
|
| 38 |
Other adjustments |
|
| (11) |
|
| - |
Deferred income taxes |
|
| (286) |
|
| (163) |
Goodwill impairment |
|
| 670 |
|
| - |
Change in accounts receivable |
|
| 161 |
|
| (56) |
Change in accounts payable and other liabilities |
|
| (471) |
|
| (108) |
Change in prepaid expenses, income taxes and other current assets |
|
| 3 |
|
| (12) |
Net cash provided from operating activities |
|
| 1,185 |
|
| 962 |
|
|
|
|
|
|
|
Cash flows provided from (used by) investing activities: |
|
|
|
|
|
|
Capital expenditures - Business operations |
|
| (846) |
|
| (960) |
Capital expenditures - Integration activities |
|
| (19) |
|
| (99) |
Cash paid for the CTF Acquisition |
|
| - |
|
| (9,886) |
Proceeds on sale of assets |
|
| 109 |
|
| - |
Other |
|
| 6 |
|
| - |
Net cash used by investing activities |
|
| (750) |
|
| (10,945) |
|
|
|
|
|
|
|
Cash flows provided from (used by) financing activities: |
|
|
|
|
|
|
Proceeds from long-term debt borrowings |
|
| 1,500 |
|
| 1,625 |
Long - term debt payments |
|
| (1,662) |
|
| (113) |
Financing costs paid |
|
| (15) |
|
| (38) |
Premium paid to retire debt |
|
| (80) |
|
| - |
Dividends paid on common stock |
|
| (219) |
|
| (370) |
Dividends paid on preferred stock |
|
| (161) |
|
| (161) |
Capital lease obligation payments |
|
| (30) |
|
| (8) |
Taxes paid on behalf of employees for shares withheld |
|
| (5) |
|
| (10) |
Other |
|
| 1 |
|
| 9 |
Net cash provided from (used by) financing activities |
|
| (671) |
|
| 934 |
|
|
|
|
|
|
|
Decrease in cash, cash equivalents, and restricted cash |
|
| (236) |
|
| (9,049) |
Cash, cash equivalents, and restricted cash at January 1, |
|
| 522 |
|
| 9,380 |
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash at September 30, |
| $ | 286 |
| $ | 331 |
|
|
|
|
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|
|
Supplemental cash flow information: |
|
|
|
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|
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Cash paid (received) during the period for: |
|
|
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|
|
|
Interest |
| $ | 1,373 |
| $ | 1,277 |
Income tax refunds, net |
| $ | (4) |
| $ | (35) |
The accompanying Notes are an integral part of these unaudited Consolidated Financial Statements.
(1) Summary of Significant Accounting Policies:
(a)
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, 2016.2019. 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 SeptemberJune 30, 2017,2020, 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 one1 reportable segment. Frontier provides both regulated and unregulated voice, data and video services to consumer, commercial and wholesale customers and is typically the incumbent voice services provider in its service areas.
On July 10, 2017,b) Going Concern:
Our interim unaudited consolidated financial statements have been prepared assuming that we effectedwill continue as a one for fifteen reverse stock splitgoing concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the normal course of business. In connection with the preparation of our common stock.interim unaudited consolidated financial statements, we conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the entity’s ability to continue as a going concern. As reflected in our consolidated financial statements, the Company had unrestricted cash and cash equivalents of $2,290 million and an accumulated deficit of $8,940 million as of June 30, 2020. The reverse stock split reducedCompany also had operating income of $412 million and a net loss of $367 million for the numbersix months ended June 30, 2020.
On April 14, 2020, Frontier Communications Corporation and its subsidiaries (collectively, the Company Parties) entered into a Restructuring Support Agreement (the Restructuring Support Agreement) with certain of common shares issued (which includes outstanding sharesits noteholders (the Consenting Noteholders). The Restructuring Support Agreement contemplates agreed-upon terms for a pre-arranged financial restructuring plan (the Plan) that leaves unimpaired all general unsecured creditors and treasury shares) from approximately 1,193,000,000 sharesholders of secured debt and subsidiary debt.
Under the Restructuring Support Agreement, the Consenting Noteholders agreed, subject to 80,000,000 shares,certain terms and reduced shares outstanding from 1,178,000,000 sharesconditions, to 79,000,000 shares. support a financial restructuring (the Restructuring) of the existing debt of, existing equity interests in, and certain other obligations of the Company Parties, pursuant to the Plan to be filed in cases commenced under chapter 11 (the Chapter 11 Cases) of the United States Bankruptcy Code (the Bankruptcy Code).
To implement the Plan, on April 14, 2020 (the Petition Date), the Company Parties filed the Chapter 11 Cases in the U.S. Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). Each Company Party continues to operate its business as a “debtor in possession” under the jurisdiction of the
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. The Chapter 11 Cases are being jointly administered under the caption In addition,re Frontier Communications Corporation., et al., Case No. 20-22476 (RDD).
On May 15, 2020, the Company Parties filed the Plan and atrelated Disclosure Statement describing the Plan and the solicitation and voting procedures to approve the same, time,each of which were amended on June 26, 2020, June 29, 2020 and June 30, 2020. On June 30, 2020, 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 inBankruptcy Court entered an order approving the par valueadequacy of the common stock,Disclosure Statement, the solicitation and no fractional shares were issued. All sharenotice procedures and per share amountsthe forms of voting ballots and notices in connection therewith. The order established June 29, 2020 as the financial statementsvoting record date, July 2, 2020 as the solicitation launch date and footnotes have been retroactively adjustedJuly 31, 2020 as the voting deadline. The hearing to consider confirmation of the Plan is scheduled for all periods presentedAugust 21, 2020. The Plan will be subject to give effectusual and customary conditions to plan confirmation, including obtaining the requisite vote of an impaired class of creditors and approval of the Bankruptcy Court.
Our ability to continue as a going concern is contingent upon, among other things, our ability to, subject to the reverse stock split.Bankruptcy Court’s approval, implement the Plan, successfully emerge from the Chapter 11 Cases and generate sufficient liquidity from the Restructuring to meet our obligations and operating needs. As a result of risks and uncertainties related to (i) the Company’s ability to obtain requisite support for the Plan from various stakeholders, and (ii) the effects of disruption from the Chapter 11 Cases making it more difficult to maintain business, financing and operational relationships, together with the Company’s recurring losses from operations and accumulated deficit, substantial doubt exists regarding our reverse stock splitability to continue as a going concern. For detailed discussion about the conversion ratesRestructuring Support Agreement and the Plan, refer to Note 3.
The filing of the Chapter 11 Cases constituted an event of default that accelerated substantially all of our Series A Preferred Stockobligations under the documents governing the JPM Credit Facilities, the First Lien Notes, the Second Lien Notes, our unsecured notes and debentures and the secured and unsecured debentures of our subsidiaries. We have reclassified all debt obligations to “Long term debt due within one year” or “Liabilities Subject to Compromise”, based on the event of default or reinstatement provisions of each security in the Restructuring Support Agreement, on our consolidated balance sheet as of June 30, 2020. For additional discussion related to the impact of the Chapter 11 Cases on our debt obligations, refer to Note 10.
Our consolidated interim unaudited financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
c) Impact of COVID-19:
On March 11, 2020, the World Health Organization declared the highly contagious and lethal corona virus outbreak a global pandemic (COVID-19) and recommended containment and other mitigation measures worldwide to lessen the transmission of COVID-19. In the first half of 2020, governments from around the world, including the United States federal government as well as state and local governments have reacted to this public health crisis, imposing travel restrictions and restrictions on large gatherings of people, which includes school and non-essential business closures. The rapid spread of COVID-19 and the drastic responses being taken to curb its spread have resulted in a significant negative impact to the global and domestic economies, which will increase the longer these limitations are in place. In an effort to reduce the economic impacts of COVID-19, the United States federal government has responded with multiple stimulus bills, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the largest economic stimulus legislation in American history. Despite these efforts, the short-term and long-term impacts of COVID-19 cannot be determined.
With more people staying at home and an increased reliance on broadband and telephone networks, the FCC issued the Keep Americans Connected Pledge on March 11, 2020, which provided for telecommunication providers, including Frontier, to not terminate service and to waive any late payment fees for 60 days for certain customers due to economic circumstances they are facing related to COVID-19 as well as making WIFI hotspots available to all Americans who need them. In addition, some of the states we operate in have issued executive orders as a result of COVID-19 that further impact our
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
business, including prohibiting the disconnection of services for customers for the length of the state of emergency. While the initial 60-day period of the Keep Americans Connected Pledge has expired, state and federal governments continue to ask companies to aid in pandemic response. While certain customers have taken advantage of our COVID-19 related relief programs, as of June 30, 2020, very few had past due balances beyond the point of normal disconnection.
In addition to committing to the Keep Americans Connected Pledge, Frontier’s response to COVID-19 has included several operational safety precautions such as limiting our product offerings in certain markets for certain periods, including not allowing our field service employees to enter a customer’s home for a period of time, a limitation which is no longer in effect. We are continuing to require personal protective equipment on any employees entering a customer location. Currently, approximately 1% of Frontier’s employees have reported testing positive for COVID-19. Through June 30, 2020, we had not experienced any significant disruptions in our supply chain; however, some of our business partners, particularly those vendors operating outside of the United States, have been more greatly impacted which has affected our service levels and distribution of work.
Given the unprecedented and evolving nature of the pandemic and the swift moving response of multiple levels of government as well as the uncertainty of funding available for services provided, the full impact of these changes and potential changes on the Company are unknown at this time.
While overall the operational and financial impacts to Frontier of the COVID-19 pandemic for the three and six months ended June 30, 2020 were proportionately adjusted.not significant, we continue to closely monitor the ongoing impact to our employees, our customers, our business and our results of operations. We have experienced a slowdown in service activations and an increase in deactivations for our SMB customers; to date, these negative impacts have been partially offset by higher residential activations and lower churn. We also continue to closely track our customers’ payment activity as well as external factors, including the future expiration of federal wage subsidies for individuals and small businesses which could materially impact payment trends. With more people working from home, we have experienced higher demands on our network and higher sales activity for our residential broadband service offering. This sustained increase in network demand could lead to reduced network availability and potential outages, which may impair our ability to meet customer service level commitments, lead to higher costs, higher customer churn and potential increased regulatory actions. These potential changes, among others, could have a material financial impact to Frontier
(b) d) Debtor-in-Possession:
In general, as debtors-in-possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Pursuant to first day and other motions filed with the Bankruptcy Court, the Bankruptcy Court authorized us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to obtain debtor-in-possession financing, pay employee wages and benefits, settle certain de minimis disputes and pay vendors and suppliers in the ordinary course for all goods and services.
e) Revenue Recognition:
Revenue for data & Internet services, voice services, video services and switched and non-switched access services is recognized
when servicesas the service is provided. 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
7
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Satisfaction of Performance Obligations
Frontier satisfies its obligations to customers by transferring goods and services in exchange for consideration received from the customer. The timing of Frontier’s satisfaction of the performance obligation often differs from the timing of the customer’s payment, which results in the recognition of a contract asset or a contract liability. Frontier recognizes a contract asset or liability when the Company transfers goods or services to a customer and bills an amount which differs from the revenue allocated to the related performance obligations.
Bundled Service and Allocation of Discounts
When customers purchase more than one service, the revenue allocable to each service is determined based upon the relative stand-alone selling price of each service received. We frequently offer service discounts as an incentive to customers. Service discounts reduce the total transaction price allocated to the performance obligations that are satisfied over the term of the customer contract. We may also offer incentives which are considered cash equivalents (e.g. Visa gift cards) that similarly result in a reduction of the total transaction price as well as lower revenue over the term of the contract. A contract asset is often created during the beginning of the contract term when the term of the incentive is shorter than the contract term. These contract assets are realized over the term of the contract as our performance obligations are satisfied and customer consideration is received.
Customer Incentives
In the process of acquiring and/or retaining customers, we may issue a variety of other incentives aside from service discounts or cash equivalent incentives. Those incentives that have stand-alone value (e.g. gift cards not considered cash equivalents or free goods/services) are considered a separate performance obligation. As a result, while these incentives are free to the customer, a portion of the consideration received from the customer over the contract term is ascribed to them based upon their relative stand-alone selling price. The revenue, reflected in “Other” revenue, and costs, reflected in “Network access expenses”, for these incentives are recognized when they are delivered to the customer and the performance obligation is satisfied. Similar to discounts, these types of incentives generally result in the creation of a contract asset during the beginning of the contract term which is recorded in Other current assets and Other assets on our consolidated balance sheet.
Upfront Fees
All non-refundable upfront fees provide our customers with a material right to renew, and their related direct and incremental coststherefore, are initially deferred and recognized asamortized into revenue and expense over the averageexpected period for which related services are provided. With upfront fees assessed at the beginning of a contract, a contract liability is often created, which is reduced over the term of the contract as the performance obligations are satisfied. The contract liabilities are recorded in Other current liabilities and Other liabilities on our consolidated balance sheet.
Contributions in Aid of Construction (CIAC)
It is customary for us to charge customers for certain construction activities. These activities are requested by the customer and construction charges are assessed at the beginning of a contract. When charges are incurred, a contract liability is often created, which is reduced over the term of the contract as performance obligations are satisfied. The contract liabilities are recorded in Other current liabilities and Other liabilities on our consolidated balance sheet.
Contract Acquisition Costs
Certain costs to acquire customers are deferred and amortized over the expected customer relationship. We recognize as current period expense the portionlife (average of installation4.0 years). For Frontier, this includes certain commissions paid to acquire new customers. Commissions attributable to new customer contracts are deferred and amortized into expense.Unamortized deferred commissions are recorded in Contract acquisition costs that exceeds installation fee revenue.and Other assets on our consolidated balance sheet.
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
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Fund (USF) surcharges from customers (primarily federal USF), which amounted to $42 million and $49 million, and $91 million and $102 million for the three and six months ended June 30, 2020 and 2019, respectively, and video franchise fees, which amounted to $8 million and $11 million, and $16 million and $21 million for the three and six months ended June 30, 2020 and 2019, respectively, that we have recorded on a gross basis in our consolidated statements of operations and included within “Revenue” and “Network related expenses”.
In June 2015, Frontier accepted the Federal Communications Commission’s (FCC) offer of $52 million and $60 million, and $160 million and $161 millionsupport to price cap carriers under the Connect America Fund (CAF) Phase II program, which is intended to provide long-term support for the three and nine months ended September 30, 2017 and 2016, respectively.
In 2015, we accepted thebroadband in high cost unserved or underserved areas. We are recognizing FCC’s Connect America Fund (CAF) Phase II offer of support, which is a successor to and augments the USF frozen high cost support that we had been receiving pursuant to a 2011 FCC order. Upon completion of the CTF Acquisition, Frontier assumed the CAF Phase II support and related obligations that Verizon had previously accepted with regard to California and Texas. CAF Phase II funding is a program intended to subsidize the high cost of establishing and delivering communications services to certain unserved or underserved areas. We are recognizing these subsidies into revenue on a straight linestraight-line basis which is consistentover the seven year funding term.
f)Cash Equivalents:
We consider all highly liquid investments with how the costs related to these subsidies are being and are expectedan original maturity of three months or less to be incurred. CAF Phase IIcash equivalents. Restricted cash of $60 million and $50 million is a multi-year program which requires us to deploy broadband to a specified number of householdsincluded in each of the states where funding was accepted. Failure to meet“Other assets” on our deployment obligations at the end of the program in 2020 would result in a return of a portion of the funding received. We regularly evaluate our ability to meet our broadband deployment obligations and adjust revenue accordingly.
We categorize our products, services and other revenues among the following five categories:
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8
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The following table provides a summary of revenues from external customers by the categories of Frontier’s products and services:
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| September 30, |
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($ in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
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Data and Internet services |
| $ | 956 |
| $ | 1,045 |
| $ | 2,923 |
| $ | 2,680 |
|
Voice services |
|
| 702 |
|
| 809 |
|
| 2,177 |
|
| 2,112 |
|
Video services |
|
| 318 |
|
| 392 |
|
| 994 |
|
| 879 |
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Other |
|
| 84 |
|
| 73 |
|
| 231 |
|
| 218 |
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Customer revenue |
|
| 2,060 |
|
| 2,319 |
|
| 6,325 |
|
| 5,889 |
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Switched access and subsidy |
|
| 191 |
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| 205 |
|
| 586 |
|
| 598 |
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Total revenue |
| $ | 2,251 |
| $ | 2,524 |
| $ | 6,911 |
| $ | 6,487 |
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(c)Goodwill and Other Intangibles:
Goodwill represents the excess of purchase price over the fair value of identifiable tangible and intangible net assets 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 annuallyconsolidated balance sheet as of June 30, 2020 and December 31, or more frequently2019, respectively. This amount represents funds held as circumstances warrant,collateral by a bank against letters of credit issued predominately to determine whether there are any impairment losses. We test for goodwill impairment at the “operating segment” level, as that term is definedinsurance carriers and, beginning in GAAP.
We determined that we have one operating segment based on a number of factors that our management uses to evaluate and run our business operations, including similarities of customers, products and technology. We tested goodwill for impairment as of September 30, 2017 as a result of the continued decline in share price of our common stock since June 30, 2017, the date of our last goodwill impairment test. Refer to Note 6 for a discussion of our goodwill impairment testing and results as of September 30, 2017. As stated in Note 2, we early adopted ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” during the second quarter, of 2017funds held in conjunctionan interest-bearing account as adequate assurances to utility providers established in accordance with our goodwill impairment assessment.First Day Motions filed by Frontier.
g)Definite and Indefinite Lived Intangible Assets:
Intangible assets arising from business combinations, such as customer lists, tradenames, and royalty agreements are initially recorded at estimated fair value. Frontier amortizes its acquired customer lists and certain other finite-lived intangible assets over their estimated useful lives on the accelerated method of sum of the years digits.digits and its royalty agreement over its estimated useful life on the straight-line method. 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.
h)Lease Accounting:
We determine if an arrangement contains a lease at inception. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating and Finance lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating and finance lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms used in accounting for leases may reflect options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term. ROU assets for operating leases are recorded to “Other Assets”, and the related liabilities recorded to “Other current liabilities”, and “Other liabilities” on our consolidated balance sheets. Assets subject to finance leases are included in “Property, Plant & Equipment”, with corresponding liabilities recorded to “Other current liabilities”, and “Other liabilities” on our consolidated balance sheets.
(2) Recent Accounting Literature:i)Assets Held for Sale:
Recent Accounting Pronouncements Not Yet Adopted
Revenue Recognition
In May 2014,We classify assets and related liabilities as held for sale when the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contractsfollowing criteria are met: when management has committed to a plan to sell the asset, the asset is available for immediate sale, there is an active program to locate a buyer and the sale and transfer of the asset is probable within one year. Assets and liabilities are presented separately on the Consolidated Balance Sheets with Customers.” This standard, along with its related amendments, requires companiesa valuation allowance, if necessary, to recognize revenuethe net carrying amount at the lower of cost or fair value, less costs to depict the transfer of promised goods or services to customers in an amountsell. Depreciation and amortization for property, plant and equipment and finite-lived intangible assets, are not recorded while these assets are classified as held for sale. Assets held for sale are tested for recoverability each period that reflects the consideration to which they expect to be entitled in exchangeare classified as held for those goods or services. This new standard will be adopted by Frontier for annual and interim reporting periods beginning with the first quarter of 2018. sale.
“modified retrospective method.” UnderOn May 1, 2020, Frontier completed the sale of its operations and associated assets in Washington, Oregon, Idaho, and Montana (Northwest Operations or Northwest Ops). As of December 31, 2019, we reclassified assets and liabilities of our Northwest Operations as held for sale on our consolidated balance sheets, and the amounts and information in the footnotes as they are presented do not include assets and liabilities that method, we will apply the ruleshave been reclassified, refer to all contracts existing as of January 1, 2018, recognizing, in beginning retained earnings, a cumulative-effect adjustment to include the establishment of contract asset and contract liability accounts with a corresponding adjustment to retained earnings. We will also provide additional disclosures comparing revenue recognized under ASC 606 to revenue as reported priorNote 8.
(2) Recent Accounting Literature:
Recently Adopted Accounting Pronouncements
Changes to the adoption of the standard.Disclosure Requirements for Fair Value Measurement
Upon initial evaluation, we believe the key changes in the standard that impact our revenue recognition relate to the allocation of contract revenues among various services and equipment, and the timing of when those revenues are recognized. Additionally, the new standard will impact the timing of recognizing costs to obtain contracts. This includes a change in our existing policy related to the way we account for customer incentives, upfront non-recurring charges, commission payments, customer disputes and the allocation of discounts.
We are in the process of identifying and implementing changes to our systems, processes, policies and internal controls to meet the standard’s reporting and disclosure requirements.
Leases
In February 2016,August 2018, the FASB issued ASU No. 20162018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – 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 similarChanges to the current model, but updated to align withDisclosure Requirements for Fair Value Measurement,” which adds, removes, and modifies 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 guidancedisclosures required by ASC 820. ASU 2018-13 is effective for fiscal years beginning after December 15, 2018, including2019, and interim periods within those fiscal years using modified retrospective application.years. Early applicationadoption is permitted. Frontier ispermitted. The standard’s new disclosures are not applicable for our interim periods and will be included in Frontier’s 10-K disclosures for our Level 3 assets.
Simplifying the initial stages of evaluating the potential impact this new standard may have on the consolidated financial statements.Accounting for Income Taxes
Compensation – Retirement Benefits
In March 2017,December 2019, the FASB issued ASU No. 2017-07, “Improving2019-12, “Income Taxes (Topic 740): Simplifying the PresentationAccounting for Income Taxes.” This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. Frontier adopted this standard on January 1, 2020, with no impact on our consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
Financial Instrument Credit Losses
In June 2016, The FASB issued ASU 2016-13, “Financial Instruments – Credit Losses”. This standard, was establishedalong with its amendments, update the current financial statement impairment model requiring entities to improveuse a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. For the presentationCompany, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. Frontier is currently evaluating the impact of net periodicadopting this standard on our consolidated financial statements.
Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General: Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans." This standard eliminates requirements for certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures under defined benefit pension costplans and net periodicother postretirement benefit cost by requiring that an employer disaggregate the service cost component of periodic benefit cost from the other components of net benefit cost.plans. We are required to adopt this guidance beginning January 1, 2021. Early adoption is permitted. The amendments in the update also provide explicit guidancestandard would need to be applied on howa retrospective basis. Frontier is currently evaluating the impact of the adoption of this standard on our disclosures.
(3) Chapter 11 Filing and Other Related Matters:
Restructuring Support Agreement
On April 14, 2020, the Company Parties entered into the Restructuring Support Agreement with the Consenting Noteholders, pursuant to present which the service cost componentConsenting Noteholders agreed, subject to certain terms and conditions, to support the Restructuring of the existing debt of, existing equity interests in, and certain other obligations of the Company Parties, pursuant to a pre-arranged Plan to be filed in the Chapter 11 Cases.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
In accordance with the Restructuring Support Agreement, the Consenting Noteholders agreed, among other things, to:
(i) support the transactions (the Restructuring Transactions) described in, within the timeframes outlined in, and in accordance with the Restructuring Support Agreement;
(ii) not take any action, directly or indirectly, that is reasonably likely to interfere with acceptance, implementation, or consummation of the Restructuring Transactions;
(iii) vote each of its Senior Notes Claims (as defined in the Restructuring Support Agreement) to accept the Plan; and
(iv) not transfer Senior Notes Claims held by each Consenting Noteholders except with respect to limited and customary exceptions, including requiring any transferee to either already be bound or become bound by the terms of the Restructuring Support Agreement.
In accordance with the Restructuring Support Agreement, the Company Parties agreed, among other things, to:
(i) support and take all steps reasonably necessary and desirable to consummate the Restructuring Transactions in accordance with the Restructuring Support Agreement;
(ii) support and take all steps reasonably necessary and desirable to obtain entry of (a) the final orders of the Bankruptcy Court (the DIP Orders) authorizing the relevant Company Parties’ entry into the documents governing a senior secured superpriority debtor-in-possession financing facility (the DIP Facility), (b) the order of the Bankruptcy Court approving the disclosure statement related to the Plan pursuant to section 1125 of the Bankruptcy Code and (c) the Bankruptcy Court’s order confirming the Plan;
(iii) use commercially reasonable efforts to obtain any and all required governmental, regulatory, and/or third-party approvals for the Restructuring Transactions;
(iv) act in good faith and use commercially reasonable efforts to execute and deliver certain required documents and agreements to effectuate and consummate the Restructuring Transactions as contemplated by the Restructuring Support Agreement;
(v) operate their businesses in the ordinary course of business in a manner consistent with the Restructuring Support Agreement and past practice and use commercially reasonable efforts to preserve their businesses; and
(vi) not, directly or indirectly, object to, delay, impede, or take any other action to interfere with acceptance, implementation, or consummation of the Restructuring Transactions.
The Restructuring Support Agreement may be terminated upon the occurrence of certain events, including the failure to meet specified milestones related to the solicitation of votes to approve the Plan, commencement of the Chapter 11 Cases, confirmation of the Plan, consummation of the Plan, and the entry of orders relating to the DIP Facility.
For a description of the Term Sheet incorporated into the Restructuring Support Agreement, see “—Plan and Disclosure Statement” below.
Chapter 11 Cases
As an initial step towards implementation of the Plan, on the Petition Date, the Company Parties filed the Chapter 11 Cases in the Bankruptcy Court pursuant to chapter 11 of the Bankruptcy Code. Each Company Party continues to operate its business as a “debtor in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. The Chapter 11 Cases are being jointly administered under the caption In re Frontier Communications Corporation., et al., Case No. 20-22476 (RDD).
In general, as debtors-in-possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business, however, we may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. To that end, on the Petition Date, the Company Parties filed certain motions and applications intended to limit the disruption of the bankruptcy proceedings on its operations (the First Day Motions). Pursuant to the First Day Motions, approved after a final hearing held on May 22, 2020, the Bankruptcy Court authorized us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders: continue to operate our cash management system and honor certain prepetition obligations related thereto; maintain existing business
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
forms; continue to perform intercompany transactions; obtain super priority administrative expense status to post-petition intercompany balances; pay certain prepetition claims of critical vendors, lien claimants and section 503(b)(9) of the Bankruptcy Code claimants in the ordinary course of business on a post-petition basis; pay prepetition employee wages, salaries, other compensation and reimbursable employee expenses and continue employee benefits programs; pay obligations under prepetition insurance policies, continue to pay certain brokerage fees; renew, supplement, modify or purchase insurance coverage; maintain our surety bond program; pay certain prepetition taxes and fees; honor certain prepetition obligations to customers and continue certain customer programs in the ordinary course of business; and pay or honor prepetition claims of content providers.
Plan and Disclosure Statement
On May 15, 2020, the Company Parties filed the Plan and related Disclosure Statement describing the Plan and the solicitation of votes to approve the same, each of which were amended on June 26, 2020, June 29, 2020 and June 30, 2020. On June 30, 2020, the Bankruptcy Court entered an order approving the adequacy of the Disclosure Statement, the solicitation and notice procedures and the forms of voting ballots and notices in connection therewith. The order established June 29, 2020 as the voting record date, July 2, 2020 as the solicitation launch date and July 31, 2020 as the voting deadline. A hearing in the Bankruptcy Court to consider confirmation of the Plan is scheduled for August 21, 2020. The Plan will be subject to usual and customary conditions to plan confirmation, including obtaining the requisite vote of a class of impaired creditors and approval of the Bankruptcy Court.
The Plan among other things, contemplates:
the applicable Company Parties’ or Reorganized Company Parties taking any actions necessary or advisable to effectuate the Restructuring Transactions described in the Plan;
the Company Parties using commercially reasonable efforts to obtain commitments on the best available terms for the DIP Facility, with an option for conversion into an Exit Facility (as defined below) on the Plan effective date (the Plan Effective Date), on terms and conditions (including as to amount) reasonably acceptable to the Company Parties and reasonably acceptable to the Consenting Noteholders, as of the relevant date, holding greater than 50.1% of the aggregate outstanding principal amount of the Frontier Communications Corporation’s senior unsecured notes and debentures (the Senior Notes) that are subject to the Restructuring Support Agreement (the Required Consenting Noteholders);
one or more third-party debt facilities (collectively, the Exit Facilities), to be entered into on the Plan Effective Date, in an amount reasonably sufficient to facilitate Plan distributions and ensure incremental liquidity on the Plan Effective Date, and otherwise be on terms and conditions (including as to amount) reasonably acceptable to the Company Parties and reasonably acceptable to the Required Consenting Noteholders;
to the extent not converted into an Exit Facility, full satisfaction in cash on the Plan Effective Date of all DIP Facility claims (if any);
on the Plan Effective Date, one or more of the Reorganized Company Parties shall issue takeback debt (the “Takeback Debt”), in a principal amount of $750 million, including, but not limited to:
oan interest rate that is either (a) no more than 2.50% higher than the interest rate of the next more junior secured debt facility to be entered into on the Plan Effective Date if the Takeback Debt is secured on a third lien basis or (b) no more than 3.50% higher than the interest rate of the most junior secured debt facility to be entered into on the Plan Effective Date if the Takeback Debt is unsecured;
oa maturity no less than one year outside of the longest-dated debt facility to be entered into on the Plan Effective Date, provided that in no event shall the maturity of the Takeback Debt be longer than eight years from the Plan Effective Date;
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
oto the extent the Second Lien Notes are reinstated under the Plan, providing the Takeback Debt will be third lien debt, provided that to the extent the Second Lien Notes are paid in full in cash during the pendency of the Chapter 11 Cases or under the Plan, the Company Parties and the Required Consenting Noteholders will agree on whether the Takeback Debt will be secured or unsecured, within three business days of the Company Parties’ delivery to the Consenting Noteholders of a term sheet for the financing to repay the Second Lien Notes in full in cash that contains terms and conditions reasonably acceptable to the Company Parties and the Required Consenting Noteholders;
othe Takeback Debt amount is subject to downward adjustment by the Consenting Noteholders holding at least sixty-six and two-thirds percent of the aggregate outstanding principal amount of Senior Notes that are held by all Consenting Noteholders; and
oall other terms including, without limitation, covenants and governance, shall be reasonably acceptable to the Company Parties and the Required Consenting Noteholders; provided that such terms shall not be more restrictive than those in the indenture for the Second Lien Notes.
subject to acceptance of the Plan by the holders of the Senior Notes, a cash payment (the Incremental Payments) on the Plan Effective Date to each holder of the Senior Notes (to the extent of the available amount of unrestricted balance sheet cash in excess of $150 million on the Plan Effective Date as projected 30 days prior to the anticipated Plan Effective Date, estimated and calculated in a manner reasonably acceptable to the Company Parties and the Required Consenting Noteholders, subject to certain adjustments described in the (Plan (the Surplus Cash));
cash interest payments at the non-default contract rate for the Revolver through the earlier of the Plan Effective Date or repayment and, to the extent not already satisfied in full during the Chapter 11 Cases from the proceeds of the DIP Facility, satisfaction in full on the Plan Effective Date of all Revolver claims;
cash interest payments for (i) the Term Loan B maturing on June 15, 2024, and (ii) the $1,650 million aggregate principal amount of the First Lien Notes, as applicable, at non-default contract rate during the Chapter 11 Cases, which shall not include any make-whole or redemption premium, until repayment or reinstatement of such indebtedness;
for the $1,600 million aggregate principal amount of the Second Lien Notes (together with the First Lien Notes, the Secured Notes), cash interest payment at non-default contract rate during the Chapter 11 Cases, which shall not include any make-whole or redemption premium, until repayment or reinstatement of the Second Lien Notes;
to the extent not already satisfied in full during the Chapter 11 Cases from the proceeds of the DIP Facility, (i) satisfaction in full of all Term Loan B claims and all Secured Notes claims on the Plan Effective Date, or (ii) solely in the event the Company Parties cannot procure financing on terms acceptable to the Company Parties and the Required Consenting Noteholders to repay in full the Term Loan B or the Secured Notes, as applicable, reinstatement of all Term Loan B claims and all Secured Notes claims, as applicable, pursuant to section 1124 of the Bankruptcy Code on the Plan Effective Date;
cash interest payments at non-default contract rate during the Chapter 11 Cases for the secured and unsecured notes of the Company’s subsidiaries and, on or as soon as reasonably practicable following the Plan Effective Date, reinstatement of such notes pursuant to section 1124 of the Bankruptcy Code;
cash payment of all general unsecured claims (other than Parent Litigation Claims (as defined below)), if applicable, that are not Senior Notes claims or subsidiary unsecured notes claims, reinstatement of such claims pursuant to section 1124 of the Bankruptcy Code or other such treatment rendering such claims unimpaired, in each case, as reasonably acceptable to the Company Parties and the Required Consenting Noteholders;
litigation-related claims against the Company that would be subject to the automatic stay (except those subject to the police and regulatory exception) (the Parent Litigation Claims) will be unimpaired, provided
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
that the Parent Litigation Claims will be allowed in an amount that does not exceed existing insurance coverage plus $25 million;
cash payment in full of all administrative expense claims, priority tax claims, other priority claims, and other componentssecured claims or other such treatment rendering such claims unimpaired, including reinstatement pursuant to section 1124 of net benefit costthe Bankruptcy Code or delivery of the collateral securing any such secured claim and payment of any interest required under section 506(b) of the Bankruptcy Code;
on or as soon as reasonably practicable following the Plan Effective Date, receipt by the holders of the Senior Notes, in full satisfaction of their claims, their pro rata share of (a) 100% of the common equity (the New Common Stock) of the Company or an entity formed to indirectly acquire substantially all of the assets and/or stock of the Company as may be contemplated by the Restructuring (the Reorganized Company Parties), subject to dilution by the Management Incentive Plan (as defined below), (b) the Takeback Debt and (c) unrestricted cash of Reorganized Frontier in excess of $150 million as of the Plan Effective Date;
on the Plan Effective Date, reservation of a pool (the Management Incentive Plan Pool) of 6% (on a fully diluted basis) of the New Common Stock for a post-emergence management incentive plan (the Management Incentive Plan) for management employees of the Reorganized Company Parties, which will contain terms and conditions as determined at the discretion of the board of directors of the Reorganized Company Parties after the Plan Effective Date; provided that up to 50% of the Management Incentive Plan Pool may be allocated prior to the Plan Effective Date as emergence grants (Emergence Awards) to individuals selected to service in key senior management positions after the Plan Effective Date; provided, further, that the Emergence Awards will have terms and conditions that are acceptable to the Company Parties and the Required Consenting Noteholders;
no distribution for existing equity interests; and
on the Plan Effective Date, Reorganized Frontier shall issue the New Common Stock and cause it to be transferred to Frontier pursuant to the Restructuring Transactions, the interests in Frontier shall be cancelled, and Frontier shall transfer the New Common Stock to the holders of Senior Notes.
DIP Facility
On April 14, 2020 and prior to the commencement of the Chapter 11 Cases, the Company and certain of its subsidiaries (the DIP Loan Parties) entered into a commitment letter (as amended by that certain Letter Agreement dated April 28, 2020, by that certain Letter Agreement dated May 12, 2020, by that certain Letter Agreement dated June 10, 2020, by that certain Letter Agreement dated June 29, 2020 and as further amended, modified or supplemented from time to time, the Commitment Letter) with Goldman Sachs Bank USA (GS Bank), Deutsche Bank AG New York Branch (DBNY), Deutsche Bank Securities Inc. (DBSI and, collectively with DBNY, DB), Barclays Bank PLC (Barclays), Morgan Stanley Senior Funding, Inc. (MSSF), Credit Suisse AG, Cayman Islands Branch (CS) and Credit Suisse Loan Funding LLC (CSLF and, together with CS and their respective affiliates, Credit Suisse, and together with GS Bank, DB, Barclays and MSSF, the Commitment Parties), pursuant to which, and subject to the satisfaction of certain customary conditions, including the approval of the Bankruptcy Court, the Commitment Parties have agreed to provide the DIP Loan Parties with a revolving DIP Facility in an aggregate principal amount of $460 million which, upon satisfaction of certain conditions, including the effectiveness of the Plan, will convert into a longer term revolving Exit Facility.
The terms and conditions of the DIP Facility are set forth in the income statementform Senior Secured Superpriority Debtor-in-Possession Credit Agreement (the Form DIP Credit Agreement) attached to the Commitment Letter. The DIP Facility includes conditions precedent (including the repayment in full of all revolving loans outstanding under the JPM Credit Agreement), representations and allow onlywarranties, affirmative and negative covenants and events of default customary for financings of this type and size. The proceeds of all or a portion of the service cost componentsDIP Facility may be used for, among other things, general corporate purposes, including working capital and permitted acquisitions for payment of, net benefit costfees, costs and expenses of the transactions contemplated by the Chapter 11 Cases, for payment of court approved adequate protection obligations and other such purposes consistent with the DIP Facility. To the extent not converted into an Exit Facility, DIP Facility claims will be paid in cash
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
on the Plan Effective Date. The terms and conditions of the Exit Facility are reflected in an exit facility term sheet attached as an exhibit to the Form DIP Credit Agreement (the Exit Facility Term Sheet). Upon the satisfaction of certain conditions set forth in the Exit Facility Term Sheet, including compliance with a 1.55:1.00 pro forma gross first lien leverage ratio test and the repayment in full of the revolving loans outstanding under the JPM Credit Agreement, the DIP Facility commitments will convert into Exit Facility commitments. The Company has the option to increase the size of the Exit Facility up to an amount of $600.0 million by obtaining commitments from one or more lenders prior to the Plan Effective Date.
A final hearing on the DIP Facility and DIP Credit Agreement is scheduled for August 21, 2020.
Regulatory Approvals
As set forth in the Plan and the Disclosure Statement, in order to implement the restructuring contemplated by the Plan, the Company Parties must satisfy several conditions after confirmation of the Plan but prior to emergence from Chapter 11. Among other things, the Company Parties must obtain requisite regulatory approvals, including required Public Utility Commission (PUC) approvals in certain states, including Arizona, California, Connecticut, Illinois, Minnesota, New York, Pennsylvania and West Virginia. The level of review undertaken by state PUCs, and the length of time to complete such review, varies by state. The Company is the subject of ongoing investigations by certain state PUCs, which may have an impact on the timing of receipt of PUC approvals in such states and/or lead to the imposition of financial sanctions and/or operational restrictions, including revocation of operating authority, In addition, certain state PUCs may impose conditions on the approval of the Restructuring Transactions, including commitments to make significant capital expenditures to improve intrastate service. No assurance can be eligiblegiven as to the terms, conditions, and timing of the required approvals or clearances.
Executory Contracts:
Subject to certain exceptions, under the Bankruptcy Code, the Company Parties may assume, amend, or reject certain executory contracts and unexpired leases with respect to their operations with the approval of the Bankruptcy Court. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Company Parties from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for capitalization. The new guidancedamages caused by such deemed breach. Generally, the assumption of an executory contract or unexpired lease requires the Company Parties to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Company Parties in this document, including where applicable a quantification of the Company’s obligations under any such executory contract or unexpired lease of the Company Parties, is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periodsqualified by any overriding rejection rights the Company has under the Bankruptcy Code.
Reorganization Items and Liabilities Subject to Compromise
Effective on April 14, 2020, we began to apply the provisions of ASC 852, Reorganizations (ASC 852), which is applicable to companies under bankruptcy protection, and requires amendments to the presentation of key financial statement line items. ASC 852 requires that the income statementfinancial statements for periods including and after the filing of the Chapter 11 Cases distinguish transactions and events that are directly associated with the Restructuring from the ongoing operations of the business. Expenses (including professional fees), realized gains and losses, and provisions for losses that can be directly associated with the Restructuring must be reported separately as reorganization items, net in the consolidated statements of operations beginning April 14, 2020, the date of filing of the Chapter 11 Cases. Liabilities that may be affected by the Plan must be reported at the amounts expected to be applied retrospectively. allowed by the Bankruptcy Court, even if they may be settled for lesser amounts as a result of the Plan or negotiations with creditors. The amounts currently classified as liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determinations of secured status of certain claims, the values of any collateral securing such claims, or other events. Any resulting changes in classification will be reflected in subsequent financial statements. If there is uncertainty about whether a secured claim is undersecured, or will be impaired under the Plan, the entire amount of the claim is included with prepetition claims in liabilities subject to compromise.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
As a result of the standard, pension settlement costsfiling of the Chapter 11 Cases on April 14, 2020, the classification of pre-petition indebtedness is generally subject to compromise pursuant to the Plan. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Company Parties authority to pay certain pre-petition claims in designated categories and subject to certain benefit coststerms and conditions. This relief generally was designed to preserve the value of the Company Parties’ businesses and assets. Among other things, the Bankruptcy Court authorized the Company Parties’ to pay certain pre-petition claims relating to employee wages and benefits, taxes and critical vendors. The Company Parties are paying and intend to pay undisputed post-petition liabilities in the ordinary course of business. In addition, the Company Parties may reject certain pre-petition executory contracts and unexpired leases with respect to their operations with the approval of the Bankruptcy Court. Any damages resulting from the rejection of executory contracts and unexpired leases are treated as general unsecured claims.
The accompanying unaudited condensed consolidated balance sheet as of June 30, 2020 includes amounts classified as Liabilities subject to compromise, which are currently includedrepresent liabilities the Company anticipates will be allowed as claims in operating expense, wouldthe Chapter 11 Cases. These amounts represent the Company's current estimate of known or potential obligations to be reported as other non-operating expense and will no longer be capitalized. This will have a material impact on previously reported operating incomeresolved in connection with the Chapter 11 Cases and may have a material impact to operating income indiffer from actual future periods, however, the impact to pre-tax income is not expectedsettlement amounts paid. Differences between liabilities estimated and claims filed, or to be material.filed, will be investigated and resolved in connection with the claims resolution process.
Liabilities subject to compromise consisted of the following:
($ in millions) | June 30, 2020 | ||||
Accounts payable | $ | 59 | |||
Other current liabilities | 92 | ||||
Accounts payable, and other current liabilities | 151 | ||||
Debt subject to compromise | 10,949 | ||||
Accrued interest on debt subject to compromise | 497 | ||||
Long-term debt and accrued interest | 11,446 | ||||
Total liabilities subject to compromise | $ | 11,597 | |||
10
Determination of the value at which liabilities will ultimately be settled cannot be made until the Bankruptcy Court approves the Plan. The Company will continue to evaluate and adjust the amount and classification of its pre-petition liabilities. Such adjustments may be material. Any additional liabilities that are subject to compromise will be recognized accordingly, and the aggregate amount of liabilities subject to compromise may change.
Reorganization items incurred as a result of the Chapter 11 Cases presented separately in the accompanying consolidated statement of operations were as follows:
($ in millions) | June 30, 2020 | ||||
Write-off of debt issuance costs and | |||||
original issue net discount on debt subject to compromise | $ | 85 | |||
Debtor-in-possession financing costs | 19 | ||||
Professional fees and other bankruptcy related costs | 38 | ||||
Reorganization items, net | $ | 142 | |||
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(DEBTOR-IN-POSSESSION)
Recently Adopted Accounting Pronouncements
Share-Based Payments - Scope of Modification Accounting
In May 2017,The Company has incurred and will continue to incur significant costs associated with the FASB issued ASU No. 2017-09, Scope of Modification Accounting which amends the scope of modification accounting for share-based payment arrangements. This standard provides guidance on the types of changesreorganization, primarily legal and professional fees. Subsequent to the terms or conditionsPetition Date, these costs are being expensed as incurred and are expected to significantly affect our consolidated results of share-based payment awardsoperations. Write off of deferred debt issuance costs, the write-off of original issue net discount related to which an entity would be requireddebt subject to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting ifcompromise and the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods and early adoption is permitted includingDIP financing costs were also included in any interim period. Frontier has adopted this standard during the second quarter 2017, with no impactreorganization items.
For discussion related to our share-based payment awards.ability to continue as a going concern, refer to Note 1.
Intangibles – Goodwill
In January 2017,
(4) Revenue Recognition:
We categorize our products, services and other revenues into the FASB issued ASU No. 2017-04, “Simplifyingfollowing categories:
Data and Internet services include broadband services for residential and business customers. We provide data transmission services to high volume business customers and other carriers with dedicated high capacity circuits (“nonswitched access”) including services to wireless providers (“wireless backhaul”);
Voice services include traditional local and long-distance wireline services, Voice over Internet Protocol (VoIP) services, as well as a number of unified messaging services offered to our residential and business customers. Voice services also include the Testlong-distance voice origination and termination services that we provide to our business customers and other carriers;
Video services include services provided directly to residential customers through the FiOS® and Vantage video brands, and through DISH® satellite TV services;
Other customer revenue includes switched access revenue, sales of customer premise equipment to our business customers, rents collected for Goodwill Impairment.” This standard was establishedcollocation services, and revenue from other services and fees. Switched access revenue includes revenues derived from allowing other carriers to simplify how an entity is requireduse our network to test goodwill for impairment by eliminating Step 2from the goodwill impairment test. Step 2 measuresoriginate and/or terminate their local and long-distance voice traffic (“switched access”). These services are primarily billed on a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwillminutes-of-use basis applying tariffed rates filed with the carrying amount of that goodwill. Under the amendments in this Update, an entity should perform its annual,FCC 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 effectsstate agencies; and
Subsidy and other regulatory revenue includes revenues generated 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 assessmentcost subsidies from state 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. Frontier early adopted this standard during the second quarter of 2017 in conjunction with our goodwill impairment assessment. See Note 1 and Note 6 for further discussion.
Compensation – Stock Compensation
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” to amend ASC Topic 718, “Compensation – Stock Compensation.” The ASU is part of the FASB’s ongoing simplification initiative, which is designed to reduce cost and complexity while maintaining or improving the usefulness of the information provided to the users of financial statements. The simplifications address a variety of areas for public entities,federal authorities, 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 third quarter of 2017. During the nine months ended September 30, 2017, Frontier recognized $2 million of income tax expense and recorded a cumulative effect adjustment to beginning accumulated deficit of $1 million to recognize all unrecognized deferred tax benefits recorded as of January 1, 2017. For the nine months ended September 30, 2016, Frontier reclassified $10 million of taxes paid on behalf of employees related to shares withheld from “Cash flows provided from (used by) operations” to “Cash flows used by financing activities” in accordance with the new standard. Connect America Fund Phase II.
The following tables provide a summary of revenues, by category:
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||
($ in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||
Data and Internet services | $ | 874 | $ | 963 | $ | 1,806 | $ | 1,930 | ||||||
Voice services | 523 | 629 | 1,095 | 1,279 | ||||||||||
Video services | 200 | 260 | 422 | 528 | ||||||||||
Other | 108 | 120 | 225 | 244 | ||||||||||
Revenue from contracts with customers (1) | 1,705 | 1,972 | 3,548 | 3,981 | ||||||||||
Subsidy and other revenue (2) | 96 | 95 | 186 | 187 | ||||||||||
Total revenue | $ | 1,801 | $ | 2,067 | $ | 3,734 | $ | 4,168 | ||||||
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||
($ in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||
Consumer | $ | 899 | $ | 1,050 | $ | 1,870 | $ | 2,127 | ||||||
Commercial | 806 | 922 | 1,678 | 1,854 | ||||||||||
Revenue from contracts with customers (1) | 1,705 | 1,972 | 3,548 | 3,981 | ||||||||||
Subsidy and other revenue (2) | 96 | 95 | 186 | 187 | ||||||||||
Total revenue | $ | 1,801 | $ | 2,067 | $ | 3,734 | $ | 4,168 | ||||||
(3) Acquisitions:(1)Includes approximately $17 million and $17 million, and $34 million and $35 million, of lease revenue for the three and six months ended June 30, 2020 and 2019, respectively.
The CTF Acquisition
On April 1, 2016, Frontier acquired the wireline operations of Verizon Communications, Inc. in California, Texas and Florida (the CTF Operations) for a purchase price of $10,540(2)Includes $10 million in cash and assumed debt (the CTF Acquisition), pursuanttransition services provided to the February 5, 2015 Securities Purchase Agreement, as amended. The final allocationpurchaser in connection with the divestiture of the purchase price presented below represents the effect of recording the fair value of assets acquired and liabilities assumed as of the date of the CTF Acquisition, based on the total transaction cash consideration of $9,871 million.
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The fair value estimates related to the allocation of the purchase price to Other intangibles were revised and updated during the first quarter of 2017 from the previous estimates as of December 31, 2016. The allocation that was reported as of December 31, 2016 for Other intangibles increased $100 million, from $2,162 million to $2,262 million. These measurement period adjustments resulted in $20 million of amortization expense during the first quarter of 2017 that would have been recorded in 2016 if the adjustments had been recognized as of the acquisition date. Other adjustments to the allocation of the purchase priceour Northwest Operations for the CTF Acquisition during the first quarter of 2017 resulted in a $140 million decrease in Property, plant & equipment, a $61 million increase in Current liabilities,three and a $98 million increase in Goodwill.six months ended June 30, 2020.
The following unaudited pro forma financial information presentsis a summary of the combined results of operations of Frontierchanges in the contract assets and the CTF Operations as if the CTF Acquisition had occurred as of January 1, 2016. contract liabilities:
Contract Assets | Contract Liabilities | |||||||||||||
($ in millions) | Current | Noncurrent | Current | Noncurrent | ||||||||||
Balance at December 31, 2019 | $ | 37 | $ | 8 | $ | 41 | $ | 21 | ||||||
Revenue recognized included | ||||||||||||||
in opening contract balance | (18) | - | (33) | (7) | ||||||||||
Cash received, excluding amounts | ||||||||||||||
recognized as revenue | - | - | 42 | 7 | ||||||||||
Credits granted, excluding amounts | ||||||||||||||
recognized as revenue | 1 | - | - | - | ||||||||||
Reclassified between current | ||||||||||||||
and concurrent | - | - | 1 | (1) | ||||||||||
Balance at June 30, 2020 | $ | 20 | $ | 8 | $ | 51 | $ | 20 | ||||||
Contract Assets | Contract Liabilities | |||||||||||||
($ in millions) | Current | Noncurrent | Current | Noncurrent | ||||||||||
Balance at December 31, 2018 | $ | 44 | $ | 25 | $ | 49 | $ | 22 | ||||||
Revenue recognized included | ||||||||||||||
in opening contract balance | (18) | (5) | (38) | (11) | ||||||||||
Cash received, excluding amounts | ||||||||||||||
recognized as revenue | - | - | 34 | 7 | ||||||||||
Credits granted, excluding amounts | ||||||||||||||
recognized as revenue | 17 | 1 | - | - | ||||||||||
Reclassified between current | ||||||||||||||
and concurrent | 4 | (4) | (1) | 1 | ||||||||||
Reclassified to held for sale | (3) | (1) | (3) | (1) | ||||||||||
Balance at June 30, 2019 | $ | 44 | $ | 16 | $ | 41 | $ | 18 | ||||||
Short-term contract assets, Long-term contract assets, Short-term contract liabilities, and Long-term contract liabilities are included in other current assets, other assets, other current liabilities, and other liabilities, respectively, on our consolidated balance sheets.
The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the CTF Acquisition been completed as of January 1, 2016. In addition, the unaudited pro forma financial information is not indicative of, nor does it purportfollowing table includes estimated revenue expected to project,be recognized in the future financial position or operating results of Frontier. The unaudited pro forma financial information excludes acquisition and integration costs and does not give effectrelated to any estimated and potential cost savings or other operating efficiencies that may result from the CTF Acquisition.
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Acquisition and Integration Costs
Acquisition costs include financial advisory, accounting, regulatory, legal and other related costs. Integration costs include expensesperformance obligations that are incremental and directly related tounsatisfied (or partially unsatisfied) at the acquisition, which were incurred to integrateend of the network and information technology platforms. Integration costs also include costs to achieve synergies and operational efficiencies directly associated with the acquisition. reporting period:
($ in millions) | Revenue from contracts with customers | ||||
2020 (remaining six months) | $ | 661 | |||
2021 | 722 | ||||
2022 | 506 | ||||
2023 | 384 | ||||
2024 | 264 | ||||
Thereafter | 511 | ||||
Total | $ | 3,048 | |||
Frontier incurred operating expenses related to the CTF Acquisition as follows:
(4)
(5) Accounts Receivable:
The components of accounts receivable, net are as follows:
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($ in millions) |
| September 30, 2017 |
| December 31, 2016 | ||
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Retail and wholesale |
| $ | 768 |
| $ | 979 |
Other |
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| 81 |
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| 90 |
Less: Allowance for doubtful accounts |
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| (69) |
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| (131) |
Accounts receivable, net |
| $ | 780 |
| $ | 938 |
($ in millions) | June 30, 2020 | December 31, 2019 | ||||||
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Retail and wholesale | $ | 636 | $ | 678 | ||||
Other | 80 | 71 | ||||||
Less: Allowance for doubtful accounts | (114) | (120) | ||||||
Accounts receivable, net | $ | 602 | $ | 629 | ||||
We maintain an allowance for doubtful accounts based on our estimate of our ability to collect accounts receivable. During 2017, we resolved settlements with carriers resulting in a reduction to our reserves of approximately $35 million.
Bad debt expense (credits), which is recorded as a reduction to revenue, wasis as follows:
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||
($ in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||
Bad debt expense | $ | 10 | $ | 18 | $ | 24 | $ | 32 | ||||||
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| For the three months ended September 30, |
| For the nine months ended September 30, | ||||||||
($ in millions) |
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Bad debt expense |
| $ | 26 |
| $ | 56 |
| $ | 83 |
| $ | 104 |
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(5)
(6) Property, Plant and Equipment:
Property, plant and equipment, net is as follows:
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($ in millions) |
| September 30, 2017 |
| December 31, 2016 | ||
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Property, plant and equipment |
| $ | 26,124 |
| $ | 25,541 |
Less: Accumulated depreciation |
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| (11,749) |
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| (10,639) |
Property, plant and equipment, net |
| $ | 14,375 |
| $ | 14,902 |
($ in millions) | June 30, 2020 | December 31, 2019 | |||||||
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Property, plant and equipment | $ | 27,047 | $ | 26,552 | |||||
Less: Accumulated depreciation | (14,202) | (13,589) | |||||||
Property, plant and equipment, net | $ | 12,845 | $ | 12,963 | (1) | ||||
(1)Excludes $1,049 million reclassified as Held for Sale as of December 31, 2019, refer to Note 8.
In connection with the adoption of ASU No. 2016 – 02, “Leases (Topic 842)”, the $15 million ($11 million net of tax) of unamortized deferred gains that had resulted from certain sale leaseback transactions were recognized directly to opening accumulated deficit as of January 1, 2019.
In January 2019, we closed the sale of certain wireless towers for approximately $76 million. The aggregate carrying value of the towers was approximately $1 million, resulting in a gain on sale of $75 million which was recognized against “Accumulated Depreciation” in our consolidated balance sheet during 2019.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Depreciation expense is principally based on the composite group method. Depreciation expense was as follows:
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||
($ in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||
Depreciation expense | $ | 314 | $ | 342 | $ | 630 | $ | 695 | ||||||
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| For the three months ended September 30, |
| For the nine months ended September 30, | ||||||||
($ in millions) |
| 2017 |
| 2016 |
| 2017 |
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Depreciation expense |
| $ | 376 |
| $ | 323 |
| $ | 1,131 |
| $ | 1,009 |
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Effective with the designation of our Northwest Operations as held-for-sale on May 28, 2019, we discontinued recording depreciation on Property, Plant and Equipment and finite-lived intangible assets of this business as required by GAAP.
We adopted newrevised the estimated remaining useful lives for certain plant assets as of October 1, 2016,2019, as a result of an annual independent study of the estimated remaining useful lives of our plant assets, with an insignificant impact to depreciation expense.
In 2017, we sold certain properties, generating $102 million in net proceeds, of which $97 million relates to property subject to leasebacks. For these properties, we have deferred $66 million in related gains that will be amortized over the related lease terms of two years. For the nine months ended September 30, 2017, amortization of these deferred gains totaled $14 million, which are included in “Selling, general and administrative expenses” on our consolidated income statement. We have remaining deferred gain balances of $52 million, which are included in “Other liabilities”.
14
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(6) (7) Goodwill and Other Intangibles:
The activity in
All goodwill from January 1, 2017 to September 30, 2017 was as follows:
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We are required to perform impairment tests related to our goodwill annually, which we performfully impaired as of December 31, or sooner if an indicator2019, other than goodwill of $658 million associated with the planned disposal of Frontier Northwest which was classified in Assets held for sale as of December 31, 2019. Goodwill impairment occurs. Due to the continued decline in our stock price we had triggering events in each ofcharges were $5,449 million for the three quarters in 2017.
We use a market multiples approach to determine fair value. Marketplace company comparisons and analyst reports within the telecommunications industry have historically supported a range of fair values of multiples between 5.0x and 7.9x annualized EBITDA (defined as operating income, net of acquisition and integration costs, pension/OPEB expense, pension settlement costs, stock-based compensation expense,six months ended June 30, 2019. Accumulated goodwill impairment storm-related costs, and restructuring costs and other charges as well as depreciation and amortization). We estimated the enterprise fair value using a multiple of 5.8x EBITDA.
Our second quarter quantitative assessment indicated that the carrying value of the enterprise exceeded its fair value and, therefore, an impairment existed, principally due to the decline in our profitability during the second quarter of 2017. We elected to early adopt the simplified goodwill method under ASU 2017-04, and recorded our goodwill impairment based on the amount that the enterprise carrying value exceeded the fair value, which resulted in a goodwill impairment of $670 million.
Our first and third quarter quantitative assessments indicated that the fair value of the enterprise exceeded its carrying value and, therefore, no indication of impairment existed in either period.
The market multiples approach that we use incorporates significant estimates and assumptions related to the forecasted results for the remainder of the year including revenues, expenses, and the achievement of other cost synergies. Our assessment includes many qualitative factors that require significant judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding the need for, or size of, an impairment. Continued declines in our profitability or cash flows or in the sustained, historically low trading prices of our common stock may result in further impairment.
We also considered whether the carrying values of finite-lived intangible assets and property plant and equipment may not be recoverable or whether the carrying value of certain indefinite-lived intangible assets were impaired, noting no additional impairment was present$9,154 million as of SeptemberJune 30, 2017.2020 and December 31, 2019.
15
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The components of other intangibles are as follows:
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| September 30, 2017 |
| December 31, 2016 | ||||||||||||||
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| Accumulated |
| Net Carrying |
| Gross Carrying |
| Accumulated |
| Net Carrying | ||||||
($ in millions) |
| Amount |
| Amortization |
| Amount |
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| Amortization |
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Other Intangibles: |
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Customer base |
| $ | 5,188 |
| $ | (3,137) |
| $ | 2,051 |
| $ | 5,088 |
| $ | (2,604) |
| $ | 2,484 |
Trade name |
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| 122 |
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| 122 |
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| 122 |
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| - |
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| 122 |
Royalty agreement |
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| 72 |
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| (22) |
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| 50 |
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| 72 |
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| (16) |
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| 56 |
Total other intangibles |
| $ | 5,382 |
| $ | (3,159) |
| $ | 2,223 |
| $ | 5,282 |
| $ | (2,620) |
| $ | 2,662 |
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June 30, 2020 | December 31, 2019 | |||||||||||||||||||
Gross Carrying | Accumulated | Net Carrying | Gross Carrying | Accumulated | Net Carrying | |||||||||||||||
($ in millions) | Amount | Amortization | Amount | Amount | Amortization | Amount | ||||||||||||||
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Other Intangibles: | ||||||||||||||||||||
Customer base | $ | 4,332 | $ | (3,627) | $ | 705 | $ | 4,332 | $ | (3,452) | $ | 880 | ||||||||
Trade name | 122 | - | 122 | 122 | - | 122 | ||||||||||||||
Royalty agreement | 72 | (61) | 11 | 72 | (54) | 18 | ||||||||||||||
Total other intangibles | $ | 4,526 | $ | (3,688) | $ | 838 | $ | 4,526 | $ | (3,506) | $ | 1,020 | ||||||||
Amortization expense was as follows:
For the three months ended | For the six months ended | |||||||||||||
June 30, | June 30, | |||||||||||||
($ in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||
Amortization expense | $ | 83 | $ | 112 | $ | 182 | $ | 243 | ||||||
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| For the three months ended September 30, |
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($ in millions) |
| 2017 |
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| 2017 |
| 2016 | ||||
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Amortization expense |
| $ | 163 |
| $ | 255 |
| $ | 539 |
| $ | 460 |
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Amortization expense primarily represents the amortization of our customer base acquired as a result of the CTF Acquisition, the acquisition of AT&T wireline propertiesour acquisitions in Connecticut in2010, 2014, and the acquisition of certain Verizon properties in 20102016 with each based on a useful life of 8 to 12 years and amortized on an accelerated method. Our Trade name is an indefinite-lived intangible asset that is not subject to amortization.
(7)
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
(8) Divestiture of Northwest Operations:
On May 1, 2020, Frontier completed the sale of its Northwest Operations pursuant to the terms and conditions of the Purchase Agreement, dated as of May 28, 2019, for gross proceeds of $1,352 million, subject to certain closing adjustments. Net of funding certain pension and other retiree medical liabilities, funding of indebtedness, funding certain escrows and other closing adjustments, we received $1,131 million in proceeds.
A portion of the proceeds from the sale are held in escrow as recourse for indemnity claims that may arise under the purchase agreement and for adjustments to employee liabilities and working capital that may be identified after closing. As of June 30, 2020, there was $27 million of proceeds held in escrow accounts included in Other current assets, as we expect these amounts to be settled within the next twelve months. We also have $30 million of proceeds held in escrow accounts included in Other assets as we expect these amounts to remain outstanding for a longer period of time.
In connection with the sale, Frontier is performing certain transition services for the purchaser. The first six months of these services are generally being provided at no additional cost to the purchaser as a condition of the transaction. The fair value of these transition services was estimated to be $30 million and were recorded as a deferred liability (recorded within the Advanced Billing financial statement caption in the balance sheet) in connection with the transaction, which amount is being amortized to other revenue as the related services are being delivered. For the three and six months ended June 30, 2020, we recognized $10 million in other revenue related to these transition services.
The Northwest Operations were included in Frontier’s continuing operations and classified as assets held for sale and liabilities related to assets held for sale on our consolidated balance sheets through the completion of the transaction on May 1, 2020. As a result of the closing of the transaction, we derecognized net assets of $1,132 million, including property, plant, and equipment of $1,084 million, goodwill of $658 million, a $603 million valuation allowance on our assets held for sale, and $142 million of defined benefit pension and other postretirement benefit plan obligations, net of transferred pension plan assets.
This transaction did not represent a strategic shift for Frontier; therefore, it did not meet the criteria to be classified as a discontinued operation. Effective with the designation as held-for-sale on May 28, 2019, we discontinued recording depreciation on Property, Plant and Equipment and finite-lived intangible assets of this business as required by GAAP.
During the three and six month periods ended June 30, 2020, Frontier recorded a loss on disposal of $136 million and $160 million, respectively, associated with the sale of our Northwest Operations. These amounts include $27 million of loss (an immaterial out of period adjustment) related to the initial measurement and recognition of the estimated loss on disposal measured during the three months ended June 30, 2019.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
(9) Fair Value of Financial Instruments:
The following table summarizes the carrying amounts and estimated fair values for long-term debt at SeptemberJune 30, 20172020 and December 31, 2016.2019. For the other financial instruments including cash, accounts receivable, long-term debt due within one year,restricted cash, accounts payable and other current liabilities, the carrying amounts approximate fair value due to the relatively short maturities of those instruments.
The fair value of our long-term debt (including $10,949 million of debt classified in Liabilities subject to compromise at June 30, 2020) is estimated based upon quoted market prices at the reporting date for those financial instruments.
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($ in millions) |
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| Carrying Amount |
|
| Fair Value |
|
| Carrying Amount |
|
| Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||
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| ||||||||||||
Long-term debt |
| $ | 17,604 |
| $ | 15,515 |
| $ | 17,560 |
| $ | 17,539 | ||||||||||||
Total debt | $ | 17,511 | $ | 7,467 | $ | 17,516 | $ | 12,026 |
(8)(
(10) Long-Term Debt:
The filing of the Chapter 11 Cases constituted an event of default that accelerated substantially all of our obligations under the documents governing the JPM Credit Facilities, the First Lien Notes, the Second Lien Notes, our unsecured notes and debentures and the secured and unsecured debentures of our subsidiaries. As such we have reclassified certain secured debt obligations to Long term debt due within one year and certain unsecured debt obligations to Liabilities subject to compromise on our consolidated balance sheet as of June 30, 2020. While this reclassification includes all of our debt, the Restructuring Support Agreement contemplates agreed-upon terms for a pre-arranged financial restructuring Plan that leaves unimpaired all holders of secured debt and subsidiary debt. Among other things, the Restructuring Support Agreement provides that holders of our secured debt will be entitled to receive cash interest payments and to have the principal amount of their indebtedness repaid or reinstated upon emergence and that holders of secured and unsecured debt of our subsidiaries will be entitled to receive cash interest payments and to have the principal amount of their indebtedness reinstated upon emergence.
Pursuant to Section 362 of the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed most actions against or on behalf of the Company Parties, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Company Parties’ property.
For information related to the Restructuring Support Agreement, the Chapter 11 Cases, the Plan and the DIP Facility, refer to Note 3.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(DEBTOR-IN-POSSESSION)
(8) Long-Term Debt:
The activity in our long-term debt from January 1, 2017 through September 30, 2017 is summarized as follows:
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| Nine months ended September 30, 2017 |
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| |||
($ in millions) |
| January 1, 2017 |
| Payments and Retirements |
| New Borrowings |
| September 30, 2017 |
| Interest Rate at | ||||
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|
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|
|
Senior and Subsidiary Unsecured Debt |
| $ | 15,900 |
| $ | (1,544) |
| $ | - |
| $ | 14,356 |
| 9.22% |
Senior Secured Debt |
|
| 2,151 |
|
| (114) |
|
| 1,500 |
|
| 3,537 |
| 4.90% |
Secured Subsidiary Debt |
|
| 100 |
|
| - |
|
| - |
|
| 100 |
| 8.50% |
Other Secured Debt |
|
| 19 |
|
| (3) |
|
| - |
|
| 16 |
| 5.25% |
Rural Utilities Service Loan Contracts |
|
| 8 |
|
| (1) |
|
| - |
|
| 7 |
| 6.15% |
Total Long-Term Debt |
| $ | 18,178 |
| $ | (1,662) |
| $ | 1,500 |
| $ | 18,016 |
| 8.36% |
|
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|
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|
|
|
|
|
|
|
|
Less: Debt Issuance Costs |
|
| (209) |
|
|
|
|
|
|
|
| (190) |
|
|
Less: Debt Premium/(Discount) |
|
| (46) |
|
|
|
|
|
|
|
| (56) |
|
|
Less: Current Portion |
|
| (363) |
|
|
|
|
|
|
|
| (166) |
|
|
|
| $ | 17,560 |
|
|
|
|
|
|
| $ | 17,604 |
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| |||||||||||
| For the six months ended |
| ||||||||||||||
Principal | Interest Rate at | |||||||||||||||
January 1, | Payments | June 30, | June 30, | |||||||||||||
($ in millions) | 2020 | and Retirements | New Borrowings | 2020 | 2020* | |||||||||||
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| |||||||||||
Secured debt issued by Frontier | $ | 5,711 | $ | (5) | $ | - | $ | 5,706 | 7.17% | |||||||
Unsecured debt issued by Frontier | 10,949 | - | - | 10,949 | 9.51% | |||||||||||
Secured debt issued by subsidiaries | 106 | - | - | 106 | 8.37% | |||||||||||
Unsecured debt issued by subsidiaries | 750 | - | - | 750 | 6.90% | |||||||||||
Total debt | $ | 17,516 | $ | (5) | $ | - | $ | 17,511 | 8.63% | |||||||
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| ||||||||||
Less: Debt Issuance Costs | (168) |
| (68) | |||||||||||||
Less: Debt Discount | (46) | (48) | ||||||||||||||
Less: Current Portion | (994) |
| (6,446) | |||||||||||||
Less: Debt subject to compromise | - | (10,949) | ||||||||||||||
Total Long-term debt | $ | 16,308 |
| $ | - | |||||||||||
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|
* Interest rate includes amortization of debt issuance costs and debt premiums or discounts. The interest rates at SeptemberJune 30, 20172020 represent a weighted average of multiple issuances.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(DEBTOR-IN-POSSESSION)
Additional information regarding our seniorsecured and unsecured long-term debt senior secured debtas of June 30, 2020 (prior to the filing of the Chapter 11 Cases) and subsidiary debtDecember 31, is as follows:
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|
| September 30, 2017 |
| December 31, 2016 | ||||||
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|
|
| Principal |
| Interest |
| Principal |
| Interest | ||
($ in millions) |
| Outstanding |
| Rate |
| Outstanding |
| Rate | ||
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|
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Senior Unsecured Debt Due: |
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|
|
|
|
|
|
|
|
|
4/15/2017 |
| $ | - |
| 8.250% |
| $ | 210 |
| 8.250% |
10/1/2018 |
|
| 578 |
| 8.125% |
|
| 583 |
| 8.125% |
3/15/2019 |
|
| 428 |
| 7.125% |
|
| 434 |
| 7.125% |
4/15/2020 |
|
| 619 |
| 8.500% |
|
| 1,169 |
| 8.500% |
9/15/2020 |
|
| 303 |
| 8.875% |
|
| 1,066 |
| 8.875% |
7/1/2021 |
|
| 490 |
| 9.250% |
|
| 500 |
| 9.250% |
9/15/2021 |
|
| 775 |
| 6.250% |
|
| 775 |
| 6.250% |
4/15/2022 |
|
| 500 |
| 8.750% |
|
| 500 |
| 8.750% |
9/15/2022 |
|
| 2,188 |
| 10.500% |
|
| 2,188 |
| 10.500% |
1/15/2023 |
|
| 850 |
| 7.125% |
|
| 850 |
| 7.125% |
4/15/2024 |
|
| 750 |
| 7.625% |
|
| 750 |
| 7.625% |
1/15/2025 |
|
| 775 |
| 6.875% |
|
| 775 |
| 6.875% |
9/15/2025 |
|
| 3,600 |
| 11.000% |
|
| 3,600 |
| 11.000% |
11/1/2025 |
|
| 138 |
| 7.000% |
|
| 138 |
| 7.000% |
8/15/2026 |
|
| 2 |
| 6.800% |
|
| 2 |
| 6.800% |
1/15/2027 |
|
| 346 |
| 7.875% |
|
| 346 |
| 7.875% |
8/15/2031 |
|
| 945 |
| 9.000% |
|
| 945 |
| 9.000% |
10/1/2034 |
|
| 1 |
| 7.680% |
|
| 1 |
| 7.680% |
7/1/2035 |
|
| 125 |
| 7.450% |
|
| 125 |
| 7.450% |
10/1/2046 |
|
| 193 |
| 7.050% |
|
| 193 |
| 7.050% |
|
|
| 13,606 |
|
|
|
| 15,150 |
|
|
Senior Secured Debt Due: |
|
|
|
|
|
|
|
|
|
|
10/24/2019 (1) |
|
| 254 |
| 5.115% (Variable) |
|
| 280 |
| 4.145% (Variable) |
3/31/2021 (2) |
|
| 1,503 |
| 3.990% (Variable) |
|
| 1,564 |
| 3.270% (Variable) |
10/12/2021 (3) |
|
| 284 |
| 5.115% (Variable) |
|
| 307 |
| 4.145% (Variable) |
6/15/2024 (4) |
|
| 1,496 |
| 4.990% (Variable) |
|
| - |
|
|
|
|
| 3,537 |
|
|
|
| 2,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary Debt Due: |
|
|
|
|
|
|
|
|
|
|
05/15/2027 |
|
| 200 |
| 6.750% |
|
| 200 |
| 6.750% |
02/01/2028 |
|
| 300 |
| 6.860% |
|
| 300 |
| 6.860% |
2/15/2028 |
|
| 200 |
| 6.730% |
|
| 200 |
| 6.730% |
10/15/2029 |
|
| 50 |
| 8.400% |
|
| 50 |
| 8.400% |
11/15/2031 |
|
| 100 |
| 8.500% |
|
| 100 |
| 8.500% |
|
|
| 850 |
|
|
|
| 850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 17,993 |
| 8.1% (5) |
| $ | 18,151 |
| 8.3% (5) |
June 30, 2020 | December 31, 2019 | |||||||||||
Principal | Interest | Principal | Interest | |||||||||
($ in millions) | Outstanding | Rate | Outstanding | Rate | ||||||||
Secured debt issued by Frontier | ||||||||||||
Revolver due 2/27/2024 (1) | $ | 749 | 4.680% (Variable) | $ | 749 | 4.760% (Variable) | ||||||
Term loan due 6/15/2024 (2) | 1,694 | 5.352% (Variable) | 1,699 | 5.550% (Variable) | ||||||||
First lien notes due 4/1/2027 | 1,650 | 8.000% | 1,650 | 8.000% | ||||||||
Second lien notes due 4/1/2026 | 1,600 | 8.500% | 1,600 | 8.500% | ||||||||
IDRB due 5/1/2030 | 13 | 6.200% | 13 | 6.200% | ||||||||
Secured debt issued by Frontier | 5,706 | 5,711 | ||||||||||
Unsecured debt issued by Frontier | ||||||||||||
Senior notes due 4/15/2020 | 172 | 8.500% | 172 | 8.500% | ||||||||
Senior notes due 9/15/2020 | 55 | 8.875% | 55 | 8.875% | ||||||||
Senior notes due 7/1/2021 | 89 | 9.250% | 89 | 9.250% | ||||||||
Senior notes due 9/15/2021 | 220 | 6.250% | 220 | 6.250% | ||||||||
Senior notes due 4/15/2022 | 500 | 8.750% | 500 | 8.750% | ||||||||
Senior notes due 9/15/2022 | 2,188 | 10.500% | 2,188 | 10.500% | ||||||||
Senior notes due 1/15/2023 | 850 | 7.125% | 850 | 7.125% | ||||||||
Senior notes due 4/15/2024 | 750 | 7.625% | 750 | 7.625% | ||||||||
Senior notes due 1/15/2025 | 775 | 6.875% | 775 | 6.875% | ||||||||
Senior notes due 9/15/2025 | 3,600 | 11.000% | 3,600 | 11.000% | ||||||||
Debentures due 11/1/2025 | 138 | 7.000% | 138 | 7.000% | ||||||||
Debentures due 8/15/2026 | 2 | 6.800% | 2 | 6.800% | ||||||||
Senior notes due 1/15/2027 | 346 | 7.875% | 346 | 7.875% | ||||||||
Senior notes due 8/15/2031 | 945 | 9.000% | 945 | 9.000% | ||||||||
Debentures due 10/1/2034 | 1 | 7.680% | 1 | 7.680% | ||||||||
Debentures due 7/1/2035 | 125 | 7.450% | 125 | 7.450% | ||||||||
Debentures due 10/1/2046 | 193 | 7.050% | 193 | 7.050% | ||||||||
Unsecured debt issued by Frontier | 10,949 | 10,949 | ||||||||||
Secured debt issued by subsidiaries | ||||||||||||
Debentures due 11/15/2031 | 100 | 8.500% | 100 | 8.500% | ||||||||
RUS loan contracts due 1/3/2028 | 6 | 6.154% | 6 | 6.154% | ||||||||
Secured debt issued by subsidiaries | 106 | 106 | ||||||||||
Unsecured debt issued by subsidiaries | ||||||||||||
Debentures due 5/15/2027 | 200 | 6.750% | 200 | 6.750% | ||||||||
Debentures due 2/1/2028 | 300 | 6.860% | 300 | 6.860% | ||||||||
Debentures due 2/15/2028 | 200 | 6.730% | 200 | 6.730% | ||||||||
Debentures due 10/15/2029 | 50 | 8.400% | 50 | 8.400% | ||||||||
Unsecured debt issued by subsidiaries | 750 | 750 | ||||||||||
Total debt including debt subject to compromise | 17,511 | 8.464% (3) | 17,516 | 8.486% (3) | ||||||||
Less: debt subject to compromise | (10,949) | - | ||||||||||
Total debt | $ | 6,562 | $ | 17,516 | ||||||||
(1) Represents borrowings under the 2014 CoBank Credit Agreement, as defined below.
(2) Represents borrowings under the JPM Credit Agreement Term Loan A,Revolver, as defined below.
(3) Represents borrowings under the 2016 CoBank Credit Agreement, as defined below.
(4)(2) Represents borrowings under the JPM Credit Agreement Term Loan B, as defined below.
(5)(3) Interest rate represents a weighted average of the stated interest rates of multiple issuances.
In September 2017, Frontier used proceeds from Term Loan B (see definition and note discussion below) to retire $24 million of 8.500% Notes due 2020, $10 million of 9.250% Notes due 2021, $6 million of 7.125% Notes due 2019, and $5 million of 8.125% Notes due 2018. Frontier recorded a gain of $1 million driven primarily by discounts on the retirement of the notes. On April 17, 2017, Frontier used cash available on hand to retire $210 million of 8.25% Senior Notes that matured on such date.Revolving Credit Facilities
In June 2017, Frontier used cash proceeds from Term Loan B (see definition and note discussion below) to retire $763 million of 8.875% Notes due 2020 and $527 million of 8.500% Notes due 2020. Frontier recorded a loss on early extinguishment of debt of $90 million driven by premiums paid to retire the notes and unamortized original issuance costs.JP Morgan Credit Facilities
On February 27, 2017, Frontier entered into a first amended and restated credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, pursuant to which Frontier combined its revolving credit agreement, dated as of June 2, 2014, and its term loan credit agreement, dated as of August 12, 2015. Under the JPM Credit Agreement as further(as amended on June 15, 2017 by Increase Joinder No.1 (as so amended,to date, the JPM Credit Agreement), Frontier has a $1,625$1,740 million senior secured term loan A facility (the Term Loan A) maturing on March 31, 2021, an $850 million undrawn secured revolving credit facility maturing on February 27, 2022 (the Revolver), and $1,500 million senior secured term loan B facility (the Term Loan B) maturing on June 15, 2024.2024 and an $850 million secured revolving credit facility maturing on February 27, 2024 (the Revolver). The maturities of the Term Loan A,B and the Revolver, and the Term Loan B, in each case if still outstanding, will be accelerated in the following circumstances: (i) if, 91 days before the maturity date of any series of Senior Notes maturing in 2020, 2023 and 2024, more than $500 million in principal amount remains outstanding on such series;series; or (ii) if, 91 days before the maturity date of the first series of Senior Notes maturing in 2021 or 2022, more than $500 million in principal amount remains outstanding, in the aggregate, on the two series of Senior Notes maturing in such year. As of June 30, 2020, approximately $227 million principal amount, in the aggregate, remains outstanding on the two series of senior notes maturing in 2020 and $309 million principal amount, in the aggregate, remains outstanding on the two series of senior notes maturing in 2021.
The determination of interest rates for each of the facilitiesTerm Loan B and Revolver under the JPM Credit Agreement is based on margins over the Base Rate (as defined in the JPM Credit Agreement) or over LIBOR, at the election of Frontier. Interest rate margins on the Term Loan A and Revolver (ranging from 0.75%1.00% to 1.75%2.00% for Base Rate borrowings and 1.75%2.00% to 2.75%3.00% for LIBOR borrowings) are subject to adjustment based on Frontier’s Total Leverage Ratio (as defined in the JPM Credit Agreement). The interest rate on the Term Loan ARevolver as of SeptemberJune 30, 20172020 was LIBOR plus 2.75%3.00%. Interest rate margins on the Term Loan B (2.75% for Base Rate borrowings and 3.75% for LIBOR borrowings) are not subject to adjustment. The security package under the JPM Credit Agreement includes pledges of the equity interests in certain Frontier subsidiaries and guarantiesguarantees by certain Frontier subsidiaries.
As of SeptemberJune 30, 2017,2020, Frontier had borrowings of $749 million outstanding under the revolvingRevolver (with letters of credit issued under the Revolver totaling an additional $90 million).
On March 15, 2019, Frontier amended the JPM Credit Agreement to, among other things, extend the maturity date of the Revolver from February 27, 2022 to February 27, 2024 (subject to springing maturity to any tranche of our existing debt with an aggregate outstanding principal amount in excess of $500 million), increase the interest rate applicable to loans under the Revolver by 0.25% and make certain modifications to the debt and restricted payment covenants. On April 26, 2019, Frontier further amended the JPM Credit Agreement to, among other things, extend the maturity date of the outstanding small tranche of loans under the Revolver that had not been party to the March 2019 amendments.
Frontier also had a $1,625 million senior secured Term Loan A facility (the Term Loan A) under the JPM Credit Agreement which was fully availablerepaid on March 15, 2019, as described below under “New Debt Issuances and no borrowingsDebt Reductions.”
Repaid CoBank Credit Facilities
Frontier had been made thereunder. The revolving credita $315 million senior term loan facility is available for general corporate purposes but may not be used to fund dividend payments.
Frontier has two senior secured credit agreementsdrawn in October 2016 (the 2016 CoBank Credit Agreement) with CoBank, ACB, as administrative agent, lead arranger and a lender, and the other lenders party thereto: the first, forwhich was repaid in full on March 15, 2019. Frontier had a separate $350 million senior term loan facility drawn in 2014 (the 2014 CoBank Credit Agreement), matures with CoBank which was repaid in full on October 24,July 3, 2018. Details of both transactions are described below under “New Debt Issuances and Debt Reductions.”
New Debt Issuances and Debt Reductions
On March 15, 2019, andFrontier completed a private offering of $1,650 million aggregate principal amount of 8.000% First Lien Secured Notes due 2027 (the First Lien Notes). The First Lien Notes are guaranteed by each of the second, for a $315 million senior term loan facility drawn in October 2016 (the 2016 CoBank Credit Agreement), matures on October 12, 2021. We refer toCompany’s subsidiaries that guarantees the 2014 CoBankJPM Credit Agreement, including the Term Loan B and Revolver. The guarantees are unsecured obligations of the guarantors equal in right of payment to all of the guarantor’s obligations under the JPM Credit Agreement and certain other permitted future senior indebtedness and senior
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
in right of payment to all subordinated obligations of the guarantors. The First Lien Notes are secured on a first-priority basis by all the assets that secure the Company’s obligations under the JPM Credit Agreement on a first-priority basis. Interest on the First Lien Notes is payable to holders of record semi-annually in arrears on April 1 and October 1 of each year, commencing October 1, 2019.
Additionally, on March 15, 2019, Frontier used the proceeds from the offering of First Lien Notes, together with cash on hand, to (i) repay in full the outstanding borrowings under the senior secured Term Loan A facility under the JPM Credit Agreement, which otherwise would have matured in March 2021, (ii) repay in full the outstanding borrowings under the 2016 CoBank Credit Agreement, collectively aswhich otherwise would have matured in October 2021, and (iii) pay related interest, fees and expenses.
For the CoBank Credit Agreements.six months ended June 30, 2020, Frontier retired $5 million principal amount of senior secured debt. For the six months ended June 30, 2019, Frontier retired $348 million principal amount of 7.125% senior unsecured notes due 2019.
RepaymentDuring 2019, Frontier recorded a gain on early extinguishment of debt of $20 million driven primarily by the outstanding principal balance under eachwrite-off of the CoBank Credit Agreements is being made in quarterly installments ($9 million, with respect to the 2014 CoBank Credit Agreement, and $8 million, with respect to the 2016 CoBank Credit Agreement), in each caseunamortized original issuance costs associated with the remaining outstanding principal balance to be repaid on the applicable maturity date. Borrowings under each of the CoBank Credit Agreements bear interest based on the margins over the Base Rate (as defined in the applicable CoBank Credit Agreement) or over LIBOR, at the election of Frontier.
On March 29, 2017, Frontier amended the 2014retired Term Loan A and 2016 CoBank Credit Agreements. The amendments provide that interest rate margins under each of these facilities will range from 0.875% to 3.875% for Base Rate borrowings and 1.875% to 4.875% for LIBOR borrowings, subject to adjustment based on our Total Leverage Ratio, as defined in each credit agreement. The interest rate on each of the facilities as of September 30, 2017 was LIBOR plus 3.875%. In addition, the amendments provide for increases in the maximum Leverage Ratio and expansion of the security package identical to those contained in the JPM Credit Agreement.
19
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
As of September 30, 2017, we were in compliance with all of our indenture and credit facility covenants.
Our scheduled principal payments are as follows as of September 30, 2017:
|
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|
|
|
|
|
|
| Principal | |
($ in millions) |
| Payments | |
|
|
|
|
2017 (remaining three months) |
| $ | 42 |
2018 |
| $ | 743 |
2019 |
| $ | 828 |
2020 |
| $ | 1,132 |
2021 |
| $ | 2,558 |
2022 |
| $ | 2,703 |
Thereafter |
| $ | 10,010 |
(9) (11) Restructuring Costs and Other ChargesCharges:
As of SeptemberJune 30, 2017,2020, restructuring related liabilities of $12$2 million pertaining to employee separation charges wereand accrued costs related to transformation initiatives are included in “Other current liabilities” in our consolidated balance sheet.
Restructuring costs and other charges, primarilyDuring the six month period ended June 30, 2020, we incurred $84 million in expenses consisting of $8 million directly associated with transformation initiatives, $4 million of severance and other employee-relatedemployee costs resulting from workforce reductions, and $72 million of $46consulting and advisory costs related to our balance sheet restructuring activities through the Petition Date.
During the three month period ended June 30, 2020, we incurred $36 million in connection withexpenses consisting of $2 million of severance and employee costs resulting from workforce reductions, and $34 million of consulting and advisory costs related to our balance sheet restructuring activities through the Petition Date.
Effective with the Petition date, these other charges consisting of consulting and advisory costs incurred are includedrecorded in “Restructuring costs and other charges”Reorganization items, net in ourthe consolidated statement of operations foroperations.
During the ninethree and six months ended SeptemberJune 30, 2017. During the second quarter2019, we incurred $31 million and $59 million, respectively, in expenses consisting of 2017, Frontier sold its Frontier Secure Strategic Partnerships business at a loss$16 million and $29 million, respectively, directly associated with transformation initiatives and $15 million and $30 million, respectively, of $9 million, which is also included in restructuringseverance and employee costs and other charges for the nine months ended September 30, 2017.resulting from workforce reductions.
The following is a summary of the changes in the liabilities established for restructuring programs at September 30, 2017:
and other related programs:
($ in millions) | |||||
Balance at January 1, | $ | 15 | |||
| Severance expense | 4 | |||
Transformation costs | 8 | ||||
Other costs | 72 | ||||
Cash payments during the period | (97) | ||||
| Balance at June 30, 2020 |
| $ | 2 | |
(10)
(12) Investment and Other Income (Loss):
The following is a summary of the components of Investment and Other Income (loss):
For the three months ended | For the six months ended | |||||||||||
June 30, | June 30, | |||||||||||
($ in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||
Interest and dividend income | $ | 2 | $ | 1 | $ | 4 | $ | 4 | ||||
Pension and OPEB costs | (20) | (11) | (19) | (22) | ||||||||
All other, net | (2) | 1 | - | - | ||||||||
Total investment and other loss, net | $ | (20) | $ | (9) | $ | (15) | $ | (18) |
(10)
Pension and OPEB costs consist of interest costs, expected return on plan assets, amortization of prior service costs (credit) and amortization of unrecognized (gain) loss.
(13) Income Taxes:
The following is a reconciliation of the provision for income taxes computed at the federal statutory rate to income taxes computed at the effective rate:
For the three months ended | For the six months ended | |||||||||||||
June 30, | June 30, | |||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||
Consolidated tax provision at federal statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | 21.0 | % | ||||||
State income tax provisions, net of federal income | ||||||||||||||
tax benefit | 11.3 | 1.5 | 5.4 | 1.5 | ||||||||||
Changes in certain deferred tax balances | (7.8) | (1.5) | (3.9) | (1.9) | ||||||||||
Interest expense deduction | 19.5 | - | 10.4 | - | ||||||||||
Restructuring cost | (6.4) | - | (5.0) | - | ||||||||||
Goodwill impairment | - | (10.4) | - | (10.4) | ||||||||||
Loss on disposal of Northwest Operations | (13.0) | (1.4) | (8.0) | (1.4) | ||||||||||
Tax reserve adjustment | 0.8 | - | (0.7) | - | ||||||||||
Shared-based payments | - | - | (0.3) | (0.1) | ||||||||||
Federal research and development tax credit | (1.5) | - | (0.5) | - | ||||||||||
All other, net | - | (0.1) | (0.5) | - | ||||||||||
Effective tax rate | 23.9 | % | 9.1 | % | 17.9 | % | 8.7 | % | ||||||
On July 14, 2020, The Department of The Treasury approved and submitted the final Regulations Sec. 1.163(j) to the Office of the Federal Register for publication. According to the final Regulations Section 1.163(j) – 1(b)(1), if property is sold or otherwise disposed of, the lesser of the amount of gain on the disposition or the amount of depreciation, amortization, or depletion deductions with respect to the property for the taxable years beginning after December 31, 2017 and before January 1, 2022 is subtracted from taxable income to determine ATI under Internal Revenue Code Section 163(j)(8)(B). Frontier is currently evaluating the impact of the final Regulations, which may be material to the Company’s income tax provision.
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| For the three months ended |
| For the nine months ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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Consolidated tax provision at federal statutory rate |
| 35.0 | % |
| 35.0 | % |
| 35.0 | % |
| 35.0 | % |
State income tax provisions, net of federal income |
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tax benefit |
| 2.8 |
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| 4.2 |
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| 1.7 |
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| 4.3 |
|
Tax reserve adjustment |
| (1.0) |
|
| 6.3 |
|
| (0.2) |
|
| 0.7 |
|
Domestic production activities deduction |
| - |
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| (9.5) |
|
| - |
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| (2.4) |
|
Changes in certain deferred tax balances |
| 7.1 |
|
| (0.8) |
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| 0.2 |
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| 3.1 |
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Goodwill impairment |
| - |
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| - |
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| (10.2) |
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| - |
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Shared-based payments |
| 0.1 |
|
| - |
|
| (0.2) |
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| - |
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Federal research and development tax credit |
| 1.5 |
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| 1.5 |
|
| 0.3 |
|
| 1.2 |
|
All other, net |
| 0.1 |
|
| - |
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| (0.1) |
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| 0.1 |
|
Effective tax rate |
| 45.6 | % |
| 36.7 | % |
| 26.5 | % |
| 42.0 | % |
IncomeUnder ASC 740 – 270, income tax expense for interim periods is based on annual effective tax rate for the full year with the exclusion of the discrete items. However, in a period when a negative annual effective tax rate occurs, the actual effective tax rate for the year-to-date period may be used as an exception. The actual year-to-date effective tax rate method is used by the Company in Q2 2020.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CARES Act
The CARES Act has a number of beneficial tax provisions (e.g., deferral of the employer portion of social security taxes for the nine months ended September 30, 2017 includesremainder of 2020, the federalability to claim additional interest deductions, net operating loss carrybacks, and removal of the 80% usage limitation for post-2017 NOLs for tax impactyears 2018, 2019 and 2020).
Employers can defer payment of $107 million relatedthe employer’s share of the Social Security tax that they otherwise are responsible for paying on wages. The deferral applies to affected taxes normally required to be paid from March 27, 2020, through December 31, 2020. The deferred tax must be paid over the goodwill impairment recorded duringfollowing two years, with half to be paid by December 31, 2021, and the second quarterother half to be paid by December 31, 2022.
The business interest deduction limit under Code Sec. 163(j) is increased to 50 percent of 2017.
Income taxesthe taxpayer’s adjusted taxable income (ATI) for the nine months ended September2019 and 2020 tax years. A taxpayer may also elect for the 2020 year only to use 2019 ATI in calculating the limitation. A taxpayer may elect not to have the increased limitation apply in 2019 or 2020.
Net operating losses (NOLs) arising in tax years beginning in 2018, 2019, and 2020 now have a five-year carryback period and an unlimited carryforward period. The provision limiting an NOL deduction attributable to NOLs arising in tax years beginning after 2017 to 80 percent of taxable income does not apply during these years.
As of June 30, 2017 includes the impact of $2 million of2020 and December 31, 2019, amounts pertaining to expected income tax expense resulting from the adoptionrefunds of ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.”
Amounts pertaining to income tax related accounts of $48$13 million and $55$1 million are included in “Income taxes and other current assets” in the consolidated balance sheets, respectively.
Frontier considered positive and negative evidence in regard to evaluating certain deferred tax assets during the second quarter of 2020, including the development of recent years of pre-tax book losses. On the basis of this evaluation, a valuation allowance of $61 million ($57 million net of federal benefit) has been recorded for the six months ended June 30, 2020, related to these deferred tax assets and reflected in “Changes in certain deferred tax balances.” The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.
As of SeptemberJune 30, 2017 and December 31, 2016, respectively.
During the first nine months2020, Frontier had approximately $1.2 billion of 2017, we received net statefederal NOLs, which for U.S. federal income tax refundspurposes can be used to offset future taxable income. In connection with the sale of $4 million. In October 2017, we received federal tax refundsthe Northwest Operations Frontier utilized NOLs of $48 million.approximately $848 million during the six months ended June 30, 2020.
On July 1, 2019, the Board of Directors of Frontier Communications adopted a shareholder’s right plan (Rights Agreement) designed to protect the availability of the net operating loss carryforwards under the Internal Revenue Code (Code). The Rights Agreement is intended to reduce the likelihood of an ownership change under Section 382 of the Code by deterring any person or group of affiliated or associated persons from acquiring beneficial ownership of 4.9% or more of the outstanding common shares.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(DEBTOR-IN-POSSESSION)
(11) (14) Net Loss Per Share:
All share and per share amounts in the tables below have been retroactively adjusted for all periods presented to give effect to the reverse stock split. See Note 1 – Summary of Significant Accounting Policies for additional details.
The reconciliation of the net loss per share calculation is as follows:
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| For the three months ended |
| For the nine months ended | ||||||||
| September 30, |
| September 30, | ||||||||
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($ in millions and shares in thousands, except per share amounts) | 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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Net loss used for basic and diluted loss |
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per share: |
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Net loss attributable to Frontier common shareholders | $ | (92) |
| $ | (134) |
| $ | (936) |
| $ | (454) |
Less: Dividends paid on unvested restricted stock awards |
| - |
|
| (1) |
|
| (2) |
|
| (3) |
Total basic net loss |
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attributable to Frontier common shareholders | $ | (92) |
| $ | (135) |
| $ | (938) |
| $ | (457) |
Effect of loss related to dilutive stock units |
| - |
|
| - |
|
| (2) |
|
| - |
Total diluted net loss |
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attributable to Frontier common shareholders | $ | (92) |
| $ | (135) |
| $ | (940) |
| $ | (457) |
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Basic loss per share: |
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Total weighted average shares and unvested restricted stock |
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awards outstanding - basic |
| 78,488 |
|
| 78,205 |
|
| 78,399 |
|
| 78,134 |
Less: Weighted average unvested restricted stock awards |
| (691) |
|
| (593) |
|
| (685) |
|
| (526) |
Total weighted average shares outstanding - basic |
| 77,797 |
|
| 77,612 |
|
| 77,714 |
|
| 77,608 |
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Basic net loss per share |
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attributable to Frontier common shareholders | $ | (1.19) |
| $ | (1.73) |
| $ | (12.06) |
| $ | (5.87) |
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Diluted loss per share: |
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Total weighted average shares outstanding - basic |
| 77,797 |
|
| 77,612 |
|
| 77,714 |
|
| 77,608 |
Effect of dilutive stock units |
| - |
|
| - |
|
| 161 |
|
| - |
Total weighted average shares outstanding - diluted |
| 77,797 |
|
| 77,612 |
|
| 77,875 |
|
| 77,608 |
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Diluted net loss per share |
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attributable to Frontier common shareholders | $ | (1.19) |
| $ | (1.73) |
| $ | (12.07) |
| $ | (5.87) |
For the three months ended | For the six months ended | ||||||||||||
June 30, | June 30, | ||||||||||||
($ in millions and shares in thousands, except per share amounts) | 2020 | 2019 | 2020 | 2019 | |||||||||
Net loss used for basic and diluted loss | |||||||||||||
per share: | |||||||||||||
Total basic net loss | |||||||||||||
attributable to Frontier common shareholders | $ | (181) | $ | (5,317) | $ | (367) | $ | (5,404) | |||||
Effect of loss related to dilutive stock units | - | - | - | - | |||||||||
Total diluted net loss | |||||||||||||
attributable to Frontier common shareholders | $ | (181) | $ | (5,317) | $ | (367) | $ | (5,404) | |||||
Basic loss per share: | |||||||||||||
Total weighted average shares and unvested restricted stock | |||||||||||||
awards outstanding - basic | 104,988 | 105,314 | 105,029 | 105,377 | |||||||||
Less: Weighted average unvested restricted stock awards | (463) | (1,196) | (592) | (1,390) | |||||||||
Total weighted average shares outstanding - basic | 104,525 | 104,118 | 104,437 | 103,987 | |||||||||
Basic net loss per share | |||||||||||||
attributable to Frontier common shareholders | $ | (1.73) | $ | (51.07) | $ | (3.51) | $ | (51.97) | |||||
Diluted loss per share: | |||||||||||||
Total weighted average shares outstanding - basic | 104,525 | 104,118 | 104,437 | 103,987 | |||||||||
Effect of dilutive stock units | - | - | - | - | |||||||||
Total weighted average shares outstanding - diluted | 104,525 | 104,118 | 104,437 | 103,987 | |||||||||
Diluted net loss per share | |||||||||||||
attributable to Frontier common shareholders | $ | (1.73) | $ | (51.07) | $ | (3.51) | $ | (51.97) | |||||
In calculating diluted net loss per common share for the three and ninesix months ended SeptemberJune 30, 2016,2020 and 2019, the effect of all common stock equivalents is excluded from the computation as the effect would be antidilutive.
Stock Options
For the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, previously granted options to purchase 2,6641,344 shares issuable under employee compensation plans were excluded from the computation of diluted earnings (loss) per share (EPS) for those periods because the exercise prices were greater than the average market price of our common stock and, therefore, the effect would be antidilutive.antidilutive.
22
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Stock Units
At Septembereach of June 30, 20172020 and 2016,June 30, 2019, we had 161,020 and 116,223339,544 stock units respectively, issued under the Non-Employee Directors’ Deferred Fee Equity Plan (Deferred Fee Plan), the Non-Employee Directors’ Equity Incentive Plan (Directors’ Equity Plan), the 2013 Equity Incentive Plan and the 2017 Equity Incentive Plan. These securities have not been included in the diluted EPS calculation for the threesix months ended SeptemberJune 30, 20172020 and 2016 and the nine months ended September 30, 20162019 because their inclusion would have an antidilutive effect. Compensation costs associated with the issuance of stock units were ($4)$0 million for each of the ninesix months ended SeptemberJune 30, 2017. There were no compensation costs associated with the issuance of stock units for the nine months ended September2020 and 2019, respectively.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
(15) Stock Plans:
At June 30, 2016.
Mandatory Convertible Preferred Stock
The impact of the common share equivalents associated with approximately 19,250,000 shares of Series A Preferred stock were not included in the diluted EPS calculation as of September 30, 2017 and 2016, as their impact was antidilutive.
(12) Stock Plans:
All share and per share amounts in the tables below2020, we have been retroactively adjusted for all periods presented to give effect to the reverse stock split. See Note 1 – Summary of Significant Accounting Policies for additional details.
At September 30, 2017, we had seven7 stock-based compensation plans under which grants were made and awards remained outstanding. No further awards may be granted under six6 of the plans: the 1996 Equity Incentive Plan (the 1996 EIP), the Amended and Restated 2000 Equity Incentive Plan (the 2000 EIP), the 2009 Equity Incentive Plan (the 2009 EIP), the 2013 Equity Incentive Plan (the 2013 EIP), the Deferred Fee Plan and the Directors’ Equity Plan. At SeptemberJune 30, 2017,2020, there were approximately 5,667,000 shares authorized for grant and approximately 4,381,0003,514,000 shares available for grant under the 2017 Equity Incentive Plan (the 2017 EIP and together with the 1996 EIP, the 2000 EIP, the 2009 EIP and the 2013 EIPS, the EIPs). Our general policy is to issue treasury shares upon the grant
Performance Shares
As of restricted shares and the exercise of options.
Performance Shares
On February 16, 2017, the Compensation Committee of our Boardof Directors granted approximately 157,400January 1, 2020, we had 96,000 outstanding performance shares under the Frontier Long Term Incentive Plan (the LTIP) and set. During the operating cash flow performance goal for 2017, which applies to the first year in the 2017-2019 measurement period, the second yearsix months ended June 30, 2020, all of the 2016-2018 measurement period and the third year of the 2015-2017 measurement period.
The following summary presents information regarding LTIP targetremaining performance shares as of September 30, 2017 and changes during the nine months then ended with regard to LTIP shares awarded under the 2013 EIP and the 2017 EIP:LTIP were cancelled.
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For purposes of determining compensation expense, the fair value of each performance share is measured at the end of each reporting period and, therefore, will fluctuate based on the price of Frontier common stock as well as performance relative to the targets. For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, we recognized net compensation expense, reflected in “Selling, general and administrative expenses,” of $0 and $4 million, respectively, for the LTIP.$0.
23
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Restricted Stock
The following summary presents information regarding unvested restricted stock as of September 30, 2017 and changes during the nine months then ended with regard to restricted stock granted under the 2013 EIP and the 2017 EIP:
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| Weighted |
|
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| |
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| Average |
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| ||
|
| Number of |
| Grant Date |
| Aggregate | ||
|
| Shares |
| Fair Value |
| Fair Value | ||
|
| (in thousands) |
| (per share) |
| (in millions) | ||
Balance at January 1, 2017 |
| 549 |
| $ | 78.00 |
| $ | 28 |
Restricted stock granted |
| 454 |
| $ | 47.77 |
| $ | 5 |
Restricted stock vested |
| (220) |
| $ | 79.78 |
| $ | (3) |
Restricted stock forfeited |
| (119) |
| $ | 61.21 |
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Balance at September 30, 2017 |
| 664 |
| $ | 59.64 |
| $ | 8 |
Weighted | ||||||||||
Average | ||||||||||
Number of | Grant Date | Aggregate | ||||||||
Shares | Fair Value | Fair Value | ||||||||
(in thousands) | (per share) | (in millions) | ||||||||
Balance at January 1, 2020 | 900 | $ | 10.57 | $ | 1 | |||||
Restricted stock granted | - | $ | - | $ | - | |||||
Restricted stock vested | (387) | $ | 15.04 | $ | - | |||||
Restricted stock forfeited | (91) | $ | 6.69 | |||||||
Balance at June 30, 2020 | 422 | $ | 7.30 | $ | - | |||||
For purposes of determining compensation expense, the fair value of each restricted stock grant is estimated based on the average of the high and low market price of a share of our common stock on the date of grant, for shares granted prior to May 10, 2017. Beginning on May 10, 2017, the fair value of each restricted stock grant is estimated based on the closing price of a share of our common stock on the date of the grant. Total remaining unrecognizedcompensation cost associated with unvested restricted stock awards that is deferred at SeptemberJune 30, 20172020 was $26$2 million, and the weighted average vesting period over which this cost is expected to be recognized is approximately 1.5 years.1 year.
Shares of restricted stock granted during the first nine months of 2016 totaled 375,133. The total fair value of shares of restricted stock granted and vested at September 30, 2016 was approximately $23 million and $15 million, respectively. The total fair value of unvested restricted stock at September 30, 2016 was $37 million. The weighted average grant date fair value of restricted shares granted during the nine months ended September 30, 2016 was $78.60 per share.
We have granted restricted stock awards to employees in the form of our common stock. None of the restricted stock awards may be sold, assigned, pledged or otherwise transferred, voluntarily or involuntarily, by the employees until the restrictions lapse, subject to limited exceptions. The restrictions are time-based. Compensation expense, recognized in “Selling, general and administrative expenses,” of $14$2 million and $5 million for each of the ninesix month periods ended SeptemberJune 30, 20172020 and 2016,2019, respectively, has been recorded in connection with these grants.
(13) (16) Comprehensive Income (Loss):
Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting shareholders’ investmentequity (deficit) and pension/postretirement benefit (OPEB) liabilities that, under GAAP, are excluded from net loss.
The components of accumulated other comprehensive loss,income (loss), net of tax at September 30, 2017 and 2016, and changes for the nine months then ended, are as follows:
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($ in millions) |
| Pension Costs |
| OPEB Costs |
| Deferred Taxes on Pension and OPEB Costs |
| Total | ||||
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Balance at January 1, 2017 |
| $ | (647) |
| $ | 29 |
| $ | 231 |
| $ | (387) |
Other comprehensive income (loss) |
|
| (34) |
|
| 1 |
|
| 12 |
|
| (21) |
Amounts reclassified from accumulated other comprehensive loss to net loss |
|
| 23 |
|
| (7) |
|
| (5) |
|
| 11 |
Recognition of net actuarial loss for pension settlement costs in net loss |
|
| 77 |
|
| - |
|
| (29) |
|
| 48 |
Net current-period other comprehensive income (loss) |
|
| 66 |
|
| (6) |
|
| (22) |
|
| 38 |
Balance at September 30, 2017 |
| $ | (581) |
| $ | 23 |
| $ | 209 |
| $ | (349) |
($ in millions) | Pension Costs | OPEB Costs | Total | |||||||
Balance at January 1, 2020 (1) | $ | (684) | $ | 34 | $ | (650) | ||||
Other comprehensive income (loss) | ||||||||||
before reclassifications | (525) | (15) | (540) | |||||||
Amounts reclassified from accumulated other | ||||||||||
comprehensive loss to net loss | 208 | (5) | 203 | |||||||
Net current-period other comprehensive | ||||||||||
income (loss) | (317) | (20) | (337) | |||||||
Balance at June 30, 2020 (1) | $ | (1,001) | $ | 14 | $ | (987) | ||||
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($ in millions) |
| Pension Costs |
| OPEB Costs |
| Deferred Taxes on Pension and OPEB Costs |
| Total | ||||
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Balance at January 1, 2016 |
| $ | (584) |
| $ | 20 |
| $ | 211 |
| $ | (353) |
Other comprehensive income (loss) |
|
| (105) |
|
| - |
|
| 40 |
|
| (65) |
Amounts reclassified from accumulated other comprehensive loss |
|
| 30 |
|
| (6) |
|
| (9) |
|
| 15 |
Net current-period other comprehensive income (loss) |
|
| (75) |
|
| (6) |
|
| 31 |
|
| (50) |
Balance at September 30, 2016 |
| $ | (659) |
| $ | 14 |
| $ | 242 |
| $ | (403) |
($ in millions) | Pension Costs | OPEB Costs | Total | |||||||
Balance at January 1, 2019 (1) | $ | (489) | $ | 26 | $ | (463) | ||||
Other comprehensive income (loss) | ||||||||||
before reclassifications | - | - | - | |||||||
Amounts reclassified from accumulated other | ||||||||||
comprehensive loss to net loss | 21 | (4) | 17 | |||||||
Net current-period other comprehensive | ||||||||||
income (loss) | 21 | (4) | 17 | |||||||
Impact of adoption of ASU 2018-02 | (83) | 4 | (79) | |||||||
Balance at June 30, 2019 (1) | $ | (551) | $ | 26 | $ | (525) | ||||
As a result(1)Pension and OPEB amounts are net of tax of $204 million and $250 million as of January 1, 2020 and 2019, respectively and $280 million and $166 million as of June 30, 2020 and 2019, respectively.
During the six months ended June 30, 2020, Frontier recorded aggregate pension settlement charges of $159 million related to lump sum pension settlement payments to terminated or retired individuals and completed its sale of the Northwest Operations. In accordance with ASC 715, Compensation - Retirement Benefits (ASC 715), Frontier remeasured its pension settlement accounting discussed in Note 14,plan during the Frontier Communications Pension Plan (the Pension Plan) was remeasured as of Septemberthree months ended June 30, 2017.2020. This remeasurement resulted in an increase in our pension liabilities and a decrease in the discount rate from 4.10% at March 31, 2017 to 3.8% at June 30, 2017 and September 30, 2017, in addition to census data changes resulting in the recording of a loss on remeasurement charge to Other comprehensive income (loss) during each of $672 million for the quarters. For the ninesix months ended SeptemberJune 30, 2017, Frontier recorded a net loss on remeasurement of $32 million, to Other comprehensive income (loss). Additionally, Frontier recorded pension settlement charges totaling $77 million ($48 million net of tax) to Other comprehensive income (loss).2020. Refer to Note 1417 for details aboutadditional disclosures related to the pension settlement accounting.and other items related to Defined Benefit Plans.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(DEBTOR-IN-POSSESSION)
The significant items reclassified from each component of accumulated other comprehensive loss for the three and nine months ended September 30, 2017 and 2016 are as follows:
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Details about Accumulated Other |
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Amortization of Pension Cost Items (2) | ||||||||||||||||||||||||||||
Actuarial gains (losses) |
| $ | (6) |
| $ | (9) |
| $ | (23) |
| $ | (30) |
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One-time loss on disposal | (61) | - | (61) | - | ||||||||||||||||||||||||
Pension settlement costs |
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Tax impact |
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| Income tax (expense) benefit | 29 | 3 | 59 | 7 | Income tax benefit | |||||||||
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| Net income (loss) | $ | (118) | $ | (11) | $ | (208) | $ | (21) | Net loss | |||||
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Prior-service costs |
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(a)(1) Amounts in parentheses indicate losses.
(b)(2) These accumulated other comprehensive loss components are included in the computation of net periodic pension and OPEB costs (see Note 1417 - Retirement Plans for additional details).
(14) (17) Retirement Plans:
The following tables provide the components of total pension and postretirement benefit cost:
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Components of total pension benefit cost |
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Service cost |
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Interest cost on projected benefit obligation |
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Expected return on plan assets |
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Amortization of unrecognized loss |
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Net periodic pension benefit cost |
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Pension settlement costs |
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One-time gain on disposal, net | (50) | - | (50) | - | |||||||||||||||||||||
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Service cost | $ | 5 | $ | 5 | $ | 10 | $ | 10 | |||||||||||||||||
Interest cost on projected benefit obligation | 8 | 11 | 16 | 21 | |||||||||||||||||||||
Amortization of prior service cost (credit) | (8) | (3) | (16) | (4) | |||||||||||||||||||||
Amortization of unrecognized (gain) loss | 1 | - | 3 | (2) | |||||||||||||||||||||
Net periodic postretirement benefit cost | 6 | 13 | 13 | 25 | |||||||||||||||||||||
One-time gain on disposal, net | (24) | - | (24) | - | |||||||||||||||||||||
Total periodic postretirement benefit cost | $ | (18) | $ | 13 | $ | (11) | $ | 25 | |||||||||||||||||
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Service cost |
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Interest cost on projected benefit obligation |
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Amortization of prior service cost/(credit) |
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Amortization of unrecognized (gain) loss |
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Net periodic postretirement benefit cost |
| $ | 13 |
| $ | 14 |
| $ | 39 |
| $ | 35 |
DuringThe components of net periodic benefit cost other than the first nine monthsservice cost component are included in “Investment and other income” in the consolidated statement of 2017 and 2016, we capitalized $20operations.
Our net pension plan liability is comprised of the Projected Benefit Obligation (PBO) offset by pension plan assets. The value of our pension plan assets decreased $520 million from the $2,730 million at December 31, 2019 to $2,210 million at June 30, 2020. This decrease primarily resulted from benefit payments to participants of $500 million and $18distributions associated with the sale of the Northwest Operations of $58 million, respectively,partially offset by increases for contributions of $37 million. Despite $558 million in distributions, the PBO component increased $2 million from $3,726 million at December 31, 2019 to $3,728 at June 30, 2020. This resulted primarily because of a decrease in the discount rate assumption from 3.4% at December 31, 2019 to 2.8% at June 30, 2020, as well as decreases to the interest rates used for lump sum payments.
The pension and OPEB expense into the cost of our capital expenditures, as the costs relate to our engineering and plant construction activities.
The Pension Planplan contains provisions that provide certain employees with the option of receiving a lump sum payment upon retirement. Frontier’s accounting policy is to record these payments as a settlement only if, in the aggregate, they exceed the sum of the annual service and interest costs for the Pension Plan’s net periodic pension benefit cost. During the three and ninesix months ended SeptemberJune 30, 2017,2020, lump sum pension settlement payments to terminated or retired individuals amounted to $87 million and $449$464 million, which exceeded the settlement threshold of $224$211 million, and as a result, Frontier recognized non-cash settlement charges totaling $77$159 million during the first ninesix months of 2017.ended June 30, 2020. The non-cash charge accelerated the recognition of a portion of the previously unrecognized actuarial losses in the Pension Plan. These non-cash charges increased our recorded net loss and accumulated deficit, with ana corresponding offset to accumulated other comprehensive loss in shareholders’ stockholders’
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
equity. An additional pension settlement charge will be required in the fourth quarter of 2017, the amount of which will be dependent on the lump sum benefit payments made during the fourth quarter. As a result of the recognition of the settlement charges in the first ninesix months of 2017,2020, as required under US GAAP, the net pension plan liability was remeasured and recorded as of September 30, 2017, June 30, 2017 and March 31, 20172020 to be $717$1,518 million, $711 million and $665million, respectively, as compared to the $699$996 million measured and recorded at December 31, 2016. The remeasured funded status2019, or an increase of $522 million. This increase in the Pension Plan was approximately 80%, asnet pension liability during the six months ended June 30, 2020 is comprised of September 30, 2017, similar to December 31, 2016. Frontier did not record any adjustmenta $395 million increase related to the three months ended March 31, 2020 (an immaterial out of period adjustment recorded in the current quarter ended June 30, 2020) and a $127 million increase related to the three months ended June 30, 2020, with a corresponding increase to accumulated other comprehensive income, net of tax.
During the first six months of both 2020 and 2019, we capitalized $13 million of pension and OPEB expense into the cost of our capital expenditures, as the costs relate to our engineering and plant construction activities.
Required pension plan liability, beyondcontributions for the settlement charge, as a resultfiscal year 2020 are estimated to be $193 million, of this remeasurement.
27
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Our Pensionwhich $37 million was contributed to the Plan assets decreased from $2,766 million at December 31, 2016 to $2,604 million at September 30, 2017, a decrease of $162 million, or 6%. This decrease was a result of benefit payments of $492 million, partially offset by positive investment returns of $270 million, net of investment management and administrative fees, and contributions in excess of the Differential (as defined below) of $60 million, during the first ninesix months of 2017.
As part2020. Certain provisions of the CTF Acquisition, Verizon was requiredCARES Act permit employers to makepostpone making pension contributions due in 2020 until January 1, 2021. Frontier intends to postpone the remaining 2020 contributions of approximately $156 million, in the aggregate, until on or prior to January 1, 2021 as permitted by the CARES Act.
Frontier notified employees that it intends to file an application with the Internal Revenue Service for a cash payment to Frontierwaiver of the minimum funding standard under Section 412(c) of the Internal Revenue Code and Section 302(c) of the Employee Retirement Income Security Act of 1974 for the differencePlan for the Plan year beginning January 1, 2020. Frontier’s minimum funding obligation for the 2020 plan year has been determined by its actuaries to be approximately $196 million. If the waiver is granted, Frontier would spread the 2020 contribution, plus additional interest, over the five subsequent plan years, in assets initially transferred by Verizon into the Pension Plan and the related obligation (the Differential). In the third quarter of 2017, we received the $131 million Differential payment from Verizon, and have remitted an equivalent amountaddition to the Pension Plan as of September 30, 2017. As the Differential was reflected as a receivable of the Pension Plan at December 31, 2016, the cash funding had no impact tominimum contributions owed for those plan assets.years.
(15)
(18) Commitments and Contingencies:
Although from time to time we make short-term purchasing commitments to vendors with respect to capital expenditures, we generally do not enter into firm, written contracts for such activities.
In June 2015, Frontier accepted the Federal Communications Commission’s (FCC) offer of support to price cap carriers under the Connect America Fund (CAF)FCC’s CAF Phase II program,offer in 25 states, which is intended to provide long-term support for broadband in high cost unserved or underserved areas. This program provides $332$313 million in annual support including $49through 2020 (since extended to 2021 under the Rural Digital Opportunity Fund (RDOF) Order) in return for the Company’s commitment to make broadband available to households within Frontier’s footprint.
On January 30, 2020, the FCC adopted an order establishing the RDOF program. With this order, the FCC plans to hold 2 auctions totaling $20.4 billion of support over ten years. In the first auction (RDOF Phase I), the FCC plans to offer up to $16 billion in support over ten years ($1.6 billion annually) for an estimated 6 million in annual support relatedlocations that lack access to speeds of at least 25/3 Mbps based on the properties acquiredFCC’s current maps. After the FCC updates its maps with more granular broadband availability information, the FCC plans to hold a second auction (RDOF Phase II) for any remaining locations with the remaining funding, at least $4.4 billion. On July 15, 2020, Frontier filed an application to be eligible to participate in the CTF Acquisition, through 2020RDOF Phase I auction, which is scheduled to makecommence on October 29, 2020. Until after that auction is completed, the FCC quiet period rules will apply.
Recognizing that RDOF support will not be made available 10 Mbps downstream/1 Mbps upstream broadband service to approximately 774,000 households across certain of the 29 states where we now operate. To the extent we do not enable the required number of households with 10 Mbps downstream/1 Mbps upstream broadband service bybefore the end of the sixth year of CAF Phase II term, we would be requiredsupport (year-end 2020), the FCC’s RDOF order explains that CAF II recipients are entitled to return a portionseventh year of CAF Phase II support through 2021, whether or not they are successful in an RDOF auction. As such, Frontier will continue to receive annual CAF Phase II support in 2021. While the funds previously received.RDOF has not yet been completely finalized, it could result in a material change in the level of funding that Frontier receives from the FCC under CAF II as early as 2022.
On April 20, 2017, the FCC issued an Order that will significantly alteraltered how Commercial Data Services are regulated once the rules go into effect.regulated. Specifically, the Order adopted a test to determine, on a county-by-county basis, whether price cap ILECs’,ILECs, like Frontier’s DS1 and DS3 services, will continue to be regulated. The test is likely to resultresulted in deregulation in
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
a substantial number of our markets. Once implemented, the deregulation will allowmarkets and is allowing Frontier to offer its DS1 and DS3 services in a manner that better responds to the competitive marketplace and allows for commercial negotiation. The areas that remain regulated may be subject to price fluctuations depending upon the price cap formula that year. Multiple parties have appealed the Order in the 8th Circuit Court of Appeals. The Court of Appeals issued a ruling August 28, 2018, which upheld the vast majority of the FCC’s decision easing regulation of business data services of internet service providers and requestedvacated and remanded one part of the Order back to the FCC. On October 10, 2018, the FCC filed a stay of this Order.Motion to Stay the Court’s Decision. Frontier cannot predict the extent to which these regulatory changes will result in changes tocould affect revenues at this time.
On April 30, 2018, an amended consolidated class action complaint was filed in the United States District Court for the District of Connecticut on behalf of certain purported stockholders against Frontier, certain of its current and former directors and officers and the underwriters of certain Frontier securities offerings. The complaint was brought on behalf of all persons who (1) acquired Frontier common stock between February 6, 2015 and February 28, 2018, inclusive, and/or (2) acquired Frontier common stock or Mandatory Convertible Preferred Stock either in or traceable to Frontier’s offerings of common and preferred stock conducted on or about June 2, 2015 and June 8, 2015. The complaint asserted, among other things, violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 thereunder, Section 20(a) of the Exchange Act and Sections 11 and 12 of the Securities Act of 1933, as amended, in connection with certain disclosures relating to the CTF Acquisition. The complaint sought, among other things, damages and equitable and injunctive relief. On March 8, 2019, the District Court granted in its entirety Frontier’s motion to dismiss the complaint. The District Court dismissed with prejudice a number of claims and with respect to certain other claims that were not dismissed with prejudice, Plaintiffs were permitted to seek the court’s permission to refile. On May 10, 2019, Plaintiffs filed a motion for leave to amend along with a proposed amended complaint that is narrower in scope than the dismissed complaint. On March 24, 2020, the court denied plaintiffs’ motion for leave to amend, finding that they had not pled a viable claim. Plaintiffs appealed and the case was stayed by the Second Circuit Court of Appeals. We continue to dispute the allegations and intend to vigorously defend against such claims. In addition, shareholders have filed derivative complaints on behalf of the Company in Connecticut, California, and Delaware courts. The derivative complaints are based, generally, on the same facts asserted in the consolidated class action complaint and allege against current and former officers and directors of the Company (i) breach of fiduciary duty claims for disseminating false and misleading information to shareholders, failure to manage internal controls, and failure to oversee and manage the company; (ii) unjust enrichment and waste of corporate assets claims; and (iii) violations of Section 14(a) of the Exchange Act for the false and misleading statements. We also dispute the allegations in the derivative complaints described above and intend to vigorously defend against such claims. Given that all of these matters are in the early stages of litigation, we are unable to estimate a reasonably possible range of loss, if any, that may result.
In addition, we are party to various legal proceedings (including individual actions, class and putative class actions)actions, and governmental investigations) 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,contract disputes, billing disputes, rights of access, taxes and surcharges, consumer protection, advertising, sales and the provision of services, trademark and patent infringement, employment, shareholder, 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 cash flows.
In October 2013, the California Attorney General’s Office notified certain Verizon companies, including one of the subsidiaries that we acquired in the CTF Acquisition, of potential violations of California state hazardous waste statutes primarily arising from the disposal of electronic components, batteries and aerosol cans at certain California facilities. We are cooperating with this investigation. We have accrued an amount for potential penalties that we deem to be probable and reasonably estimated, and we do not expect that any potential penalties, if ultimately incurred, will be material in comparison to the established accrual.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
We accrue an expense for pending litigation when we determine that an unfavorable outcome is probable, and the amount of the loss can be reasonably estimated. Legal defense costs are expensed as incurred. None of our existing accruals for pending matters, after considering insurance coverage, is material. We monitor our pending litigation for the purpose of adjusting our accruals and revising our disclosures accordingly, when required. Litigation is, however, subject to uncertainty, and the outcome of any particular matter is not predictable. We will vigorously defend our interests in pending litigation, and as of this date, we believe that the ultimate resolution of all such matters, after considering insurance coverage or other indemnities to which we are entitled, will not have a material adverse effect on our consolidated financial position, results of operations, or our cash flows.flows.
In October 2013, the California Attorney General’s Office notified certain Verizon companies, including oneAs part of the subsidiaries that we acquiredsale of our Northwest Operations, Frontier indemnified the purchaser for customary post-closing matters, including, among other things, breaches of certain covenants, agreements and warranties, changes to final closing statements and working capital, employee liabilities and other obligations included in the CTF Acquisition,purchase agreement. While Frontier intends to comply with its obligations under the purchase agreement, we could be obligated to make payments pursuant to these provisions in the future.
We conduct certain of potential violations of California state hazardous waste statutes primarily arisingour operations in leased premises and also lease certain equipment and other assets pursuant to operating leases. The lease arrangements have terms ranging from 1 to 99 years and several contain rent escalation clauses providing for increases in monthly rent at specific intervals. When rent escalation clauses exist, we record annual rental expense based on the disposal of electronic components, batteries and aerosol cans at certain California facilities. total expected rent payments on a straight-line basis over the lease term. Certain leases also have renewal options. Renewal options that are reasonably assured are included in determining the lease term.
We are cooperatingparty to contracts with this investigation. We have accrued an amountseveral unrelated long-distance carriers. The contracts provide fees based on traffic they carry for potential penalties us subject to minimum monthly fees.
Effect of Automatic Stay
Subject to certain exceptions under the Bankruptcy Code, the filing of the Company Parties’ Chapter 11 Cases automatically stayed the continuation of most legal proceedings or the filing of other actions against or on behalf of the Company Parties or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Company Parties’ bankruptcy estates, unless and until the Bankruptcy Court modifies or lifts the automatic stay as to any such claim. Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under their police and regulatory powers.
(19) Subsequent Events:
As previously discussed in Note 3, on May 15, 2020, the Company Parties filed the Plan with the Bankruptcy Court and the related Disclosure Statement. On June 30, 2020, the Disclosure Statement, as amended, was approved by the Bankruptcy Court and, on July 2, 2020, the Company commenced the solicitation of votes of certain of its credits for approval of the Plan. On August 21, 2020, the Bankruptcy Court is scheduled to hold a confirmation hearing to consider the approval of the Plan and a final hearing on the DIP Facility and DIP Credit Agreement.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(DEBTOR-IN-POSSESSION)
that we deem to be probable and reasonably estimated, and we do not expect that any potential penalties, if ultimately incurred, will be material in comparison to the established accrual.
29
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements,"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,"“expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “may,” “will,” “would,” or "target."“target.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertaintiesUncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include:include, but are not limited to:
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our ability to continue as a going concern;
our ability to successfully consummate a financial restructuring of our existing debt, existing equity interests, and certain other obligations (the Restructuring), and emerge from cases commenced under chapter 11 (the Chapter 11 Cases) of the United States Bankruptcy Code, including by satisfying the conditions and milestones in the restructuring support agreement;
our ability to improve our liquidity and long-term capital structure and to address our debt service obligations through the Restructuring and the potential adverse effects of the Chapter 11 Cases on our liquidity and results of operations;
our ability to maintain relationships with suppliers, customers, employees and other third parties as a result of the Restructuring and the Chapter 11 Cases;
the effects of the Restructuring and the Chapter 11 Cases on the Company and the interests of various constituents;
risks and uncertainties associated with the Restructuring, including our ability to receive approvals for debtor-in-possession financing, obtain confirmation of the Plan under the Chapter 11 Cases and successfully consummate the Restructuring;
our ability to comply with the restrictions expected to be imposed by covenants in debtor-in-possession and exit financing;
the length of time that we will operate under Chapter 11 protection and the continued availability of operating capital during the pendency of the Chapter 11 Cases;
risks associated with third party motions in the Chapter 11 Cases, which may interfere with the Company’s ability to consummate the Restructuring;
increased administrative and legal costs related to the Chapter 11 process;
declines in revenue from our voice services, switched and nonswitched access and video and data services that we cannot stabilize or offset with increases in revenue from other products and services;
our ability to successfully implement strategic initiatives, including opportunities to enhance revenue and realize productivity improvements;
our ability to effectively manage our operations, operating expenses, capital expenditures, debt service requirement and cash paid for income taxes and liquidity;
competition from cable, wireless and wireline carriers, satellite, and OTT companies, and the risk that we will not respond on a timely or profitable basis;
our ability to successfully adjust to changes in the communications industry, including the effects of technological changes and competition on our capital expenditures, products and service offerings;
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
risks related to disruption in our networks, infrastructure and information technology that result in customer loss and/or incurrence of additional expenses;
the impact of potential information technology or data security breaches or other cyber-attacks or other disruptions;
our ability to retain or attract new customers and to maintain relationships with customers, employees or suppliers;
our ability to secure, continue to use or renew intellectual property and other licenses used in our business;
our ability to hire or retain key personnel;
our ability to dispose of certain assets or asset groups on terms that are attractive to us, or at all;
the effects of changes in the availability of federal and state universal service funding or other subsidies to us and our competitors and our ability to obtain future subsidies, including participation in the proposed RDOF program;
our ability to meet our CAF II obligations and the risk of penalties or obligations to return certain CAF II funds;
our ability to defend against litigation and potentially unfavorable results from current pending and future litigation;
our ability to comply with applicable federal and state consumer protection requirements;
the effects of state regulatory requirements that could limit our ability to transfer cash among our subsidiaries or dividend funds up to the parent company;
the effects of governmental legislation and regulation on our business, including costs, disruptions, possible limitations on operating flexibility and changes to the competitive landscape resulting from such legislation or regulation;
the impact of regulatory, investigative and legal proceedings and legal compliance risks;
government infrastructure projects (such as highway construction) that impact our capital expenditures;
continued reductions in switched access revenues as a result of regulation, competition or technology substitutions;
our ability to effectively manage service quality in the states in which we operate and meet mandated service quality metrics;
the effects of changes in income tax rates, tax laws, regulations or rulings, or federal or state tax assessments, including the risk that such changes may benefit our competitors more than us, as well as potential future decreases in the value of our deferred tax assets;
the effects of changes in accounting policies or practices, including potential future impairment charges with respect to our intangible assets or additional losses on assets held for sale;
the effects of increased medical expenses and pension and postemployment expenses;
our ability to successfully renegotiate union contracts;
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
changes in pension plan assumptions, interest rates, discount rates, regulatory rules and/or the value of our pension plan assets, which could require us to make increased contributions to the pension plan in 2020 and beyond;
adverse changes in economic, political and market conditions in the areas that we serve, the U.S. and globally, including but not limited to, changes resulting from epidemics, pandemics and outbreaks of contagious diseases, including the COVID-19 pandemic, or other adverse public health developments;
potential adverse impacts of the COVID-19 pandemic on our business and operations, including potential disruptions to the work of our employees arising from health and safety measures such as social distancing and working remotely, our ability to effectively manage increased demand on our network, our ability to maintain relationships with our current or prospective customers and vendors as well as their abilities to perform under current or proposed arrangements with us, and stress on our supply chain; and
trading price and volatility of our common stock and risks related to the delisting of our common stock from the Nasdaq Global Select Market.
Any of the foregoing events, or other events, could cause our results to vary from management’s forward-looking statements included in this report. You should consider these important factors, as well as the risks contained in our most recent Form 10-K and other filings with the SEC,in evaluating any statement in this report 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.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Frontier Communications Corporation (Frontier) is a provider of communications services in the United States, with approximately 3.7 million customers, 3.1 million broadband subscribers and 16,400 employees, operating in 25 states as of June 30, 2020. We offer a broad portfolio of communications services for consumer and commercial customers. These services which include data and internet services, video services, voice services, access services, and advanced hardware and network solutions, are offered on either a standalone basis or in a bundled package, depending on each customer’s needs.
On April 1, 2016, we completed our acquisition14, 2020, Frontier filed for Chapter 11 bankruptcy with the U.S. Bankruptcy Court for the Southern District of Verizon’s wirelineNew York. Frontier is working on a restructuring plan to reduce its debt by more than $10 billion. During this Chapter 11 filing, Frontier is allowed to reorganize its finances while the business operations continue. The Company Parties continue to operate their businesses and manage their properties in California, Texas, and Florida (the CTF Acquisition,as “debtors-in-possession” under the jurisdiction of the CTF Operations).Frontier’s scopeBankruptcy Court and in accordance with the applicable provisions of operationsthe Bankruptcy Code and balance sheet changed materiallyorders of the Bankruptcy Court. To ensure the Company Parties’ ability to continue operating in the ordinary course of business and minimize the effect of the Restructuring on the Company Parties’ customers and employees, the Company Parties filed with the Bankruptcy Court motions seeking a variety of “first-day” relief, including authority to pay employee wages and benefits, and pay vendors and suppliers for goods and services provided both before and after the filing date. For further developments on this topic see “Recent Developments” discussion below.
On May 1, 2020, Frontier completed the sale of its Northwest Operations for gross proceeds of $1,352 million, subject to certain closing adjustments. Net of funding certain pension and other retiree medical liabilities, funding certain escrows and other closing adjustments, we received $1,131 million in proceeds. Revenues for the Northwest Operations represented approximately 7% of consolidated revenue for the year ended December 31, 2019.
During the second quarter of 2020, Frontier reported operating income of $140 million and a net loss of $181 million. This compares to an operating loss of $5,459 million and a net loss of $5,317 million reported in the second quarter of 2019. We have continued to experience net losses in customers, which have contributed to lower revenues and lower profitability. Our results in the second quarter of 2020 reflect a $136 million loss on the sale of our Northwest Operations, a pension settlement charge of $56 million, $36 million of restructuring and other charges, and $142 million of reorganization charges. Contractual interest attributable to our unsecured noteholders of $218 million was not recorded, as we do not expect those amounts to be paid. Our results for the second quarter of 2019 included a $5,449 million goodwill impairment, a loss on disposal of $384 million, and $31 million of restructuring costs and other charges.
As discussed elsewhere in this Form 10-Q, our ability to continue as a resultgoing concern is contingent upon, among other things, our ability to successfully emerge from the Chapter 11 Cases (as defined below) and generate sufficient liquidity from the Restructuring (as defined below) to meet our obligations and operating needs.
Recent Developments
Chapter 11 Cases
On April 14, 2020, Frontier Communications Corporation and its subsidiaries (collectively, the Company Parties) entered into a Restructuring Support Agreement (the Restructuring Support Agreement) with certain of its noteholders (the Consenting Noteholders). The Restructuring Support Agreement contemplates agreed-upon terms for a pre-arranged financial restructuring plan (the Plan) that leaves unimpaired all general unsecured creditors and holders of secured debt.
Under the Restructuring Support Agreement, the Consenting Noteholders agreed, subject to certain terms and conditions, to support a financial restructuring (the Restructuring) of the completionexisting debt of, existing equity interests in, and certain other obligations of the CTF Acquisition. Historical financial and operating data presented for Frontier includesCompany Parties, pursuant to the resultsPlan to be filed in cases commenced under chapter 11 (the Chapter 11 Cases) of the CTF Operations that were acquiredUnited States Bankruptcy Code (the Bankruptcy Code).
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
To implement the Plan, on April 14, 2020 (the Petition Date), the Company Parties filed the Chapter 11 Cases in the CTF Acquisition fromU.S. Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). Each Company Party continues to operate its business as a “debtor in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. The Chapter 11 Cases are being jointly administered under the caption In re Frontier Communications Corporation., et al., Case No. 20-22476 (RDD).
On May 15, 2020, the Company Parties filed the Plan and related Disclosure Statement describing the Plan and the solicitation and voting procedures to approve the same, each of which were amended on June 26, 2020, June 29, 2020 and June 30, 2020. On June 30, 2020, the Bankruptcy Court entered an order approving the adequacy of the Disclosure Statement, the solicitation and notice procedures and the forms of voting ballots and notices in connection therewith. The order established June 29, 2020 as the voting record date, July 2, 2020 as the solicitation launch date and July 31, 2020 as the voting deadline. The hearing to consider confirmation of acquisitionthe Plan is scheduled for August 21, 2020. The Plan will be subject to usual and customary conditions to plan confirmation, including obtaining the requisite vote of an unimpaired class of creditors and approval of the Bankruptcy Court.
See “—(b) Liquidity and Capital Resources—Chapter 11 Filing and Other Related Matters” and Note 3 of the Notes to Consolidated Financial Statements for more information on Aprilthe Restructuring and the Chapter 11 Cases. Refer to “—Going Concern” and Note 1 2016of the Notes to Consolidated Financial Statements for further discussion of the Company’s ability to continue as a going concern and is not indicative of future operating results. The financial discussion below includes a comparative analysisNote 9 for further detail of our results of operations on a historical basisdebt obligations as of and for the ninequarter ended June 30, 2020.
Going Concern
In connection with the preparation of our interim unaudited consolidated financial statements, we conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the Company’s ability to continue as a going concern. As reflected in our interim unaudited consolidated financial statements, the Company had unrestricted cash and cash equivalents of $2,290 million and an accumulated deficit of $8,940 million as of June 30, 2020. The Company also had operating income of $412 million and a net loss of $367 million for the six months ended SeptemberJune 30, 20172020.
As disclosed in “—Chapter 11 Cases,”on April 14, 2020, the Company Parties entered into the Restructuring Support Agreement and 2016.filed the Chapter 11 Cases.
On July 10, 2017, we effectedOur ability to continue as a one for fifteen reverse stock split ofgoing concern is contingent upon, among other things, 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 sharesability 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 discussion below have been retroactively adjusted for all periods presented to give effectsubject to the reverse stock split.Bankruptcy Court’s approval, implement the Plan, successfully emerge from the Chapter 11 Cases and generate sufficient liquidity from the Restructuring to meet our obligations and operating needs. As a result of our reverse stock splitrisks and uncertainties related to (i) the conversion rates of our Series A Preferred Stock were proportionately adjusted.
Our financial resultsCompany’s ability to obtain requisite support for the first nine monthsPlan from various stakeholders, (ii) the effects of 2017 includedisruption from the CTF Operations Chapter 11 Cases making it more difficult to maintain business, financing and operational relationships, together with the Company’s recurring losses from operations and accumulated deficit, substantial doubt exists regarding our ability to continue as a going concern.
See Note 1 of the Notes to Consolidated Financial Statements for further discussion of the first quarterCompany’s ability to continue as a going concern See “—(b) Liquidity and Capital Resources” and Note 3 of 2017. With the acquisition occurring April 1, 2016, there are no comparative resultsNotes to Consolidated Financial Statements for more information on the corresponding period in 2016. The table below reflects the results of operations for the CTF Operations for the first quarter of 2017. In the narrative that follows for the nine month period, unless otherwise noted we will only discuss the remaining variance. Restructuring and our limited liquidity.
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Impact of COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the highly contagious and lethal corona virus outbreak a global pandemic (COVID-19) and recommended containment and other mitigation measures worldwide to lessen the transmission of COVID-19. In the first half of 2020, governments from around the world, including the United States federal government as well as state and local governments have reacted to this public health crisis, imposing travel restrictions and restrictions on large gatherings of people, which includes school and non-essential business closures. The rapid spread of COVID-19 and the drastic responses being taken to curb its spread have resulted in a significant negative impact to the global and domestic economies, which will increase the longer these limitations are in place. In an effort to reduce the economic impacts of COVID-19, the United States federal government has responded with multiple stimulus bills, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the largest economic stimulus legislation in American history. Despite these efforts, the short-term and long-term impacts of COVID-19 cannot be determined.
With more people staying at home and an increased reliance on broadband and telephone networks, the FCC issued the Keep Americans Connected Pledge on March 11, 2020, which provided for telecommunication providers, including Frontier, to not terminate service and to waive any late payment fees for 60 days for certain customers due to economic circumstances they are facing related to COVID-19 as well as making WIFI hotspots available to all Americans who need them. In addition, some of the states we operate in have issued executive orders as a result of COVID-19 that further impact our business, including prohibiting the disconnection of services for customers for the length of the state of emergency. While the initial 60-day period of the Keep Americans Connected Pledge has expired, state and federal governments continue to ask companies to aid in pandemic response. While certain customers have taken advantage of our COVID-19 related relief programs, as of June 30, 2020, very few had past due balances beyond the point of normal disconnection.
In addition to committing to the Keep Americans Connected Pledge, Frontier’s response to COVID-19 has included several operational safety precautions such as limiting our product offerings in certain markets for certain periods, including not allowing our field service employees to enter a customer’s home for a period of time, a limitation which is no longer in effect. We are continuing to require personal protective equipment on any employees entering a customer location. Currently, approximately 1% of Frontier’s employees have reported testing positive for COVID-19. Through June 30, 2020, we had not experienced any significant disruptions in our supply chain; however, some of our business partners, particularly those vendors operating outside of the United States, have been more greatly impacted which has affected our service levels and distribution of work.
Given the unprecedented and evolving nature of the pandemic and the swift moving response of multiple levels of government as well as the uncertainty of funding available for services provided, the full impact of these changes and potential changes on the Company are unknown at this time.
While overall the operational and financial impacts to Frontier of the COVID-19 pandemic for the three and six months ended June 30, 2020 were not significant, we continue to closely monitor the ongoing impact to our employees, our customers, our business and our results of operations. We have experienced a slowdown in service activations and an increase in deactivations for our SMB customers; to date, these negative impacts have been partially offset by higher residential activations and lower churn. We also continue to closely track our customers’ payment activity as well as external factors, including the future expiration of federal wage subsidies for individuals and small businesses which could materially impact payment trends. With more people working from home, we have experienced higher demands on our network and higher sales activity for our residential broadband service offering. This sustained increase in network demand could lead to reduced network availability and potential outages, which may impair our ability to meet customer service level commitments, lead to higher costs, higher customer churn and potential increased regulatory actions. These potential changes, among others, could have a material financial impact to Frontier.
Presentation of Results of Operations
The sections below include tables that present customer counts, average monthly consumer revenue per customer (ARPC) and consumer customer churn. We define churn which we define as the average of the number of consumer customer deactivations during the month divided by the number of consumer customers at the beginning of the month.month and utilize the average of each monthly churn in the period.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Management believes that consumer customer counts and average monthly revenue per customer are important factors in evaluating our consumer customer trends. Among the key services we provide to consumer 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.
The following section should be read in conjunction with the unaudited interim consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
The following charts present key customer metrics, disaggregation of revenue, and the results of operations of the consolidated company including the Northwest Operations (“Northwest Ops”) through the date of sale. The results of operations for the Northwest Operations are shown separate from the total for our operations located in the remaining 25 states (“Remaining Properties”).
(a)Results of Operations
Unless otherwise indicated, the discussion of the customer metrics and components of operating income that follows relates only to those the changes in the Remaining Properties.
Customer counts, ARPC, and Consumer Customer Churn
As of or for the three months ended | ||||||||||||||
June 30, 2020 | June 30, 2019 | % | ||||||||||||
Consolidated | Northwest | Remaining | Consolidated | Northwest | Remaining | Remaining | ||||||||
Frontier | Ops | Properties | Frontier | Ops | Properties | Properties | ||||||||
Customers (in thousands) | 3,664 | N/A | N/A | 4,292 | N/A | N/A | N/A | |||||||
Consumer customer metrics | ||||||||||||||
Customers (in thousands) | 3,341 | - | 3,341 | 3,902 | 348 | 3,554 | -6% | |||||||
Net customer additions (losses) | (362) | (330) | (32) | (93) | (6) | (87) | -63% | |||||||
Average monthly consumer | ||||||||||||||
revenue per customer | $ 85.01 | $ 76.74 | $ 86.68 | $ 88.68 | $ 77.02 | $ 89.82 | -3% | |||||||
Customer monthly churn | 1.63% | 1.51% | 1.63% | 2.14% | 1.77% | 2.18% | -25% | |||||||
Commercial customer metrics | ||||||||||||||
Customers (in thousands) | 323 | N/A | N/A | 390 | N/A | N/A | N/A | |||||||
Broadband subscriber metrics | ||||||||||||||
Broadband subscribers (in thousands) | 3,142 | - | 3,142 | 3,626 | 311 | 3,315 | -5% | |||||||
Net subscriber additions (losses) | (338) | (297) | (41) | (71) | (4) | (67) | -39% | |||||||
Video (excl. DISH) subscriber metrics | ||||||||||||||
Video subscribers - in thousands) | 560 | - | 560 | 738 | 33 | 705 | -21% | |||||||
Net subscriber additions (losses) | (61) | (27) | (34) | (46) | (2) | (44) | -23% | |||||||
DISH subscriber metrics | ||||||||||||||
DISH subscribers (in thousands) | 144 | - | 144 | 190 | 18 | 172 | -16% | |||||||
Net subscriber additions (losses) | (21) | (16) | (5) | (8) | (1) | (7) | -29% | |||||||
Employees | 16,420 | - | 16,420 | 19,872 | 950 | 18,922 | -13% |
33
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
For the six months ended | |||||||||||||||
June 30, 2020 | June 30, 2019 | % | |||||||||||||
Consolidated | Northwest | Remaining | Consolidated | Northwest | Remaining | Remaining | |||||||||
Frontier | Ops | Properties | Frontier | Ops | Properties | Properties | |||||||||
Consumer customer metrics | |||||||||||||||
Net customer additions (losses) | (406) | (335) | (71) | (158) | (10) | (148) | -52% | ||||||||
Average monthly consumer | |||||||||||||||
revenue per customer | $ 86.70 | $ 76.74 | $ 87.33 | $ 88.94 | $ 76.44 | $ 90.16 | -3% | ||||||||
Customer monthly churn | 1.72% | 1.51% | 1.74% | 2.07% | 1.67% | 2.10% | -17% | ||||||||
Broadband subscriber metrics | |||||||||||||||
Net subscriber additions (losses) | (371) | (302) | (69) | (110) | (7) | (103) | -33% | ||||||||
Video (excl. DISH) subscriber metrics | |||||||||||||||
Net subscriber additions (losses) | (100) | (29) | (71) | (99) | (4) | (95) | -25% | ||||||||
DISH subscriber metrics | |||||||||||||||
Net subscriber additions (losses) | (29) | (17) | (12) | (16) | (2) | (14) | -14% | ||||||||
Consumer Customers
For the three and six months ended June 30, 2020, Frontier lost 32,000, or 1%, and 71,000, or 2% of our consumer customers compared to 87,000, or 2% and 148,000, or 4% for the three and six months ended June 30, 2019. As of June 30, 2020, 53% of our consumer broadband customers also subscribed to at least one other service offering. For the six months ended June 30, 2020, we lost 1% of our consumer broadband subscribers, primarily to competitors offering more attractive pricing or higher speeds. During the three months ended June 30, 2020, net additions for our broadband subscribers were relatively flat as compared to the second quarter of 2019. For the three and six months ended June 30, 2020 we experienced a 5% and 11% decline, respectively, in our video subscribers as a result of shifting our focus away from the acquisition of high cost video customers and existing customers opting for other video services including Over the Top, in lieu of traditional video services. During the second quarter of 2020, we also lost voice subscribers as a result of customers choosing alternative voice products and as well as from reduced attachment to broadband services.
Our average monthly consumer customer churn was 1.63% and 1.74% for the three and six months ended June 30, 2020 compared to 2.18% and 2.10% for three and six months ended June 30, 2019. The average monthly consumer revenue per customer (consumer ARPC) decreased by $3.14 or 4% to $86.68 and $2.82 or 3% to $87.33, respectively, during the three and six months ended June 30, 2020 compared to the prior year period. The overall decrease in consumer ARPC is primarily a result of decreased FiOS/Vantage video services along with decreased consumer voice services, slightly offset by increased data equipment revenues.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Financial Results
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For the three months ended June 30, | ||||||||||||||||||||||
2020 | 2019 | % Change | ||||||||||||||||||||
Consolidated | Northwest | Remaining | Consolidated | Northwest | Remaining | Consolidated | Remaining | |||||||||||||||
Frontier | Ops (1) | Properties | Frontier | Ops (2) | Properties | Frontier | Properties | |||||||||||||||
Data and Internet services | $ | 874 | $ | 25 | $ | 849 | $ | 963 | $ | 78 | $ | 885 | -9% | -4% | ||||||||
Voice services | 523 | 14 | 509 | 629 | 47 | 582 | -17% | -13% | ||||||||||||||
Video services | 200 | 3 | 197 | 260 | 12 | 248 | -23% | -21% | ||||||||||||||
Other | 108 | 3 | 105 | 120 | 9 | 111 | -10% | -5% | ||||||||||||||
Revenue from contracts | ||||||||||||||||||||||
with customers | 1,705 | 45 | 1,660 | 1,972 | 146 | 1,826 | -14% | -9% | ||||||||||||||
Subsidy and other revenue | 96 | 2 | 94 | 95 | 6 | 89 | 1% | 6% | ||||||||||||||
Revenue | 1,801 | 47 | 1,754 | 2,067 | 152 | 1,915 | -13% | -8% | ||||||||||||||
Operating expenses (3): | ||||||||||||||||||||||
Network access | ||||||||||||||||||||||
expenses | 255 | 4 | 251 | 318 | 13 | 305 | -20% | -18% | ||||||||||||||
Network related | ||||||||||||||||||||||
expenses | 430 | 7 | 423 | 445 | 20 | 425 | -3% | 0% | ||||||||||||||
Selling, general and | ||||||||||||||||||||||
administrative | ||||||||||||||||||||||
expenses | 407 | 7 | 400 | 445 | 18 | 427 | -9% | -6% | ||||||||||||||
Depreciation and | ||||||||||||||||||||||
amortization | 397 | - | 397 | 454 | 25 | 429 | -13% | -7% | ||||||||||||||
Goodwill impairment | - | - | - | 5,449 | - | 5,449 | -100% | -100% | ||||||||||||||
Loss on disposal of | ||||||||||||||||||||||
Northwest Operations | 136 | - | 136 | 384 | - | 384 | -65% | -65% | ||||||||||||||
Restructuring costs and | ||||||||||||||||||||||
other charges | 36 | - | 36 | 31 | 1 | 30 | 16% | 20% | ||||||||||||||
Total operating expenses | $ | 1,661 | $ | 18 | $ | 1,643 | $ | 7,526 | $ | 77 | $ | 7,449 | -78% | -78% | ||||||||
Operating income | 140 | 29 | 111 | (5,459) | 75 | (5,534) | -103% | -102% | ||||||||||||||
Consumer | 899 | 25 | 874 | 1,050 | 81 | 969 | -14% | -10% | ||||||||||||||
Commercial | 806 | 20 | 786 | 922 | 65 | 857 | -13% | -8% | ||||||||||||||
Revenue from contracts | ||||||||||||||||||||||
with customers | 1,705 | 45 | 1,660 | 1,972 | 146 | 1,826 | -14% | -9% | ||||||||||||||
Subsidy and other revenue | 96 | 2 | 94 | 95 | 6 | 89 | 1% | 6% | ||||||||||||||
Total revenue | $ | 1,801 | $ | 47 | $ | 1,754 | $ | 2,067 | $ | 152 | $ | 1,915 | -13% | -8% |
CUSTOMER RELATED METRICS
(1)Amounts represent the financial results of our Northwest Operations for the one month ended April 30, 2020.
(2)Amounts represent the financial results of our Northwest Operations for the three months ended June 30, 2019.
(3)Operating expenses for Northwest Ops do not include allocated expenses which are included in operating expenses for our Remaining Properties.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
For the six months ended June 30, | ||||||||||||||||||||||
2020 | 2019 | % Change | ||||||||||||||||||||
Consolidated | Northwest | Remaining | Consolidated | Northwest | Remaining | Consolidated | Remaining | |||||||||||||||
Frontier | Ops (1) | Properties | Frontier | Ops (2) | Properties | Frontier | Properties | |||||||||||||||
Data and Internet services | $ | 1,806 | $ | 102 | $ | 1,704 | $ | 1,930 | $ | 157 | $ | 1,773 | -6% | -4% | ||||||||
Voice services | 1,095 | 57 | 1,038 | 1,279 | 93 | 1,186 | -14% | -12% | ||||||||||||||
Video services | 422 | 13 | 409 | 528 | 24 | 504 | -20% | -19% | ||||||||||||||
Other | 225 | 12 | 213 | 244 | 20 | 224 | -8% | -5% | ||||||||||||||
Revenue from contracts | ||||||||||||||||||||||
with customers | 3,548 | 184 | 3,364 | 3,981 | 294 | 3,687 | -11% | -9% | ||||||||||||||
Subsidy and other revenue | 186 | 8 | 178 | 187 | 13 | 174 | -1% | 2% | ||||||||||||||
Revenue | 3,734 | 192 | 3,542 | 4,168 | 307 | 3,861 | -10% | -8% | ||||||||||||||
Operating expenses (3): | ||||||||||||||||||||||
Network access | ||||||||||||||||||||||
expenses | 541 | 14 | 527 | 656 | 28 | 628 | -18% | -16% | ||||||||||||||
Network related | ||||||||||||||||||||||
expenses | 874 | 26 | 848 | 901 | 39 | 862 | -3% | -2% | ||||||||||||||
Selling, general and | ||||||||||||||||||||||
administrative | ||||||||||||||||||||||
expenses | 851 | 26 | 825 | 901 | 37 | 864 | -6% | -5% | ||||||||||||||
Depreciation and | ||||||||||||||||||||||
amortization | 812 | - | 812 | 938 | 60 | 878 | -13% | -8% | ||||||||||||||
Goodwill impairment | - | - | - | 5,449 | - | 5,449 | -100% | -100% | ||||||||||||||
Loss on disposal of | ||||||||||||||||||||||
Northwest Operations | 160 | - | 160 | 384 | - | 384 | -58% | -58% | ||||||||||||||
Restructuring costs and | ||||||||||||||||||||||
other charges | 84 | - | 84 | 59 | 2 | 57 | 42% | 47% | ||||||||||||||
Total operating expenses | $ | 3,322 | $ | 66 | $ | 3,256 | $ | 9,288 | $ | 166 | $ | 9,122 | -64% | -64% | ||||||||
Operating income | 412 | 126 | 286 | (5,120) | 141 | (5,261) | -108% | -105% | ||||||||||||||
Consumer | 1,870 | 102 | 1,768 | 2,127 | 162 | 1,965 | -12% | -10% | ||||||||||||||
Commercial | 1,678 | 82 | 1,596 | 1,854 | 132 | 1,722 | -9% | -7% | ||||||||||||||
Revenue from contracts | ||||||||||||||||||||||
with customers | 3,548 | 184 | 3,364 | 3,981 | 294 | 3,687 | -11% | -9% | ||||||||||||||
Subsidy and other revenue | 186 | 8 | 178 | 187 | 13 | 174 | -1% | 2% | ||||||||||||||
Total revenue | $ | 3,734 | $ | 192 | $ | 3,542 | $ | 4,168 | $ | 307 | $ | 3,861 | -10% | -8% |
(1)Amounts represent the financial results of our Northwest Operations for the four months ended April 30, 2020.
(2)Amounts represent the financial results of our Northwest Operations for the six months ended June 30, 2019.
(3)Operating expenses for Northwest Ops do not include allocated expenses which are included in operating expenses for our Remaining Properties.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
REVENUE
Revenue for our consumer and commercial customers was as follows:
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| As of or for the three months ended | |||||||||||||||
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| September 30, 2017 |
| December 31, 2016 |
| % Increase (Decrease) |
| September 30, 2016 |
| % Increase (Decrease) | |||||||
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Customers (in thousands) |
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| 4,949 |
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| 5,393 |
| (8) | % |
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| 5,551 | (1) | (11) | % |
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Consumer customer metrics |
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Customers (in thousands) |
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| 4,486 |
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| 4,891 |
| (8) | % |
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| 5,035 | (1) | (11) | % |
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Net customer additions/(losses) |
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| (99) |
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| (144) |
| (31) | % |
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| (155) |
| (36) | % |
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Average monthly consumer |
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revenue per customer |
| $ | 80.91 |
| $ | 80.33 |
| 1 | % |
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| $ | 82.34 |
| (2) | % |
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Customer monthly churn |
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| 2.08% |
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| 2.08% |
| - | % |
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| 2.08% |
| - | % |
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Commercial customer metrics |
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Customers (in thousands) |
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| 463 |
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| 502 |
| (8) | % |
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| 516 | (1) | (10) | % |
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Broadband subscriber metrics |
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(in thousands) |
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Broadband subscribers |
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| 4,000 |
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| 4,271 |
| (6) | % |
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| 4,362 | (2) | (8) | % |
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Net subscriber additions/(losses) |
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| (63) |
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| (91) |
| (31) | % |
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| (99) |
| (36) | % |
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Video (excl. DISH) subscriber metrics |
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(in thousands) |
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Video subscribers (in thousands) |
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| 981 |
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| 1,145 |
| (14) | % |
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| 1,222 | (2) | (20) | % |
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Net subscriber additions/(losses) |
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| (26) |
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| (77) |
| (66) | % |
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| (82) |
| (68) | % |
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DISH subscriber metrics |
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(in thousands) |
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DISH subscribers (in thousands) |
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| 244 |
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| 274 |
| (11) | % |
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| 281 | (2) | (13) | % |
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Net subscriber additions/(losses) |
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| (10) |
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| (7) |
| 43 | % |
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| (11) |
| (9) | % |
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Employees |
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| 23,181 | (3) |
| 28,332 |
| (18) | % |
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| 30,358 |
| (24) | % |
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| As of or for the nine months ended |
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| September 30, 2017 |
| September 30, 2016 |
| % Increase |
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Consumer customer metrics |
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Average monthly consumer |
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revenue per customer |
| $ | 80.73 |
| $ | 76.11 |
| 6 | % |
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Customer monthly churn |
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| 2.23% |
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| 1.94% |
| 15 | % |
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For the three months ended June 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2020 | 2019 | (Decrease) | (Decrease) | ||||||||||
Consumer | $ | 874 | $ | 969 | $ | (95) | (10) | % | ||||||
Commercial | 786 | 857 | (71) | (8) | % | |||||||||
Revenue from contracts with customers (1) | 1,660 | 1,826 | (166) | (9) | % | |||||||||
Subsidy and other revenue | 94 | 89 | 5 | 6 | % | |||||||||
Total revenue | $ | 1,754 | $ | 1,915 | $ | (161) | (8) | % | ||||||
For the six months ended June 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2020 | 2019 | (Decrease) | (Decrease) | ||||||||||
Consumer | $ | 1,768 | $ | 1,965 | $ | (197) | (10) | % | ||||||
Commercial | 1,596 | 1,722 | (126) | (7) | % | |||||||||
Revenue from contracts with customers (1) | 3,364 | 3,687 | (323) | (9) | % | |||||||||
Subsidy and other revenue | 178 | 174 | 4 | 2 | % | |||||||||
Total revenue | $ | 3,542 | $ | 3,861 | $ | (319) | (8) | % | ||||||
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Customer Trends(1)Amounts include approximately $16 million and Revenue Performance$32 million of lease revenue for each of the three and six months ended June 30, 2020 and 2019, respectively.
We provide service and product options in our consumer and commercial offerings in each of our markets. As of September 30, 2017, 68% of our consumer broadband customers were subscribed to at least one other service offering.
We had approximately 4,486,000 and 5,035,000 total consumer customers as of September 30, 2017 and 2016, respectively. Our consumer customer churn was 2.08% for the three months ended September 30, 2017 (1.92% for Frontier legacy and 2.33% for CTF Operations) compared to 2.08% (1.89% for Frontier legacy and 2.34% for CTF Operations) for the third quarter of 2016 and 2.24% (1.95% for Frontier legacy and 2.69% for CTF Operations) for the second quarter of 2017, respectively. The consolidated average monthly consumer revenue per customer
34
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(consumer ARPC) decreased by $1.43 or 2% to $80.91 during the third quarter of 2017 compared to the prior year period. The overall decrease in consumer ARPC is a result of lower voice services revenue and lower video revenue from our CTF Operations, partially offset by higher Frontier Secure revenue.
Our consumer customer churn was 2.23% for the nine months ended September 30, 2017 (1.94% for Frontier legacy and 2.68% for CTF Operations) compared to 1.94% (1.81% for Frontier legacy and 2.27% for CTF Operations) for the nine months ended September 30, 2016. The consolidated average monthly consumer revenue per customer (consumer ARPC) increased by $4.62 or 6% to $80.73 during the first nine months of 2017 compared to the prior year period. The overall increase in consumer ARPC is a result of higher revenue due to having nine months of CTF Operations in 2017 and only six months in 2016, partially offset by lower voice services revenue.
We had approximately 463,000 and 516,000 total commercial customers as of September 30, 2017 and 2016, respectively. We lost approximately 10,000 commercial customers during the three months ended September 30, 2017 compared to a loss of 12,000 customers for the three months ended September 30, 2016 and a loss of 11,000 for the three months ended June 30, 2017. Frontier expects the declines in voice services revenue and wireless backhaul revenues from commercial customers to continue for the remainder of 2017. Our Ethernet product revenues from our SME (small business, medium business and larger enterprise customers) and carrier customers have grown by 9% for the Frontier legacy operations during the third quarter of 2017, compared to the prior year period, and declined by 3% (including CTF Operations) compared to the second quarter of 2017.
We had approximately 4,000,000 and 4,362,000 broadband subscribers as of September 30, 2017 and 2016, respectively. During the three months ended September 30, 2017, we lost approximately 63,000 net broadband subscribers compared to a loss of 99,000 and a loss of 99,000 for the three months ended September 30, 2016 and June 30, 2017, respectively.
We offer video services under the Vantage brand to certain of our customers in portions of Connecticut, North Carolina, South Carolina and Minnesota, and under the FiOS® brand in portions of California, Texas, and Florida (and on a limited basis in Indiana, Oregon and Washington). We also offer satellite TV video service to our customers under an agency relationship with DISH® in all of our markets. For the three months ended September 30, 2017, we lost approximately 36,000 net video subscribers across all markets. At September 30, 2017, we had 981,000 linear video subscribers that are served with FiOS or Vantage video service. In addition to our linear video subscribers, we have approximately 244,000 DISH satellite video customers.
35
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
REVENUE
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| For the three months ended September 30, |
| $ Increase |
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| % Increase | ||||||
($ in millions) |
| 2017 |
| 2016 |
| (Decrease) |
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| (Decrease) | ||||
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Data and Internet services (1) |
| $ | 956 |
| $ | 1,045 |
| $ | (89) |
|
| (9) | % |
Voice services |
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| 702 |
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| 809 |
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| (107) |
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| (13) | % |
Video services |
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| 318 |
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| 392 |
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| (74) |
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| (19) | % |
Other |
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| 84 |
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| 73 |
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| 11 |
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| 15 | % |
Customer revenue (1) |
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| 2,060 |
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| 2,319 |
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| (259) |
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| (11) | % |
Switched access and |
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subsidy |
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| 191 |
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| 205 |
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| (14) |
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| (7) | % |
Total revenue (1) |
| $ | 2,251 |
| $ | 2,524 |
| $ | (273) |
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| (11) | % |
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| For the three months ended September 30, |
| $ Increase |
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| % Increase | ||||||
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| 2017 |
| 2016 |
| (Decrease) |
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| (Decrease) | ||||
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Consumer |
| $ | 1,102 |
| $ | 1,272 |
| $ | (170) |
|
| (13) | % |
Commercial |
|
| 958 |
|
| 1,047 |
|
| (89) | �� |
| (9) | % |
Customer revenue (1) |
|
| 2,060 |
|
| 2,319 |
|
| (259) |
|
| (11) | % |
Switched access and |
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subsidy |
|
| 191 |
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| 205 |
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| (14) |
|
| (7) | % |
Total revenue (1) |
| $ | 2,251 |
| $ | 2,524 |
| $ | (273) |
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| (11) | % |
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| For the nine months ended September 30, |
| $ Increase |
|
| % Increase | ||||||
($ in millions) |
| 2017 |
| 2016 |
| (Decrease) |
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| (Decrease) | ||||
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Data and Internet services (1) |
| $ | 2,923 |
| $ | 2,680 |
| $ | 243 |
|
| 9 | % |
Voice services |
|
| 2,177 |
|
| 2,112 |
|
| 65 |
|
| 3 | % |
Video services |
|
| 994 |
|
| 879 |
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| 115 |
|
| 13 | % |
Other |
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| 231 |
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| 218 |
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| 13 |
|
| 6 | % |
Customer revenue (1) |
|
| 6,325 |
|
| 5,889 |
|
| 436 |
|
| 7 | % |
Switched access and |
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subsidy |
|
| 586 |
|
| 598 |
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| (12) |
|
| (2) | % |
Total revenue (1) |
| $ | 6,911 |
| $ | 6,487 |
| $ | 424 |
|
| 7 | % |
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| For the nine months ended September 30, |
| $ Increase |
|
| % Increase | ||||||
|
| 2017 |
| 2016 |
| (Decrease) |
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| (Decrease) | ||||
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Consumer |
| $ | 3,390 |
| $ | 3,187 |
| $ | 203 |
|
| 6 | % |
Commercial |
|
| 2,935 |
|
| 2,702 |
|
| 233 |
|
| 9 | % |
Customer revenue (1) |
|
| 6,325 |
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| 5,889 |
|
| 436 |
|
| 7 | % |
Switched access and |
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subsidy |
|
| 586 |
|
| 598 |
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| (12) |
|
| (2) | % |
Total revenue (1) |
| $ | 6,911 |
| $ | 6,487 |
| $ | 424 |
|
| 7 | % |
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(1) Includes revenue from Frontier Secure Strategic Partnerships business, which was sold in May of 2017, of $22 million for the three months ended September 30, 2016 and $40 million and $62 million for the nine months ended September 30, 2017 and 2016, respectively.
36
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Revenue
We generate revenues primarily 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 the provision for uncollectible amounts.
Consolidated total revenue forFor each of the ninethree and six months ended SeptemberJune 30, 2017 increased $424 million to $6,911 million2020, revenues decreased 8% as compared to the prior year period. Excluding additional revenue fromsame period in 2019. Decreases in consumer revenues were primarily driven by the CTF Operations for the first quarter of 2017, our revenue for the first nine months of 2017 decreased $663 million, or 10%, as6% decline in consumer customers when compared to the prior year period. This declineJune 30, 2019, combined with decreased ARPC (as described above) resulting in 2017 is primarily the result of decreases inreduced revenues for consumer voice services, revenues, lower switchedvideo services, and nonswitched access revenue, video,to a lesser extent, data and data services revenue, each as describedinternet services.
Decreases in more detail below.
Customer revenue for the nine months ended September 30, 2017 increased $436 million to $6,325 million as compared to the prior year period. Excluding additional revenue from the CTF Operations for the first quarter of 2017, our customer revenue for the first nine months of 2017 decreased $599 million, or 10%, as compared to the prior year period.
Consolidated consumer customer revenue for the nine months ended September 30, 2017 increased $203 million, or 6%, as compared to the prior year period. Excluding additional consumer customer revenue from the CTF Operations for the first quarter of 2017,commercial revenues for the first ninethree and six months ended June 30, 2020 were primarily driven by reductions in wholesale revenues, 6% and 5%, respectively, which comprised approximately 53% of 2017our commercial revenues. The decline in wholesale revenues were primarily a result of rate declines for our network access services. Decreases in our SME revenues, 11% and 10%, respectively, decreased $411 million, or 13%, compared to the prior year period, primarily as a result of decreasesa decline in voice, videosmall business customers as compared to June 30, 2019.
The increases in subsidy and dataother revenue, were driven primarily by transition services revenue. Similarprovided in connection with the divestiture of our Northwest Operations. This increase was partially offset by scheduled reductions in subsidy funding levels, primarily funding related to other wireline providers, we have experienced declines in the numberCAF Phase II subsidies.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
REVENUE
For the three months ended June 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2020 | 2019 | (Decrease) | (Decrease) | ||||||||||
Data and Internet services | $ | 849 | $ | 885 | $ | (36) | (4) | % | ||||||
Voice services | 509 | 582 | (73) | (13) | % | |||||||||
Video services | 197 | 248 | (51) | (21) | % | |||||||||
Other | 105 | 111 | (6) | (5) | % | |||||||||
Revenue from contracts with customers (1) | 1,660 | 1,826 | (166) | (9) | % | |||||||||
Subsidy and other revenue | 94 | 89 | 5 | 6 | % | |||||||||
Total revenue | $ | 1,754 | $ | 1,915 | $ | (161) | (8) | % | ||||||
For the six months ended June 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2020 | 2019 | (Decrease) | (Decrease) | ||||||||||
Data and Internet services | $ | 1,704 | $ | 1,773 | $ | (69) | (4) | % | ||||||
Voice services | 1,038 | 1,186 | (148) | (12) | % | |||||||||
Video services | 409 | 504 | (95) | (19) | % | |||||||||
Other | 213 | 224 | (11) | (5) | % | |||||||||
Revenue from contracts with customers (1) | 3,364 | 3,687 | (323) | (9) | % | |||||||||
Subsidy and other revenue | 178 | 174 | 4 | 2 | % | |||||||||
Total revenue | $ | 3,542 | $ | 3,861 | $ | (319) | (8) | % | ||||||
(1)Amounts include approximately $16 million and $32 million, of traditional voice customers and switched access minutes of use as a result of competition and the availability of substitutes, a trend we expect to continue.
Consolidated commercial customerlease revenue for the nineeach of the three and six months ended SeptemberJune 30, 2017 increased $233 million, or 9%, as compared to the prior year period. Excluding additional commercial customer revenue from the CTF Operations for the first quarter of 2017, revenues for 2017 declined $188 million, or 7%, as compared to the prior year period, principally as a result of decreases in our voice services revenue2020 and nonswitched revenue including wireless backhaul revenue.2019.
Consolidated switched access and subsidy revenue of $586 million represented 8% of our revenues for the nine months ended September 30, 2017. Switched access revenue was $129 million for both the first nine months of 2017 and 2016, or 2% of our revenues for each period. The Report and Order released by the FCC on November 18, 2011 (the 2011 Order) provided for the gradual elimination of terminating traffic charges by 2017 with a related decline in operating expenses. Switched access revenue declined sequentially in the third quarter of 2017, reflecting the rate reductions mandated by the 2011 Order, and we anticipate that we have experienced nearly all of the rate decline related to the 2011 Order. 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 throughout 2017. We expect declining revenue trends due to reduced volume in switched access revenue to continue in the fourth quarter of 2017 in our legacy operations. Subsidy revenue, including CAF Phase II subsidies, was $457 million for the nine months ended September 30, 2017, or 7% of our revenues, which decreased from $468 million, or 7% of our revenues, in the prior year period.
We categorize our products, services, and other revenues into the following five categories:
Data and Internet Services
Data and internet services revenue for each of the three and six months ended June 30, 2020 decreased 4% as compared with the comparative periods in 2019. Broadband and data services revenues comprised 61% or $514 million, and 60% or $1,028 million, respectively of total Data and internet services revenue, while network access revenues comprised 39% or $335 million, and 40% or $676 million. Network access revenues include broadband services for consumer and commercial customers. We provideour data transmission services to high volume commercial customers and other carriers with dedicated high capacity circuits (“nonswitched access”) including services to wireless providers (“wireless backhaul”).
DataFor each of the three and Internetsix months ended June 30, 2020, broadband and data services revenue fordecreased by 3% compared to the corresponding periods in 2019. The decreases were primarily driven by a loss of Consumer and SME customers combined with decreased other data services revenue. For the three and six months ended SeptemberJune 30, 2017 decreased $89 million as2020, Network access revenues declined 6% and 5%, respectively, compared with 2016. Data services revenue forto the three months ended September 30, 2017 decreased $65 million, or 11%, to $548 million, primarily due to an 8%same periods in 2019. This decrease in the total number of broadband subscribers since September 30, 2016, and a decline in revenue of approximately $22 millionwas due to the salemigration of our Frontier Secure Strategic Partnerships business. Nonswitched access revenues for the three months ended September 30, 2017carrier customers from legacy technology circuits to lower priced ethernet circuits.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
decreased $25 million, or 6%, to $408 million, primarily due to lower monthly recurring revenues for wireless backhaul and other carrier services.
Consolidated data and Internet services revenue for the nine months ended September 30, 2017 increased $243 million as compared with 2016. Consolidated data services revenue for the nine months ended September 30, 2017 increased $128 million, or 8%, to $1,696 million as compared with 2016. Excluding additional data service revenue from the CTF Operations for the first quarter of 2017, revenue for the first nine months decreased $111 million, or 7%, driven by a reduction in revenue of $22 million as a result of the sale of the Frontier Secure Strategic Partnerships business in May of 2017 and a decrease in the total number of broadband subscribers.
Consolidated nonswitched access revenues for the nine months ended September 30, 2017 increased $115 million or 10% to $1,277 million as compared with 2016. Excluding additional nonswitched access revenue from the CTF Operations for the first quarter of 2017, revenue decreased $67 million, or 6%, due to lower monthly recurring revenue for wireless backhaul and other carrier services. 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, in the near term, we anticipate that our overall wireless backhaul revenues (which comprise approximately 2.9% of consolidated total revenues) will continue to decline in 2017, as our carrier customers migrate to Ethernet solutions at lower price points or migrate to our competitors.
Voice Services
Voice services include traditional local and long distancelong-distance wireline services, data-based Voice over Internet Protocol (VoIP) services, as well as voice messaging services offered to our consumer and commercial customers. Voice services also include the long distancelong-distance voice origination and termination services that we provide to our commercial customers and other carriers.
Voice services revenueThe decrease of 13% and 12%, respectively for the three and six months ended SeptemberJune 30, 2017 decreased $107 million, or 13%, to $702 million as compared with 2016,2020 in voice services revenue was primarily due to the continueda net loss of voicein consumer customers and decreasesa net loss in long distance revenue among thosecommercial customers that do not havecombined with a bundled long distance plan.
Voice services revenue for the nine months ended September 30, 2017 increased $65 million, or 3%, to $2,177 million as compared with 2016. Excluding additionalreduction in voice services revenue from the CTF Operations for the first quarter of 2017, revenues decreased $262 million, or 12%, due to the continued loss of voice customers and decreases in long distance revenue. being bundled with broadband services.
Video Services
Video servicesinclude revenues generated from services provided directly to consumer customers through the FiOS video and Vantage video brands, and through DISHDish satellite TV services.
Video services revenueThe decrease of 21% and 19%, respectively for the three and six months ended SeptemberJune 30, 2017 decreased $74 million, or 19%, to $318 million as compared with 2016 due to a decrease2020 in the total number of video subscribers.
Video services revenue for the nine months ended September 30, 2017 increased $115 million, or 13%, to $994 million compared with 2016. Excluding additional video services revenue from the CTF Operations for the first quarter of 2017, revenues decreased $166 million, or 19%,was primarily due to a decreasenet losses in the total number ofFiOS and Vantage terrestrial video subscribers.customers.
Other
Other customer revenue includes switched access revenue and sales of customer premise equipmentCustomer Premise Equipment (CPE) to our commercialbusiness customers and directory services, less our provision for bad debts.
Other revenue for the three months ended September 30, 2017 increased $11 million, or 15%, as compared with 2016 primarily due to a decrease in uncollectibles, partially offset by a decrease in customer premise equipment sales during the third quarter of 2017. Other revenue for the nine months ended September 30, 2017 increased $13 million, or 6%. Excluding additional other revenue from the CTF Operations for the first quarter of 2017, revenues increased $8 million due to a decrease in uncollectibles, partially offset by a decrease in maintenance contracts.
38
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Switched Access and Subsidy
services. Switched access and subsidy revenues include revenuesrevenue includes revenue derived from allowing other carriers to use our network to originate and/or terminate their local and long distancelong-distance voice traffic (“switched access”). These services are primarily billed on a minutes-of-use basis applying tariffed rates filed with the FCC or state agencies. We also receive
The decrease in other revenue for the three and six months ended June 30, 2020 was primarily driven by decreases in switched access revenue due to reduced rates mandated by the Universal Service Fund/Intercarrier Compensation Report and Order with a related decline in operating expenses and activation associated fees.
Subsidy and other revenue
Subsidy and other revenue includes revenue generated from cost subsidies from state and federal authorities, including the Connect America Fund.
Switched access and subsidyFund Phase II as well as revenue forgenerated from the three months ended September 30, 2017 decreased $14 million, or 7%, as compared with 2016. Switched access revenue decreased $4 million for the three months ended September 30, 2017, primarily due to the impact of the decline in minutes of use related to access line losses and the displacement of minutes of use by wireless and other communicationstransition services combined with the lower rates required by the FCC’s 2011 Order on intercarrier compensation reform. Subsidy revenues decreased $10 million for the three months ended September 30, 2017, primarily due to one-time true-up payments and phasedown support recognized in the second quarter of 2016provided in connection with our divestiture of our Northwest Operations.
The increases in subsidy and other revenue, were driven primarily by $10 million in transition services provided to the purchaser of the Northwest Operations since May 1, 2020 sale date. This increase was partially offset by scheduled reductions in subsidy funding levels, primarily funding related to CAF Phase II program.subsidies.
Switched access and subsidy revenue for the nine months ended September 30, 2017 decreased $12 million, or 2%, as compared with 2016. Switched access revenue decreased $1 million for the nine months ended September 30, 2017, primarily due to the impact of the decline in minutes of use related to access line losses and the displacement of minutes of use by wireless and other communications service, combined with the lower rates required by the FCC’s 2011 Order on intercarrier compensation refund. Excluding additional switched access revenue from the CTF Operations for the first quarter of 2017, revenue decreased $15 million, or 11%. Subsidy revenues for the nine months ended September 30, 2017 decreased $11 million. Excluding additional subsidy revenue from the CTF Operations for the first quarter of 2017, revenue decreased $46 million, or 10%. We expect that switched access revenue will continue to decline in the fourth quarter of 2017.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
OPERATING EXPENSES
NETWORK ACCESS EXPENSES
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| $ Increase |
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($ in millions) |
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Network access expenses |
| $ | 390 |
| $ | 440 |
| $ | (50) |
| (11) | % |
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| For the nine months ended September 30, |
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Network access expenses |
| $ | 1,209 |
| $ | 1,053 |
| $ | 156 |
| 15 | % |
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For the three months ended June 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2020 | 2019 | (Decrease) | (Decrease) | ||||||||||
Network access expenses | $ | 251 | $ | 305 | $ | (54) | (18) | % | ||||||
For the six months ended June 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2020 | 2019 | (Decrease) | (Decrease) | ||||||||||
Network access expenses | $ | 527 | $ | 628 | $ | (101) | (16) | % | ||||||
Network access expenses include access charges and other third-party costs directly attributable to connecting customer locations to our network, and video content costs and certain promotional costs. Such access charges and other third-party costs exclude network related expenses, depreciation and amortization, and employee related expenses.
For the three and six months ended June 30, 2020, Network access expense decreased 18% and 16%, respectively. The decreases in network access expenses for the three months ended September 30, 2017 decreased $50 million, or 11%,were primarily due todriven by lower video content costs as a result of a decline in video customers partially offset by higher promotionaland decreased CPE costs.
Network access expenses for the nine months ended September 30, 2017 increased $156 million, or 15%. Excluding additional expenses from the CTF Operations for the first quarter of 2017, network access expenses for the nine months ended September 30, 2017 decreased $105 million, or 10%, primarily due to lower video content and long distance costs as a result of a decline in customers.
39
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NETWORK RELATED EXPENSES
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| For the three months ended September 30, |
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($ in millions) |
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| 2016 |
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Network related expenses |
| $ | 497 |
| $ | 527 |
| $ | (30) |
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Network related expenses |
| $ | 1,468 |
| $ | 1,399 |
| $ | 69 |
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For the three months ended June 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2020 | 2019 | (Decrease) | (Decrease) | ||||||||||
Network related expenses | $ | 423 | $ | 425 | $ | (2) | (0) | % | ||||||
For the six months ended June 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2020 | 2019 | (Decrease) | (Decrease) | ||||||||||
Network related expenses | $ | 848 | $ | 862 | $ | (14) | (2) | % | ||||||
Network related expenses include 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, and the operation and maintenance of our network.
Network related expenses fordecreased 2% during the six months ended June 30, 2020 and were relatively flat during the three months ended SeptemberJune 30, 20172020. This decrease was driven by decreased $30 million, or 6%, as compared with 2016, primarily due to a decrease in compensation costs related to lower employee headcount, and certain benefits, including incentive compensation, pension and OPEB expense (as discussed below). There was also a reduction in rental costs for vehicles previously under operating leases that were modified during late 2016, resulting in the classification as capital leases, which were partiallyslightly offset by an increase in outside services, primarily related to storm-related costs.the abandonment of certain in-progress capital projects during the quarter.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the three months ended June 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2020 | 2019 | (Decrease) | (Decrease) | ||||||||||
Selling, general and | ||||||||||||||
administrative expenses | $ | 400 | $ | 427 | $ | (27) | (6) | % | ||||||
For the six months ended June 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2020 | 2019 | (Decrease) | (Decrease) | ||||||||||
Selling, general and | ||||||||||||||
administrative expenses | $ | 825 | $ | 864 | $ | (39) | (5) | % | ||||||
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administrative expenses |
| $ | 486 |
| $ | 582 |
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administrative expenses |
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| $ | 1,535 |
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Selling, general and administrative expenses (SG&A expenses) 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.
SG&A expenses fordecreased 6% and 4% the three and six months ended SeptemberJune 30, 2017 decreased $96 million, or 16%, due to lower costs for compensation, primarily related to decreased employee headcount, lower incentive compensation costs, certain benefits, including pension and OPEB expense (as discussed below), reduced marketing costs, and lower information technology and other outside services costs. There were approximately $23 million of additional SG&A
40
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
expense during the third quarter of 2016 related to the Frontier Secure Strategic Partnerships business, which was sold2020, respectively. The decreases in May of 2017.
SG&A expenses for the nine months ended September 30, 2017 increased $26 million, or 2%, as compared with 2016. Excluding additional expenses from the CTF Operations for the first quarter of 2017, SG&A expenses for the nine months ended September 30, 2017were primarily driven by decreased $200 million, or 13%, primarily duecompensation costs related to lower compensation and other employee related costsheadcount and reduced costs for outside services and marketing. There were approximately $28 million of additional SG&A expense during the nine months ended September 30, 2016 related to the Frontier Secure Strategic Partnerships business, which was sold in May of 2017. property taxes.
Pension and OPEB costs
Frontier allocates certain pension/OPEB expense to network related expenses and SG&A expenses. Total consolidated pension and OPEB costs, excluding pension settlementservice costs for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 were as follows:
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||
($ in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||
Total pension/OPEB | ||||||||||||||
service costs | $ | 29 | $ | 26 | $ | 59 | $ | 52 | ||||||
Less: costs capitalized into | ||||||||||||||
capital expenditures | (6) | (7) | (13) | (13) | ||||||||||
Net pension/OPEB costs | $ | 23 | $ | 19 | $ | 46 | $ | 39 | ||||||
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expense |
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| $ | 33 |
| $ | 93 |
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Less: costs capitalized into |
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capital expenditures |
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| $ | 28 |
| $ | 73 |
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
DEPRECIATION AND AMORTIZATION EXPENSE
For the three months ended June 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2020 | 2019 | (Decrease) | (Decrease) | ||||||||||
Depreciation expense | $ | 314 | $ | 322 | $ | (8) | (2) | % | ||||||
Amortization expense | 83 | 107 | (24) | (22) | % | |||||||||
Depreciation and | ||||||||||||||
Amortization expense | $ | 397 | $ | 429 | $ | (32) | (7) | % | ||||||
For the six months ended June 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2020 | 2019 | (Decrease) | (Decrease) | ||||||||||
Depreciation expense | $ | 630 | $ | 647 | $ | (17) | (3) | % | ||||||
Amortization expense | 182 | 231 | (49) | (21) | % | |||||||||
Depreciation and | ||||||||||||||
Amortization expense | $ | 812 | $ | 878 | $ | (66) | (8) | % | ||||||
The fair value estimates related todecreases in depreciation expense for the allocation of the purchase price of the CTF Operations to Other intangibles were revisedthree and finalized during the first quarter of 2017 from the previous estimates as of December 31, 2016. The allocation that was reported as of December 31, 2016 for Other intangibles increased $100 million, from $2,162 million to $2,262 million. These adjustments resulted in higher amortization expense during the ninesix months ended SeptemberJune 30, 2017 ($20 million of which is attributable2020 were primarily driven by lower asset bases, refer to 2016).Note 6.
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Depreciation expense |
| $ | 376 |
| $ | 323 |
| $ | 53 |
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| 163 |
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| 255 |
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| $ | 539 |
| $ | 578 |
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Depreciation expense |
| $ | 1,131 |
| $ | 1,009 |
| $ | 122 |
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| $ | 1,469 |
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Depreciation andThe decreases in amortization expense for the three and ninesix months ended SeptemberJune 30, 2017 decreased $39 million, or 7%, and increased $201 million, or 14%, respectively. Depreciation expense for the three months ended September 30, 2017 increased $53 million, or 16%. The increase was primarily driven by the changes in the remaining lives of certain plant assets. Excluding additional expense from the CTF Operations for the first quarter of 2017, depreciation expense decreased $17 million, or 2%, for the nine months ended September 30, 2017 as compared to the prior year period due to lower net asset bases as compared to 2016.
41
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Amortization expense for the three months ended September 30, 2017 decreased $92 million, or 36% as compared with 2016. The decrease was2020 were primarily driven by the accelerated method of amortization related to customer bases acquired in 2010, 2014, and 2014, offset by an increase in the value2016.
LOSS ON DISPOSAL OF NORTHWEST OPERATIONS
We recorded a loss on disposal of the acquired CTF customer base as a result of final purchase accounting adjustments in 2017. Excluding additional expense from the CTF Operations for the first quarter of 2017, amortization expense decreased $62 million, or 13%, for the nine months ended September 30, 2017 as compared to the prior year period due to an increase in the value of the acquired CTF customer base subsequent to the second quarter of 2016, offset by the accelerated method of amortization related to customer bases acquired in 2010 and 2014.
GOODWILL IMPAIRMENT
As a result of the continued decline in the share price of our common stock in each of the three quarters in 2017, we tested goodwill for impairment. The results of our quantitative goodwill impairment test resulted in a $670 million goodwill impairment in the second quarter of 2017, principally due to the decline in our profitability during the period (See Note 6). Results from our first and third quarter quantitative assessments did not result in additional goodwill impairment charges. Further declines in our profitability or share price could result in additional impairment in the future.
ACQUISITION AND INTEGRATION COSTS
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($ in millions) |
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| $ | 122 |
| $ | (121) |
| (99) | % |
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Acquisition and integration costs |
| $ | 15 |
| $ | 387 |
| $ | (372) |
| (96) | % |
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Acquisition costs include financial advisory, accounting, regulatory, legal and other related costs. Integration costs include expenses that are incremental and directly related to the acquisition, which were incurred to integrate the network and information technology platforms. Integration costs also include costs to achieve synergies and operational efficiencies directly associated with the acquisition.
We invested $19$136 million and $99$160 million in capital expenditures related to the CTF Acquisition during the nine months ended September 30, 2017 and 2016, respectively.
PENSION SETTLEMENT COSTS
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Pension Settlement Costs |
| $ | 15 |
| $ | - |
| $ | 15 |
| 100 | % |
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| For the nine months ended September 30, |
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($ in millions) |
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Pension Settlement Costs |
| $ | 77 |
| $ | - |
| $ | 77 |
| 100 | % |
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The Pension Plan contains provisions that provide certain employees with the option of receiving a lump sum payment upon retirement. Frontier’s accounting policy is to record these payments as a settlement only if, in the aggregate, they exceed the sum of the annual service and interest costs for the Pension Plan’s net periodic pension benefit cost. During the three and ninesix months ended SeptemberJune 30, 2017, lump sum pension settlement payments2020.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
to terminated or retired individuals amounted to $87 million and $449 million, which exceeded the settlement threshold of $224 million, and as a result, Frontier recognized non-cash settlement charges totaling $77 million during 2017. The non-cash charge accelerated the recognition of a portion of the previously unrecognized actuarial losses in the Pension Plan. Additional pension settlement charges will be required in the fourth quarter of 2017, the amount of which will be dependent on the lump sum benefit payments made during the fourth quarter.
RESTRUCTURING COSTS AND OTHER CHARGES
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($ in millions) |
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Restructuring costs and |
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other charges |
| $ | 14 |
| $ | 11 |
| $ | 3 |
| 27 | % |
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($ in millions) |
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Restructuring costs and |
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other charges |
| $ | 55 |
| $ | 11 |
| $ | 44 |
| NM |
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For the three months ended June 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2020 | 2019 | (Decrease) | (Decrease) | ||||||||||
Restructuring costs and | ||||||||||||||
other charges | $ | 36 | $ | 30 | $ | 6 | 20 | % | ||||||
For the six months ended June 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2020 | 2019 | (Decrease) | (Decrease) | ||||||||||
Restructuring costs and | ||||||||||||||
other charges | $ | 84 | $ | 57 | $ | 27 | 47 | % | ||||||
NM – Not meaningful
Restructuring costs and other charges consist of expenses related to changes in the composition of our business, including workforce reductions, the sale of business lines or divisions,transformation initiatives, other restructuring expenses, and corresponding changes to our retirement plans.plans resulting from a voluntary severance program.
RestructuringIn 2018, Frontier launched a strategic transformation program with the aim of re-positioning the Company to be better able to react to current and future business and operational challenges and to create long-term sustainable value. This program was reduced in scope and largely completed during the first half of 2019.
For the three months ended June 30, 2020, the $36 million of restructuring costs and other charges increasedwere comprised of $2 million in severance expense, and $34 million in consulting and advisory costs related to our balance sheet restructuring activities, respectively.
For the third quartersix months ended June 30, 2020, the $84 million of 2017 compared to the third quarter of 2016 primarily due to a reduction in the workforce of approximately 300 employees in the third quarter of 2017.
Restructuringrestructuring costs and other charges increased forwere comprised of $8 million in costs related to transformation initiatives, $4 million in severance expense, and $72 million in consulting and advisory costs related to our balance sheet restructuring activities, respectively.
Following the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 primarily due to a reduction in the workforce of approximately 850 employees and the loss on the salefiling of the Chapter 11 Cases, Frontier Secure Strategic Partnerships business.recorded all consulting and advisory costs related to our balance sheet restructuring activities outside of operating income in “Reorganization Items, net”.
OTHER NON-OPERATING INCOME AND EXPENSE
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Investment and other income (loss), net |
| $ | 2 |
| $ | 3 |
| $ | (1) |
| (33) | % |
Loss (gain) on extinguishment of debt |
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and debt exchanges |
| $ | (1) |
| $ | 7 |
| $ | (8) |
| (114) | % |
Interest expense |
| $ | 381 |
| $ | 386 |
| $ | (5) |
| (1) | % |
Income tax benefit |
| $ | (31) |
| $ | (46) |
| $ | 15 |
| 33 | % |
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| For the nine months ended September 30, |
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Investment and other income, net |
| $ | 5 |
| $ | 14 |
| $ | (9) |
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Loss (gain) on extinguishment of debt |
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and debt exchanges |
| $ | 89 |
| $ | 7 |
| $ | 82 |
| NM |
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Interest expense |
| $ | 1,157 |
| $ | 1,145 |
| $ | 12 |
| 1 | % |
Income tax benefit |
| $ | (280) |
| $ | (212) |
| $ | (68) |
| (32) | % |
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NM - Not meaningful |
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For the three months ended June 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2020 | 2019 | (Decrease) | (Decrease) | ||||||||||
Investment and other loss, net | $ | (20) | $ | (9) | $ | (11) | NM | |||||||
Pension settlement | $ | 56 | $ | - | $ | 56 | 100 | % | ||||||
Loss on extinguishment of debt | $ | - | $ | - | $ | - | 100 | % | ||||||
Reorganization items, net | $ | (142) | $ | - | $ | (142) | 100 | % | ||||||
Interest expense | $ | 160 | $ | 383 | $ | (223) | (58) | % | ||||||
Income tax benefit | $ | (57) | $ | (534) | $ | 477 | (89) | % | ||||||
For the six months ended June 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2020 | 2019 | (Decrease) | (Decrease) | ||||||||||
Investment and other loss, net | $ | (15) | $ | (18) | $ | 3 | (17) | % | ||||||
Pension settlement | $ | 159 | $ | - | $ | 159 | 100 | % | ||||||
Loss on extinguishment of debt | $ | - | $ | (20) | $ | 20 | NM | |||||||
Reorganization items, net | $ | (142) | $ | - | $ | (142) | 100 | % | ||||||
Interest expense | $ | 543 | $ | 762 | $ | (219) | (29) | % | ||||||
Income tax benefit | $ | (80) | $ | (516) | $ | 436 | NM | |||||||
NM - Not meaningful | ||||||||||||||
Investment and other income,loss, net
Investment and other income,loss, net for the ninesix months ended SeptemberJune 30, 20162020 and 2019 included interest income$19 million and $22 million, respectively, of $12non-operating pension and OPEB expense.
Pension settlement
During the six months ended June 30, 2020, lump sum pension settlement payments to terminated or retired individuals amounted to $464 million, primarily due to interest earned on restricted cash. The decreasewhich exceeded the settlement threshold of $9$211 million, was driven by less restricted cash on hand in 2017.and as a result, Frontier recognized non-cash settlement charges totaling $56 million and $159 million for the three and six months ended June 30, 2020, respectively.
Loss on Extinguishmentextinguishment of Debt and Debt Exchangesdebt
During the nine months ended September 30, 2017, Frontier recorded a loss on early extinguishment of debt of $89$20 million primarilyfor the six months ended June 30, 2019 driven by a lossthe write-off of $90 million resulting fromunamortized original issuance costs that were retired along with the Term Loan A and the 2016 CoBank Credit Agreement.
Reorganization items, net
The Company has incurred and will continue to incur significant costs associated with the reorganization, primarily the write-off of certain debt buy backs duringissuance costs and net discounts, financing costs, and legal and professional fees. Subsequent to the second quarter,Petition Date, these costs are being expensed as incurred and slightly offset by a gainare expected to significantly affect our consolidated results of $1 million resulting from buy backs in the third quarter.
operations. During the nine months ended September 30, 2016, Frontier recorded a loss of $7 million resulting from the exchange of senior notes during the third quarter of 2016.
Interest expense
Interest expense for the three and ninesix months ended SeptemberJune 30, 2017 increased $52020, Frontier incurred $142 million in reorganization costs associated with the restructuring of our balance sheet.
Interest expense
For the six months ended June 30, 2020 interest expense decreased $219 million, or 1%, and $12 million, or 1%29%, as compared to the three and ninesame period in 2019. Beginning on the Petition Date, we ceased recording interest expense for our unsecured debt. The contractual interest is $218 million higher than what we have recorded for our debt obligations for the six months ended SeptemberJune 30, 2016. We incurred additional interest of $19 million in 2017 on the $1,625 million term loan facility related to the CTF Acquisition. Our composite average borrowing rate as of September 30, 2017 and 2016 was 8.36% and 8.55%, respectively.2020.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Income tax benefit
Income tax benefit forFor the three and ninesix months ended SeptemberJune 30, 2017 decreased $152020, Frontier recorded income tax benefits of $57 million and increased $68$80 million, as compared torespectively on the threepre-tax loss of $238 million and nine months ended September 30, 2016.$447 million, respectively. The effective tax raterates on our pretax loss for the ninethree and six months ended SeptemberJune 30, 2017 was 26.5% as2020 were 23.9% and 17.9%, respectively, compared with 42.0%9.1% and 8.7%, respectively, for the ninepretax loss for the three and six months ended SeptemberJune 30, 2016. The increase in income tax benefit was primarily due to the impact of the goodwill impairment incurred during the second quarter of 2017. 2019.
44
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NetBasic and diluted net loss attributable to Frontier common shareholders
NetBasic and diluted net loss attributable to Frontier common shareholders for the third quarterfirst six months of 20172020 was $92$(367) million, or ($1.19)$(3.51) per share, as compared to a net loss of $134$(5,404) million, or ($1.73)$(51.97) per share, in the third quarter of 2016, and net loss for the first ninesix months of 2017 of $936 million, or ($12.06) per share, as compared to a net loss of $454 million, or ($5.87) per share for the first nine months of 2016.2019. For the first nine months of 2017, the increase in2020, our net loss was primarily driven by the $532non-cash pension settlement charges of $159 million, (after-tax) goodwill impairment charge incurred during the second quarterinterest expense of 2017.$543 million, and $142 million of net reorganization items.
Diluted net loss attributable to Frontier common shareholders
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
(b) Liquidity and Capital Resources
Historically, our principal liquidity requirements have been to maintain and expand our business, pay principal and interest obligations on our indebtedness, including our Term Loan B, Revolver, the notes and other expenses, and for capital expenditures to replace, upgrade, expand and improve our networks and infrastructure, to integrate acquired businesses and to separate assets and systems for sale.
Our ability to continue as a going concern is dependent upon our ability to, subject to the Bankruptcy Court’s approval, implement the Plan, successfully emerge from the Chapter 11 Cases and generate sufficient liquidity from the Restructuring to meet our obligations and operating needs. These factors, together with the Company’s recurring losses from operations and accumulated deficit, create substantial doubt about the Company’s ability to continue as a going concern.
Refer to “—Chapter 11 Filing and Other Related Matters” for more information on the terms of the Restructuring Support Agreement, the Chapter 11 Cases and the effects of both on our liquidity.
Analysis of Cash Flows
As of SeptemberJune 30, 2017,2020, we had unrestricted cash and cash equivalents aggregating $286$2,290 million. Our primary source of funds duringFor the ninesix months ended SeptemberJune 30, 2017 was cash on hand, cash generated from operations, and cash received from issuance of our Term Loan B. For the nine months ended September 30, 2017,2020, we used cash flow from operations, cash on hand, proceeds from the sale of our Northwest Operations, and cash from prior year borrowings to principally fund all of our cash investing and financing activities, which were primarily capital expenditures, dividendsexpenditures.
On May 1, 2020, Frontier completed the sale of its Northwest Operations for gross proceeds of $1,352 million, subject to certain closing adjustments. Net of funding certain pension and debt repayments.other retiree medical liabilities, funding certain escrows and other closing adjustments, we received $1,131 million in proceeds. Revenues for the Northwest Operations represented approximately 7% of consolidated revenue for the year ended December 31, 2019.
At SeptemberAs of June 30, 2017,2020, we had a working capital deficit of $531$4,593 million including $166 million of long-term debt due within one year, as compared to a working capital deficitsurplus of $788$233 million at December 31, 2016. 2019. The decrease inprimary driver for the working capital deficit is primarily due to a decrease in current liabilitiesat June 30, 2020, was the acceleration of $651 million, partially offset by a reduction in accounts receivablethe maturities of $158 million. our long-term debt that resulted from our filing of the Chapter 11 Cases.
Cash Flows provided byfrom Operating Activities
Cash flows provided by operating activities increased $223$93 million to $1,185$950 million for the ninesix months ended SeptemberJune 30, 20172020 as compared withto the prior year period.corresponding period in 2019. The overall increase in operating cash flows was primarily the result of the addition of our CTF Operations, partially offset by unfavorablefavorable changes in working capital, along with higherprimarily attributable to withholding payment of pre-petition trade accounts payable subsequent to the filing of the Chapter 11 Cases as well as a reduction in cash payments for interest expense.as compared to the comparative period in 2019.
We received $4paid $1 million and $35$5 million in net cash tax refundstaxes during the ninesix months ended SeptemberJune 30, 20172020 and 2016,June 30, 2019, respectively.
In connection withCash Flows from Investing Activities
Cash flows provided by investing activities increased $1,133 million to $628 million for the CTF Acquisition, Frontier recognized acquisition and integration costs of $15 million during the first ninesix months of 2017ended June 30, 2020 as compared to $387the corresponding period in 2019. The primary driver of this increase were cash proceeds of $1,131 million duringreceived for the first nine monthssale of 2016. Interest expense of $581 million was incurred during the first nine months of 2017 related to the September 2015 debt offering and the term loan credit agreement, dated as of August 12, 2015, with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, compared to $559 million in interest expense during the first nine months of 2016. Additionally, Frontier incurred $10 million of interest expense related to the Verizon Bridge Facility (as defined below) during the first nine months of 2016.Northwest Operations.
Cash Flows used by Investing Activities
Capital Expenditures
For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, our capital expenditures were $865$511 million and $1,059$580 million, respectively, including $19 million and $99 million, respectively, of integration related capital expenditures associated with the CTF Acquisition.respectively. Capital expenditures related to CAF Phase II are included in our reported amounts for capital expenditures. We anticipateThis reduction in capital expenditures was primarily driven by delays in payments for business operations to be approximately $1.15 billion to $1.2 billion in 2017, as compared to $1.26 billion in 2016.certain prepetition capital expenditures following the filing of the Chapter 11 Cases.
Cash Flows used by and provided from Financing Activities
DIP Financing Costs:
In connection with the filing of the Chapter 11 Cases, Frontier recorded approximately $19 million in financing costs related to the issuance of the DIP Credit Facility for the six months ended June 30, 2020.
New Debt ReductionIssuances and Debt Reductions:
On March 15, 2019, we completed a private offering of $1,650 million aggregate principal amount of 8.00% First Lien Secured Notes due 2027 (the First Lien Notes). The First Lien Notes are guaranteed by each of the Company’s subsidiaries that guarantees its senior secured credit facilities. The guarantees are unsecured obligations of the guarantors equal in right of payment to all of the guarantor’s obligations under the Company’s senior secured credit facilities and certain other permitted future senior indebtedness and senior in right of payment with all subordinated obligations of the guarantors. The First Lien Notes are secured on a first-priority basis by all the assets that secure Frontier’s obligations under its senior secured credit facilities on a first-priority basis.Interest on the First Lien Notes is payable to holders of record semi-annually in arrears on April 1 and October 1 of each year, commencing October 1, 2019.
During the first ninesix months of 2017,ended June 30, 2020, Frontier used cash on hand for the scheduled retirement of $328 million of debt, including $210 million of unsecured 8.25% senior notes at maturity, and contractual payments of principal for debt of $118 million. Additionally, Frontier used cash proceeds from the Term Loan B to retire $1,335 million of unsecured senior notes prior to maturity, consisting of $763 million of 8.875% Notes due 2020, $551 million of 8.500% Notes due 2020, $10 million of 9.250% Notes due 2021, $6 million of 7.125% Notes due 2019, and $5 million principal amount of 8.125% Notes due 2018. senior indebtedness.
During the first ninesix months of 2017, Frontier recorded a loss on early extinguishment of debt of $89 million driven primarily by premiums paid to retire certain notes and unamortized original issuance costs, slightly offset by discounts received on the retirement of certain notes.
During the first nine months of 2016,ended June 30, 2019, Frontier used cash on hand to retire an aggregatefor the scheduled retirement of $358 million principal amount of $280senior indebtedness. In addition, Frontier used the proceeds from the offering of First Lien Notes, together with cash on hand, to (i) repay in full the outstanding borrowings under the senior secured term loan A facility under the JPM Credit Agreement, which otherwise would have matured in March 2021, (ii) repay in full the outstanding borrowings under the 2016 CoBank Credit Agreement, which otherwise would have matured in October 2021, and (iii) pay related interest, fees and expenses.
Capital Resources
We are highly leveraged, and a substantial portion of our liquidity needs arise from debt service on our outstanding indebtedness and from funding the costs of operations, working capital and capital expenditures. Our primary sources of cash are cash flows from operations, cash on hand and proceeds from debt borrowings, including issuances of long-term debt and our fully drawn $850 million of debt, $189 millionborrowing capacity under our Revolver (as reduced by any Standby Letters of which was senior unsecured debt and $91 million of which was secured debt.
Subject to limitations contained in our indentures and credit facilities, we may from time to time make repurchasesCredit outstanding under the JPM Credit Agreement). As of our debt in the open market, through tender offers, 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
Wedate of filing, we believe our operating cash flows and existing cash balances, existingincluding the full borrowing under our revolving credit facility, and access tocash proceeds from the capital markets, as necessary,sale of our Northwest Operations 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. 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 affect our cash generated from operations. AsWe completed the sale of September 30, 2017,the Northwest Operations on May 1, 2020. Net of pension funding, certain escrows, and other closing adjustments, we had $42received $1,131 million in proceeds. In addition, we have obtained commitments, subject to the satisfaction of debt maturing duringcertain customary conditions, including the last three monthsapproval of 2017; $743 millionthe Bankruptcy Court, for a senior secured superpriority debtor-in-possession revolving credit facility, or DIP Facility.
However, our ability to continue as a going concern is dependent upon our ability to, subject to the Bankruptcy Court’s approval, implement the Plan, successfully emerge from the Chapter 11 Cases and $828 milliongenerate sufficient liquidity from the Restructuring to meet our obligations and operating needs. Refer to “—Chapter 11 Filing and Other Related Matters” for a description of debt will mature in 2018the potential DIP Facility and 2019, respectively.Exit Facility and for more information on the terms of the Restructuring Support Agreement, the Chapter 11 Cases and the effects of both on our liquidity.
Term Loan and Revolving Credit Facilities
JP Morgan Credit Facilities:
On February 27, 2017, Frontier entered into a first amended and restated credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, pursuant to which Frontier combined its revolving credit agreement, dated as of June 2, 2014, and its term loan credit agreement, dated as of August 12, 2015. Under
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
the JPM Credit Agreement as further(as amended on June 15, 2017 by Increase Joinder No.1 (as so amended,to date, the JPM Credit Agreement), Frontier has a $1,625$1,740 million senior secured term loan A facility (the Term Loan A) maturing on March 31, 2021, an $850 million undrawn secured revolving credit facility maturing on February 27, 2022 (the Revolver), and $1,500 million senior secured term loan B facility (the Term Loan B) maturing on June 15, 2024.2024 and an $850 million secured revolving credit facility maturing on February 27, 2024 (the Revolver). The maturities of the Term Loan A,B and the Revolver, and the Term Loan B, in each case if still outstanding, will be accelerated in the following circumstances: (i) if, 91 days before the maturity date of any series of Senior Notes maturing in 2020, 2023 and 2024, more than $500 million in principal amount remains outstanding on such series;series; or (ii) if, 91 days before the maturity date of the first series of Senior Notes maturing in 2021 or 2022, more than $500 million in principal amount remains outstanding, in the aggregate, on the two series of Senior Notes maturing in such year. As of December 31, 2019, approximately $227 million principal amount, in the aggregate, remains outstanding on the two series of senior notes maturing in 2020 and $309 million principal amount, in the aggregate, remains outstanding on the two series of senior notes maturing in 2021.
The determination of interest rates for each of the facilitiesTerm Loan B and Revolver under the JPM Credit Agreement is based on margins over the Base Rate (as defined in the JPM Credit Agreement) or over LIBOR, at the election of Frontier. Interest rate margins on the Term Loan A and Revolver (ranging from 0.75%1.00% to 1.75%2.00% for Base Rate borrowings and 1.75%2.00% to 2.75%3.00% for LIBOR borrowings) are subject to adjustment based on Frontier’s Total Leverage Ratio (as defined in the JPM Credit Agreement). The interest rate on the Revolver as of June 30, 2020 was LIBOR plus 3.00%. Interest rate margins on the Term Loan B (2.75% for Base Rate borrowings and 3.75% for LIBOR borrowings) are not subject to adjustment. The security package under the JPM Credit Agreement includes pledges of the equity interests in certain Frontier subsidiaries and guarantiesguarantees by certain Frontier subsidiaries. As of SeptemberJune 30, 2017,2020, Frontier had borrowings of $749 million outstanding under the revolvingRevolver (with letters of credit facility was fully available and noissued under the Revolver totaling $90 million).
On March 15, 2019, Frontier used proceeds from the offering of First Lien Notes, together with cash on hand, to repay in full the outstanding borrowings had been made thereunder. The revolving credit facility is available for general corporate purposes but may not be used to fund dividend payments.
Frontier has twounder its $1,625 million senior secured credit agreementsTerm Loan A facility, which otherwise would have matured in March 2021, as described above under “New Debt Issuances and Debt Reductions.”
In addition on March 15, 2019, Frontier amended the JPM Credit Agreement to, among other things, (i) extend the maturity date of the Revolver from February 27, 2022 to February 27, 2024 (subject to springing maturity to any tranche of our existing debt with an aggregate outstanding principal amount in excess of $500 million), (ii) increase the interest rate applicable to such revolving loans by 0.25% and (iii) make certain modifications to the debt and restricted payment covenants.
CoBank Credit Facilities:
Frontier had a $315 million senior term loan facility drawn in October 2016 (as amended to date, the 2016 CoBank Credit Agreement) with CoBank, ACB, as administrative agent, lead arranger and a lender, and the other lenders party thereto:lenders. On March 15, 2019, Frontier used proceeds from the first, foroffering of the First Lien Notes, together with cash on hand, to repay in full the outstanding borrowings under the 2016 CoBank Credit Agreement, which otherwise would have matured in October 2021.
Frontier had a separate $350 million senior term loan facility drawn in 2014 (the 2014 CoBank Credit Agreement), matures with CoBank which was repaid in full on October 24, 2019,July 3, 2018, as described above under “New Debt Issuances and the second, for a $315 million senior term loanDebt Reductions.”
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
facility drawn in October 2016 (the 2016 CoBank Credit Agreement), matures on October 12, 2021. We refer to the 2014 CoBank Credit Agreement and the 2016 CoBank Credit Agreement collectively as the CoBank Credit Agreements.
Repayment of the outstanding principal balance under each of the CoBank Credit Agreements is being made in quarterly installments ($9 million, with respect to the 2014 CoBank Credit Agreement, and $8 million, with respect to the 2016 CoBank Credit Agreement), in each case with the remaining outstanding principal balance to be repaid on the applicable maturity date. Borrowings under each of the CoBank Credit Agreements bear interest based on the margins over the Base Rate (as defined in the applicable CoBank Credit Agreement) or over LIBOR, at the election of Frontier.
On March 29, 2017, Frontier amended the 2014 and 2016 CoBank Credit Agreements. The amendments provide that interest rate margins under each of these facilities will range from 0.875% to 3.875% for Base Rate borrowings and 1.875% to 4.875% for LIBOR borrowings, subject to adjustment based on our Total Leverage Ratio, as defined in each credit agreement. The interest rate on each of the facilities as of September 30, 2017 was LIBOR plus 3.875%. In addition, the amendments provide for increases in the maximum Leverage Ratio and expansion of the security package identical to those contained in the February 2017 amendment and restatement of the August 2015 JPM credit agreement.
Letters of Credit Facility
Frontier has a Continuing Agreement for Standby Letters of Credit with Deutsche Bank AG New York Branch and Bank of Tokyo – Mitsubishi UFJ, LTD. (the LC Agreements)Agreement). After the filing of the Chapter 11 Cases, Frontier can no longer issue new letters of credit under the Revolver. As of SeptemberJune 30, 2017, $1292020, $49 million and $90 million of undrawn Standby Letters of Credit had been issued under the LC Agreements. BorrowingsAgreement and Revolver respectively. Letters of credit under the LC Agreement are secured by a pledge ofsecurity package identical to those contained in the stock of certain Frontier subsidiaries and guaranties by certain Frontier subsidiaries.JPM Credit Amendment.
Covenants
The terms and conditions contained in one or more of our indentures the CoBank Credit Agreements and the JPM Credit Agreement include covenants that, among other things, placethe timely payment of principal and interest when due, the maintenance of our corporate existence, keeping proper books and records in accordance with GAAP, restrictions on the following: the incurrence of liens on our assets securing indebtedness and our subsidiaries’ assets, securing indebtedness;restrictions on the incurrence of indebtedness by usour subsidiaries and our subsidiaries; the payment of dividendsrestrictions on asset sales and other restricted payments; selling or transferring assets; the maximum levels of our leveragetransfers, mergers and secured leverage ratios; and the entry into mergers or other changes in corporate control. All of the above restrictions arecontrol subject to important detailed qualifications and exceptions that are included inexceptions.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Under the JPM Credit Agreement, Frontier is subject to a first lien net leverage ratio maintenance test which provides for a maximum first lien net leverage ratio of 1.50 to 1.00 as of the last day of any fiscal quarter, stepping down to 1.35 to 1.00 for the fiscal quarters ending June 30, 2020 and thereafter. The covenants provide for junior lien capacity on any indebtedness permitted under the credit agreements, while limiting the incurrence of first lien debt. Additionally, the credit agreement prohibits us from using proceeds from our revolving credit facility to fund dividend payments if the undrawn amount under the Revolver is less than $250 million, and we may not pay dividends on our common stock in excess of $2.40 per share in any fiscal year.
The indentures governing our secured notes and senior notes and debentures 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. Our secured notes are guaranteed by each of our subsidiaries that guarantees the JPM Credit Agreement. In addition, the secured notes are secured on a first-priority basis and a second-priority basis, as applicable, by all the assets that secure our obligations under the JP Credit Agreement on a first-priority basis.
On April 14, 2020, the Company Parties filed the Chapter 11 Cases in the Bankruptcy Court. The filing of the Chapter 11 Cases constituted an Event of Default under our debt covenants.
Shareholder Rights Plan
On July 1, 2019, our Board of Directors adopted a shareholder rights plan designed to protect our net operating losses for tax purposes (NOLs) from the effect of limitations imposed by federal and state tax rules following a change in the ownership of our stock. This plan was designed to deter an “ownership change” (as defined in IRC Section 382) from occurring, and therefore protect our ability to utilize our federal and state net operating loss carryforwards in the future. Pursuant to the shareholder rights plan, if a shareholder (or group of affiliated or associated persons) acquires beneficial ownership of 4.9 percent or more of the outstanding shares of Frontier’s common stock without prior approval of our Board of Directors or without meeting certain customary exceptions (such as a result of repurchases of stock by Frontier, dividends or distributions by Frontier or certain inadvertent actions by our stockholders), the rights would become exercisable and entitle shareholders (other than the acquiring shareholder or group) to purchase additional shares of Frontier at a significant discount and result in significant dilution in the economic interest and voting power of acquiring shareholder or group. For purposes of calculating percentage ownership under the plan, “outstanding shares” of common stock include all of the shares of common stock actually issued and outstanding. Beneficial ownership is determined as provided in the rights plan and generally includes, without limitation, any ownership of securities a person would be deemed to actually or constructively own for purposes of Section 382 of the IRC or the regulations promulgated thereunder.
The plan is not meant to be an anti-takeover measure and our Board of Directors has established a procedure to consider requests to exempt the acquisition of our common stock from the rights plan, if such acquisition would not limit or impair the availability of our NOLs. Such determination will be made in the sole and absolute discretion of our Board of Directors, upon request by any person prior to the date upon which such person would otherwise become the beneficial owner of 4.9 percent or more of the outstanding shares of our common stock. In addition, if our Board of Directors determines in good faith that a person has inadvertently become the beneficial owner of 4.9 percent or more of the outstanding shares of our common stock, and such person divests as promptly as practicable a sufficient number of shares of common stock so that such person beneficially owns less than 4.9 percent, then such person will not cause the rights under the plan to become exercisable.
This summary description of the rights plan does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, dated as of July 1, 2019, by and between us and Computershare Trust Company, N.A., as Rights Agent, filed as an exhibit to our QuarterlyPeriodic Report on Form 10-Q for8-K filed on July 1, 2019.
Chapter 11 Filing and Other Related Matters
Restructuring Support Agreement
On April 14, 2020, the quarterly period ended June 30, 2017Company Parties entered into the Restructuring Support Agreement with the Consenting Noteholders, pursuant to which the Consenting Noteholders agreed, subject to certain terms and in the CoBank Credit Agreements and our indentures, filed as exhibitsconditions, to our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. In addition, under the Certificate of Designations of our 11.125% Mandatory Convertible Preferred Stock, Series A, we would be restricted from paying dividends on our common stock if we failed to declare and pay dividends on our Series A Preferred Stock.
Mandatory Convertible Preferred Stock, Series A,support the Restructuring of $2.78125 per share, payablethe existing debt of, existing equity interests in, and certain other obligations of the Company Parties, pursuant to a pre-arranged Plan to be filed in the Chapter 11 Cases.
In accordance with the Restructuring Support Agreement, the Consenting Noteholders agreed, among other things, to:
(i) support the transactions (the Restructuring Transactions) described in, within the timeframes outlined in, and in accordance with the Restructuring Support Agreement;
(ii) not take any action, directly or indirectly, that is reasonably likely to interfere with acceptance, implementation, or consummation of the Restructuring Transactions;
(iii) vote each of its Senior Notes Claims (as defined in the Restructuring Support Agreement) to accept the Plan; and
(iv) not transfer Senior Notes Claims held by each Consenting Noteholders except with respect to limited and customary exceptions, including requiring any transferee to either already be bound or become bound by the terms of the Restructuring Support Agreement.
In accordance with the Restructuring Support Agreement, the Company Parties agreed, among other things, to:
(i) support and take all steps reasonably necessary and desirable to consummate the Restructuring Transactions in accordance with the Restructuring Support Agreement;
(ii) support and take all steps reasonably necessary and desirable to obtain entry of (a) the final orders of the Bankruptcy Court (the DIP Orders) authorizing the relevant Company Parties’ entry into the documents governing a senior secured superpriority debtor-in-possession financing facility (the DIP Facility), (b) the order of the Bankruptcy Court approving the disclosure statement related to the Plan pursuant to section 1125 of the Bankruptcy Code and (c) the Bankruptcy Court’s order confirming the Plan;
(iii) use commercially reasonable efforts to obtain any and all required governmental, regulatory, and/or third-party approvals for the Restructuring Transactions;
(iv) act in good faith and use commercially reasonable efforts to execute and deliver certain required documents and agreements to effectuate and consummate the Restructuring Transactions as contemplated by the Restructuring Support Agreement;
(v) operate their businesses in the ordinary course of business in a manner consistent with the Restructuring Support Agreement and past practice and use commercially reasonable efforts to preserve their businesses; and
(vi) not, directly or indirectly, object to, delay, impede, or take any other action to interfere with acceptance, implementation, or consummation of the Restructuring Transactions.
The Restructuring Support Agreement may be terminated upon the occurrence of certain events, including the failure to meet specified milestones related to confirmation of the Plan and consummation of the Plan.
For a description of the Term Sheet incorporated into the Restructuring Support Agreement, see “—Plan and Disclosure Statement” below.
Chapter 11 Cases
As an initial step towards implementation of the Plan, on December 29, 2017the Petition Date, the Company Parties filed the Chapter 11 Cases in the Bankruptcy Court pursuant to holderschapter 11 of record at the closeBankruptcy Code. Each Company Party continues to operate its business as a “debtor in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. The Chapter 11 Cases are being jointly administered under the caption In re Frontier Communications Corporation., et al., Case No. 20-22476 (RDD).
In general, as debtors-in-possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business, however, we may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. To that end, on the Petition Date, the Company Parties filed certain motions and applications intended to limit the disruption of the bankruptcy proceedings on its operations (the First Day Motions). Pursuant to the First Day Motions, approved after a final hearing held on May 22, 2020, the Bankruptcy Court authorized us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders: continue to operate our cash management system and honor certain prepetition obligations related thereto; maintain existing business forms; continue to perform intercompany
PART I. FINANCIAL INFORMATION (Continued)
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(DEBTOR-IN-POSSESSION)
transactions; obtain super priority administrative expense status to post-petition intercompany balances; pay certain prepetition claims of critical vendors, lien claimants and section 503(b)(9) of the Bankruptcy Code claimants in the ordinary course of business on Decembera post-petition basis; pay prepetition employee wages, salaries, other compensation and reimbursable employee expenses and continue employee benefits programs; pay obligations under prepetition insurance policies, continue to pay certain brokerage fees; renew, supplement, modify or purchase insurance coverage; maintain our surety bond program; pay certain prepetition taxes and fees; honor certain prepetition obligations to customers and continue certain customer programs in the ordinary course of business; and pay or honor prepetition claims of content providers.
Plan and Disclosure Statement
On May 15, 2017.2020, the Company Parties filed the Plan and related Disclosure Statement describing the Plan and the solicitation of votes to approve the same, each of which were amended on June 26, 2020, June 29, 2020 and June 30, 2020. On June 30, 2020, the Bankruptcy Court entered an order approving the adequacy of the Disclosure Statement, the solicitation and notice procedures and the forms of voting ballots and notices in connection therewith. The order established June 29, 2020 as the voting record date, July 2, 2020 as the solicitation launch date and July 31, 2020 as the voting deadline. A hearing in the Bankruptcy Court to consider confirmation of the Plan is scheduled for August 21, 2020. The Plan will be subject to usual and customary conditions to plan confirmation, including obtaining the requisite vote of a class of impaired creditors and approval of the Bankruptcy Court.
The declarationPlan, among other things, contemplates:
the applicable Company Parties’ or Reorganized Company Parties to taking any actions necessary or advisable to effectuate the Restructuring Transactions described in the Plan;
the Company Parties using commercially reasonable efforts to obtain commitments on the best available terms for the DIP Facility, with an option for conversion into an Exit Facility (as defined below) on the Plan effective date (the Plan Effective Date), on terms and conditions (including as to amount) reasonably acceptable to the Company Parties and reasonably acceptable to the Consenting Noteholders, as of the relevant date, holding greater than 50.1% of the aggregate outstanding principal amount of the Frontier Communications Corporation’s senior unsecured notes and debentures (the Senior Notes) that are subject to the Restructuring Support Agreement (the Required Consenting Noteholders);
one or more third-party debt facilities (collectively, the Exit Facilities), to be entered into on the Plan Effective Date, in an amount reasonably sufficient to facilitate Plan distributions and ensure incremental liquidity on the Plan Effective Date, and otherwise be on terms and conditions (including as to amount) reasonably acceptable to the Company Parties and reasonably acceptable to the Required Consenting Noteholders;
to the extent not converted into an Exit Facility, full satisfaction in cash on the Plan Effective Date of all DIP Facility claims (if any);
on the Plan Effective Date, one or more of the Reorganized Company Parties shall issue takeback debt (the “Takeback Debt”), in a principal amount of $750 million, including, but not limited to:
oan interest rate that is either (a) no more than 2.50% higher than the interest rate of the next more junior secured debt facility to be entered into on the Plan Effective Date if the Takeback Debt is secured on a third lien basis or (b) no more than 3.50% higher than the interest rate of the most junior secured debt facility to be entered into on the Plan Effective Date if the Takeback Debt is unsecured;
oa maturity no less than one year outside of the longest-dated debt facility to be entered into on the Plan Effective Date, provided that in no event shall the maturity of the Takeback Debt be longer than eight years from the Plan Effective Date;
oto the extent the Second Lien Notes are reinstated under the Plan, providing the Takeback Debt will be third lien debt; provided that to the extent the Second Lien Notes are paid in full in cash during the pendency of the Chapter 11 Cases or under the Plan, the Company Parties and the Required Consenting Noteholders will agree on whether the Takeback Debt will be secured or unsecured within three business days of the Company Parties’ delivery to the Consenting Noteholders of a term sheet for the financing to repay the Second Lien Notes in full in cash that contains terms and
PART I. FINANCIAL INFORMATION (Continued)
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(DEBTOR-IN-POSSESSION)
conditions reasonably acceptable to the Company Parties and the Required Consenting Noteholders;
othe Takeback Debt amount is subject to downward adjustment by the Consenting Noteholders holding at least sixty-six and two-thirds percent of the aggregate outstanding principal amount of Senior Notes that are held by all Consenting Noteholders; and
oall other terms including, without limitation, covenants and governance, shall be reasonably acceptable to the Company Parties and the Required Consenting Noteholders; provided that such terms shall not be more restrictive than those in the indenture for the Second Lien Notes.
subject to acceptance of the Plan by the holders of the Senior Notes, a cash payment (the Incremental Payments) on the Plan Effective Date to each holder of the Senior Notes (to the extent of the available amount of unrestricted balance sheet cash in excess of $150 million on the Plan Effective Date as projected 30 days prior to the anticipated Plan Effective Date, estimated and calculated in a manner reasonably acceptable to the Company Parties and the Required Consenting Noteholders, subject to certain adjustments described in the Plan (the Surplus Cash));
cash interest payments at the non-default contract rate for the Revolver through the earlier of the Plan Effective Date or repayment and, to the extent not already satisfied in full during the Chapter 11 Cases from the proceeds of the DIP Facility, satisfaction in full on the Plan Effective Date of all Revolver claims;
cash interest payments for (i) the Term Loan B maturing on June 15, 2024, and (ii) the $1,650 million aggregate principal amount of the First Lien Notes, as applicable, at non-default contract rate during the Chapter 11 Cases, which shall not include any make-whole or redemption premium, until repayment or reinstatement of such indebtedness;
for the $1,600 million aggregate principal amount of the Second Lien Notes (together with the First Lien Notes, the Secured Notes), cash interest payment at non-default contract rate during the Chapter 11 Cases, which shall not include any make-whole or redemption premium, until repayment or reinstatement of the Second Lien Notes;
to the extent not already satisfied in full during the Chapter 11 Cases from the proceeds of the DIP Facility, (i) satisfaction in full of all Term Loan B claims and all Secured Notes claims on the Plan Effective Date, or (ii) solely in the event the Company Parties cannot procure financing on terms acceptable to the Company Parties and the Required Consenting Noteholders to repay in full the Term Loan B or the Secured Notes, as applicable, reinstatement of all Term Loan B claims and all Secured Notes claims, as applicable, pursuant to section 1124 of the Bankruptcy Code on the Plan Effective Date;
cash interest payments at non-default contract rate during the Chapter 11 Cases for the secured and unsecured notes of the Company’s subsidiaries and, on or as soon as reasonably practicable following the Plan Effective Date, reinstatement of such notes pursuant to section 1124 of the Bankruptcy Code;
cash payment of all general unsecured claims (other than Parent Litigation Claims (as defined below)), if applicable, that are not Senior Notes claims or subsidiary unsecured notes claims, reinstatement of such claims pursuant to section 1124 of the Bankruptcy Code or other such treatment rendering such claims unimpaired, in each case, as reasonably acceptable to the Company Parties and the Required Consenting Noteholders;
litigation-related claims against the Company that would be subject to the automatic stay (except those subject to the police and regulatory exception) (the Parent Litigation Claims) will be unimpaired, provided that the Parent Litigation Claims will be allowed in an amount that does not exceed existing insurance coverage plus $25 million;
cash payment in full of all administrative expense claims, priority tax claims, other priority claims, and other secured claims or other such treatment rendering such claims unimpaired, including reinstatement pursuant to section 1124 of the Bankruptcy Code or delivery of the collateral securing any such secured claim and payment of future dividends any interest required under section 506(b) of the Bankruptcy Code;
on ouror as soon as reasonably practicable following the Plan Effective Date, receipt by the holders of the Senior Notes, in full satisfaction of their claims, their pro rata share of (a) 100% of the common equity
PART I. FINANCIAL INFORMATION (Continued)
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(DEBTOR-IN-POSSESSION)
(the New Common Stock) of the Company or an entity formed to indirectly acquire substantially all of the assets and/or stock isof the Company as may be contemplated by the Restructuring (the Reorganized Company Parties), subject to dilution by the Management Incentive Plan (as defined below), (b) the Takeback Debt and (c) unrestricted cash of Reorganized Frontier in excess of $150 million as of the Plan Effective Date;
on the Plan Effective Date, reservation of a pool (the Management Incentive Plan Pool) of 6% (on a fully diluted basis) of the New Common Stock for a post-emergence management incentive plan (the Management Incentive Plan) for management employees of the Reorganized Company Parties, which will contain terms and conditions as determined at the discretion of our Boardthe board of Directors,directors of the Reorganized Company Parties after the Plan Effective Date; provided that up to 50% of the Management Incentive Plan Pool may be allocated prior to the Plan Effective Date as emergence grants (Emergence Awards) to individuals selected to service in key senior management positions after the Plan Effective Date; provided, further, that the Emergence Awards will have terms and conditions that are acceptable to the Company Parties and the Required Consenting Noteholders;
no distribution for existing equity interests; and
on the Plan Effective Date, Reorganized Frontier shall issue the New Common Stock and cause it to be transferred to Frontier pursuant to the Restructuring Transactions, the interests in Frontier shall be cancelled, and Frontier shall transfer the New Common Stock to the holders of Senior Notes.
Documents filed on the docket and other information related to the Chapter 11 Cases are available at https://cases.primeclerk.com/ftr. Documents and other information available on such website are not part of this document and shall not be deemed incorporated by reference in this document.
DIP Facility
On April 14, 2020 and prior to the commencement of the Chapter 11 Cases, the Company and certain of its subsidiaries (the DIP Loan Parties) entered into a commitment letter (as amended by that certain Letter Agreement dated April 28, 2020, by that certain Letter Agreement dated May 12, 2020, by that certain Letter Agreement dated June 10, 2020, by that certain Letter Agreement dated June 29, 2020 and as further amended, modified or supplemented from time to time, the Commitment Letter) with Goldman Sachs Bank USA (GS Bank), Deutsche Bank AG New York Branch (DBNY), Deutsche Bank Securities Inc. (DBSI and, collectively with DBNY, DB), Barclays Bank PLC (Barclays), Morgan Stanley Senior Funding, Inc. (MSSF), Credit Suisse AG, Cayman Islands Branch (CS) and Credit Suisse Loan Funding LLC (CSLF and, together with CS and their respective affiliates, Credit Suisse, and together with GS Bank, DB, Barclays and MSSF, the Commitment Parties), pursuant to which, and subject to the satisfaction of certain customary conditions, including the approval of the Bankruptcy Court, the Commitment Parties have agreed to provide the DIP Loan Parties with a revolving DIP Facility in an aggregate principal amount of $460 million which, upon satisfaction of certain conditions, including the effectiveness of the Plan, will depend upon many factors,convert into a longer term revolving Exit Facility.
The terms and conditions of the DIP Facility are set forth in the form Senior Secured Superpriority Debtor-in-Possession Credit Agreement (the Form DIP Credit Agreement) attached to the Commitment Letter. The DIP Facility includes conditions precedent (including the repayment in full of all revolving loans outstanding under the JPM Credit Agreement), representations and warranties, affirmative and negative covenants and events of default customary for financings of this type and size. The proceeds of all or a portion of the DIP Facility may be used for, among other things, general corporate purposes, including our financial condition, results of operations, growth prospects, funding requirements,working capital and permitted acquisitions, for payment of cumulative dividends on Series A Preferred Stock, applicable law, restrictions in agreements governing our indebtednessfees, costs and expenses of the transactions contemplated by the Chapter 11 Cases, for payment of court approved adequate protection obligations and other factors such purposes consistent with the DIP Facility. To the extent not converted into an Exit Facility, DIP Facility claims will be paid in cash on the Plan Effective Date. The terms and conditions of the Exit Facility are reflected in an exit facility term sheet attached as an exhibit to the Form DIP Credit Agreement (the Exit Facility Term Sheet). Upon the satisfaction of certain conditions set forth in the Exit Facility Term Sheet, including compliance with a 1.55:1.00 pro forma gross first lien leverage ratio test and the repayment in full of the revolving loans outstanding under the JPM Credit Agreement, the DIP Facility commitments will convert into Exit Facility commitments. The Company has the option to increase the size of the Exit Facility up to an amount of $600.0 million by obtaining commitments from one or more lenders prior to the Plan Effective Date.
A final hearing on the DIP Facility and DIP Credit Agreement is scheduled for August 21, 2020.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Regulatory Approvals
As set forth in the Plan and the Disclosure Statement, in order to implement the restructuring contemplated by the Plan, the Company Parties must satisfy several conditions after confirmation of the Plan but prior to emergence from Chapter 11. Among other things, the Company Parties must obtain requisite regulatory approvals, including required Public Utility Commission (PUC) approvals in certain states, including Arizona, California, Connecticut, Illinois, Minnesota, New York, Pennsylvania and West Virginia. The level of review undertaken by state PUCs, and the length of time to complete such review, varies by state. The Company is the subject of ongoing investigations by certain state PUCs, which may have an impact on the timing of receipt of PUC approvals in such states and/or lead to the imposition of financial sanctions and/or operational restrictions, including revocation of operating authority, In addition, certain state PUCs may impose conditions on the approval of the Restructuring Transactions, including commitments to make significant capital expenditures to improve intrastate service. No assurance can be given as to the terms, conditions, and timing of the required approvals or clearances.
Effects of the Restructuring and the Chapter 11 Cases on Our Liquidity
The filing of the Chapter 11 Cases constituted an event of default that accelerated substantially all of our Boardobligations under the documents governing the JPM Credit Facilities, the First Lien Notes, the Second Lien Notes, our unsecured notes and debentures and the secured and unsecured debentures of Directors deems relevant.our subsidiaries. However, pursuant to the Bankruptcy Code and as described in “Part II. Other Information—Item 1. Legal Proceedings”, the filing of the Bankruptcy Petitions automatically stayed most actions against the Company Parties, including most actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Company Parties’ property. Accordingly, although the filing of the Bankruptcy Petitions triggered events of default under our existing debt obligations, creditors are stayed from taking action as a result of these defaults. Additionally, under Section 502(b)(2) of the Bankruptcy Code, and subject to the terms of the DIP Orders providing for adequate protection payments to certain of our prepetition lenders, we are no longer required to pay interest on our indentures and credit facilities accruing on or after the Petition Date.
Additionally, in connection with the Chapter 11 Cases, we have incurred, and expect to continue to incur, significant professional fees and other costs in connection with the Chapter 11 Cases. There can be no assurance that our current liquidity is sufficient to allow us to satisfy our obligations related to the Chapter 11 Cases or to pursue confirmation of the Plan.
Contractual Obligations
Other than as disclosed elsewhere in this report with respect to the filing of the Chapter 11 Cases and the acceleration of substantially all of our debt as a result, there have been no material changes outside the ordinary course of business to the information provided with respect to our contractual obligations, including indebtedness and purchase and lease obligations, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
Future Commitments
OnIn April 29, 2015, the FCC released its right of first refusal offer of support to price cap carriers under the CAF Phase II program, which is intended to provide long-term support for broadband in high cost unserved or underserved areas. In June 2015, Frontier accepted the FCC’s CAF Phase II offer in 25 states, which provides for $332$313 million in annual support through 2020 including $49 million in annual support related(since extended to the properties acquired in the CTF Acquisition,2021 under RDOF), to make available 10 Mbps downstream/1 Mbps upstream broadband service to approximately 774,000 households across some of the 2925 states where we operate.
To the extent we do not enable the required number of households with 10 Mbps downstream/1 Mbps upstream broadband service by the end of the CAF Phase II term or we are unable to satisfy other FCC CAF Phase II requirements, Frontier would be required to return a portion of the funds previously received.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
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.
These critical accounting estimates have been reviewed with the Audit Committee of our Board of Directors.
Other thanExcept for the updated indefinite-lived intangibles discussion below,removal of goodwill impairment as a critical accounting policy due to full impairment during fiscal 2019, there have been no material changes to our critical accounting policies and estimates from the information provided in Item 7. “Management Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Indefinite-lived Intangibles
Our indefinite-lived intangibles consist of goodwill and trade name, which were generated as a result of business combinations. We test for impairment of these assets annually as of December 31 or more frequently, whenever events occur or facts and circumstances change that make it more likely than not that the fair value of a reporting unit has been reduced below its carrying amount. Events that might indicate impairment include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, material negative changes in relationships with significant customers, and/or a significant decline in our stock price for a sustained period.
We early adopted ASU 2017-04 “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”) during the second quarter of 2017. In accordance with ASU 2017-04, our annual goodwill impairment test (and interim test if determined to be necessary) will consist of comparing the fair value of our reporting unit to its carrying value. To the extent that the carrying value exceeds fair value, an impairment will be recognized.
For the purpose of our goodwill impairment test, we first assess qualitative factors to determine if it is more likely than not that fair value of the reporting unit is less than the carrying amount. If it is less, an additional quantitative evaluation must be performed. Our quantitative assessment consists of using a market multiples approach to determine fair value. Marketplace company comparisons and analyst reports within the telecommunications industry have historically supported a range of fair values of multiples between 5.0x and 7.9x annualized EBITDA (defined as operating income,
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
net of acquisition and integration costs, pension/ OPEB expense, pension settlement costs, stock-based compensation expense, goodwill impairment, storm-related costs, and restructuring costs and other charges, as well as depreciation and amortization).
During 2017, our common stock has declined and traded at historically low prices. As a result, we tested goodwill for impairment in each of the three quarters in 2017. The second quarter quantitative assessment, as described above, resulted in a conclusion that the estimated enterprise fair value was lower than its carrying value, principally due to the decline in our profitability during the period. Accordingly, we recorded a goodwill impairment of $670 million in the second quarter of 2017. The first and third quarter quantitative assessments, did not result in goodwill impairment charges. In estimating the enterprise fair value we used 5.8x as the multiple in each of the three quarters in 2017.
The market multiples approach that we use incorporates significant estimates and assumptions related to the forecasted results for the remainder of the year, including revenues, expenses, and the achievement of other cost synergies. Our assessment includes many qualitative factors that require significant judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding the need for, or size of, an impairment. Continued declines in our profitability or cash flows or in sustained low trading prices of our common stock may result in further impairment.
The enterprise fair value is sensitive to the amount of EBITDA generated by Frontier and the EBITDA multiple used in the calculation. 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. The market multiples approach is sensitive to changes in the estimated annual EBITDA, with each $100 million change equating to approximately $580 million of estimated enterprise value. Similarly, a 1% change in the multiple used would affect the estimated enterprise value by approximately $200 million. Sustained low trading prices for our common stock could also affect the reconciliation of our market capitalization and indicate further impairment.
We also considered whether the carrying values of finite-lived intangible assets and property plant and equipment may not be recoverable or whether the carrying value of certain finite-lived intangible assets were impaired, noting no additional impairment was present as of September 30, 2017.
Recent Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements included in Part I of this report for additional information related to recent accounting literature.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Regulatory Developments
On April 29, 2015, the FCC released offers of support to price cap carriers under the CAF Phase II program. The intent of these offers is to provide long-term support for carriers for establishing and providing broadband service with at least 10 Mbps downstream/1 Mbps upstream speeds in high-cost unserved or underserved areas. Frontier accepted the FCC’s CAF Phase II offer in 2925 states, including our CTF properties, which provides for $332$313 million in annual support through 2020 and a(since extended to 2021 under the Rural Digital Opportunity Fund (RDOF) Order) in return for the Company’s commitment to make broadband available to approximately 774,000 households.households within Frontier’s footprint.
On January 30, 2020, the FCC adopted an order establishing the RDOF program. With this order, the FCC plans to hold two auctions totaling $20.4 billion of support over ten years. In the first auction (RDOF Phase I), the FCC plans to offer up to $16 billion in support over ten years ($1.6 billion annually) for an estimated 6 million locations that lack access to speeds of at least 25/3 Mbps based on the FCC’s current maps. After the FCC updates its maps with more granular broadband availability information, the FCC plans to hold a second auction (RDOF Phase II) for any remaining locations with the remaining funding, at least $4.4 billion. On July 15, 2020, Frontier filed an application to be eligible to participate in the RDOF Phase I auction, which is scheduled to commence on October 29, 2020. Until after that auction is completed, the FCC quiet period rules will apply.
Recognizing that RDOF support will not be made available before the end of the sixth year of CAF Phase II support is a successor to(year-end 2020), the approximately $156 million in annual USF frozen high-cost supportFCC’s RDOF order explains that Frontier had been receiving prior to the CTF acquisition, and the $42 million in annual transitional USF frozen high-cost support that Verizon had been receiving in California and Texas. In addition to the annual support levels, these amounts also include frozen support phasedown amounts in states where the annual CAF II funding is less than the prior annual frozen high-cost support funding. The frozen support phasedown support was $35 million in 2015 and $27 million in 2016, and is expectedrecipients are entitled to be $17 million in 2017 and $6 million in 2018.
In February 2017, the FCC adopted an Order further explaining its competitive bidding process to continue to distributea seventh year of CAF Phase II fundingsupport through 2021, whether or not they are successful in those high-cost areas where price cap carriers declined the FCC’s offer of support. This auction could present a new support and deployment opportunity.
On August 4, 2017, the FCC adopted a Public Notice initiating the pre-auction process for the Connect America Fundan RDOF auction. As such, Frontier will continue to receive annual CAF Phase II auction. The Phase II auction will award up to $198 million annually for 10 years to service providers that commit to offer voice and broadband services to fixed locationssupport in unserved high-cost areas;2021. While the auction will also account for other service elements such as the minimum data speed provided and data usage allowances. The
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
auction is likely to begin in 2018 though the exact timeframe is unknown. FrontierRDOF has not yet determined whetherbeen completely finalized, it will participatecould result in any competitive bid process at this time, and becausea material change in the level of funding that Frontier accepted virtually all of its availablereceives from the FCC under CAF II support up front, we expect the funding available within our footprint to be limited. as early as 2022.
On April 20, 2017, the FCC issued an Order (the 2017 Order) that will significantly alteraltered how Commercial Data Servicescommercial data services are regulated once the rules go into effect.regulated. Specifically, the 2017 Order adopted a test to determine, on a county-by-county basis, whether price cap ILECs, likeprice-cap ILEC services, such as Frontier’s DS1 and DS3 services, will continue to be regulated. The test is likely to resultresulted in deregulation in a substantial number of our markets. Once implemented, the deregulation will allowmarkets and is allowing Frontier to offer its DS1 and DS3 services in a manner that better responds to the competitive marketplace and allows for commercial negotiation. The areas that remain regulated may be subject to price fluctuations depending upon the price cap formula in each year. While multiple parties appealed the 2017 Order, the 8th Circuit issued a decision that year. Multiple partiesupheld the majority of the 2017 Order. As to the part of the decision that was vacated and remanded to the FCC, the FCC has reinstated the deregulation and the FCC’s decision to reaffirm its deregulation has not been appealed.
On September 25, 2019, the FCC released an order scheduling its CBRS (3.5 GHz) auction, in which the FCC will auction 7 blocks of 10 MHz TDD per county, or 22,631 licenses nationwide, to begin on July 23, 2020. Short form applications to participate need to be filed by May 7, 2020. Frontier is evaluating whether to participate in this auction.
Frontier did file a short form application for the CBRS auction and is currently under the FCC quiet period.
In September 2018, California network neutrality legislation was signed into law. The California legislation aims to reimpose the provisions of the FCC’s 2015 Network Neutrality decision. The Department of Justice has filed a lawsuit against California, stating that it attempts to govern interstate commerce, which is a federal matter outside the state’s jurisdiction. Four Industry Associations representing Internet Service Providers (USTelecom, CTIA, NCTA and ACA) have appealed and requested a stay of this Order.also filed suit. The California Attorney General has agreed to delay implementing the California law until the federal lawsuit is resolved. Frontier cannot predict the outcome of this litigation and, although Frontier’s current practices comply with the California law, the extent to which these regulatory changes willassociated with the California law could affect revenues at this time. A number of additional states are currently considering Network Neutrality legislation during their 2019 legislative sessions.
On October 1, 2019, the D.C. Circuit Court largely upheld the FCC decision in its 2018 Restoring Internet Freedom Order to reclassify broadband as an “information service.” However, the Court invalidated the FCC’s preemption of a state’s ability to pass their own network neutrality rules and remanded back to the FCC other parts of the 2018 Order. We anticipate that this ruling will be appealed. California’s network neutrality provisions will remain on hold until all appeals of this case have been exhausted.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
On March 13, 2020, in response to the COVID-19 pandemic, over 550 providers of critical communications services, including Frontier, took the FCC’s Keep Americans Connected pledge pursuant to which providers agreed for the following 60 days (i) not to terminate service to any residential or small business customers because of their inability to pay their bills due to the disruptions caused by the coronavirus pandemic; (ii) waive any late fees that any residential or small business customers incur because of their economic circumstances related to the coronavirus pandemic; and (iii) to open their Wi-Fi hotspots to any American who needs them. Some of the states we operate in have issued executive orders as a result of COVID-19 that further impact our business, including prohibiting the disconnection of services for customers for the length of the state of emergency. While the initial 60-day period of the Keep Americans Connected Pledge has expired, state and federal governments continue to ask companies to aid in pandemic response. Given the unprecedented and evolving nature of the pandemic and the swift moving response of multiple levels of government as well as the uncertainty of funding available for services provided, the full impact of these changes and potential changes on the Company are unknown at this time.
Item 3. 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:
Our exposure to market risk for changes in interest rates relates primarily to the interest-bearing portion of our pension investment portfolio and the related actuarial liability for pension obligations, as well as our floating rate indebtedness. As of SeptemberJune 30, 2017, 80%2020, 86% of our total debt had fixed interest rates. We had no interest rate swap agreements in effect at SeptemberJune 30, 2017.2020. We believe that our currently outstanding obligation exposure to interest rate changes is minimal.
Our discount rate assumption for our pension benefit obligation is determined at least annually, or whenever required, 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 June 30, 2020, our discount rate utilized in calculating our benefit plan obligation was 2.8%. Decreasing this rate by 25 basis points would result in an increase in our obligation of approximately $98 million, while increasing the rate by 25 basis points would result in a decrease in our obligation of approximately $94 million.
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 $3,537 million14% of our outstanding borrowings at SeptemberJune 30, 20172020 have floating interest rates. Our undrawn $850The annual impact of 100 basis points change in the LIBOR would result in approximately $24 million revolving credit facility hasof additional 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.expense. 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, a near-term change in interest rates would not materially affect our consolidated financial position, results of operations or cash flows.
At SeptemberJune 30, 2017,2020, the fair value of our long-term debt was estimated to be approximately $15.5$7.5 billion, based on quoted market prices, our overall weighted average borrowing rate was 8.36%8.46% and our overall weighted average maturity was approximately six years. As of SeptemberJune 30, 2017,2020, prior to the filing of the Chapter 11 Cases, there hashad been no significant change in the weighted average maturity applicable to our obligations since December 31, 2016.2019. However, the filing of the Chapter 11 Cases has accelerated the maturity of substantially all of our debt obligations. Refer to Note 10 for discussion of the impact of the Chapter 11 Cases on our debt obligations.
Our exposure to market risks for changes in equity security prices as of SeptemberJune 30, 20172020 is primarily limited to our pension plan assets. We have no other security investments of any significant amount.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Our Pension Plan assets decreased from $2,766$2,730 million at December 31, 20162019 to $2,604$2,210 million at SeptemberJune 30, 2017,2020, a decrease of $162$520 million, or 6%19%. This decrease was primarily a result of benefit payments of $492$500 million, the impact of the sale of the Northwest Operations of $58 million, partially offset by positive investment returnscontributions of $270 million, net of investment management and administrative fees, and contributions in excess of the Differential (as defined below) of $60 million, during the first nine months of 2017.$37 million.
As part of the CTF Acquisition, Verizon was required to make a cash payment to Frontier for the difference in assets initially transferred by Verizon into the Pension Plan and the related obligation (the Differential). In the third quarter of 2017, we received the $131 million Differential payment from Verizon, and have remitted an equivalent amount to the
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Pension Plan as of September 30, 2017. As the Differential was reflected as a receivable of the Pension Plan at December 31, 2016, the cash funding had no impact to plan assets.
Item 4. Controls and Procedures
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(a)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, SeptemberJune 30, 2017,2020, that our disclosure controls and procedures were effective. effective in recording, processing, summarizing and reporting on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and were effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
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We reviewed our internal control over financial reporting at September 30, 2017.
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in an evaluation thereof that occurred during the thirdsecond fiscal quarter of 20172020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting.
Item 1. Legal Proceedings
See Note 15On April 30, 2018, an amended consolidated class action complaint was filed in the United States District Court for the District of Connecticut on behalf of certain purported stockholders against Frontier, certain of its current and former directors and officers and the underwriters of certain Frontier securities offerings. The complaint was brought on behalf of all persons who (1) acquired Frontier common stock between February 6, 2015 and February 28, 2018, inclusive, and/or (2) acquired Frontier common stock or Mandatory Convertible Preferred Stock either in or traceable to Frontier’s offerings of common and preferred stock conducted on or about June 2, 2015 and June 8, 2015. The complaint asserted, among other things, violations of Section 10(b) of the NotesSecurities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 thereunder, Section 20(a) of the Exchange Act and Sections 11 and 12 of the Securities Act of 1933, as amended, in connection with certain disclosures relating to Consolidated Financial Statements includedthe CTF Acquisition. The complaint sought, among other things, damages and equitable and injunctive relief. On March 8, 2019, the District Court granted in Part I, Item 1its entirety Frontier’s motion to dismiss the complaint. The District Court dismissed with prejudice a number of this report. Thereclaims and with respect to certain other claims that were not dismissed with prejudice, Plaintiffs were permitted to seek the court’s permission to refile. On May 10, 2019, Plaintiffs filed a motion for leave to amend along with a proposed amended complaint that is narrower in scope than the dismissed complaint. On March 24, 2020, the court denied plaintiffs’ motion for leave to amend, finding that they had not pled a viable claim. Plaintiffs appealed and the case was stayed by the Second Circuit Court of Appeals. We continue to dispute the allegations and intend to vigorously defend against such claims. In addition, shareholders have been no material changesfiled derivative complaints on behalf of the Company in Connecticut, California, and Delaware courts. The derivative complaints are based, generally, on the same facts asserted in the consolidated class action complaint and allege against current and former officers and directors of the Company (i) breach of fiduciary duty claims for disseminating false and misleading information to our legal proceedings fromshareholders, failure to manage internal controls, and failure to oversee and manage the information provided in Item 3. “Legal Proceedings” included in our Annual Report on Form 10-Kcompany; (ii) unjust enrichment and waste of corporate assets claims; and (iii) violations of Section 14(a) of the Exchange Act for the year ended December 31, 2016. false and misleading statements. We also dispute the allegations in the derivative complaints described above and intend to vigorously defend against such claims. Given that all of these matters are in the early stages of litigation, we are unable to estimate a reasonably possible range of loss, if any, that may result.
WeIn addition, we are party to various other legal proceedings (including individual, class and putative class actions)actions as well as federal and state governmental investigations) 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 isSuch matters are subject to uncertainty and the outcome of individual matters is not predictable. However, we believe that the ultimate resolution of all suchthese 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 cash flows.
Most of our pending legal proceedings have been stayed as a result of filing the Chapter 11 Cases on April 14, 2020 and the effect of the automatic stay.
Effect of Automatic Stay upon filing under Chapter 11 of the United States Bankruptcy Code
Pursuant to Section 362 of the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed most actions against or on behalf of the Company Parties, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Company Parties’ property. Subject to certain exceptions under the Bankruptcy Code, the filing of the Company Parties’ Chapter 11 Cases also automatically stayed the continuation of most legal proceedings or the filing of other actions against or on behalf of the Company Parties or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Company Parties’ bankruptcy estates, unless and until the Bankruptcy Court modifies or lifts the automatic stay as to any such claim. Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under their police and regulatory powers.
Item 1A. Risk Factors
There have been no material changes to the Risk Factors described in Part 1, Item 1A.1A “Risk Factors” in our Annual Report on Form 10-K, for the fiscal year ended December 31, 2016.
2019.
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities during the quarter ended SeptemberJune 30, 2017.2020.
ISSUER PURCHASES OF EQUITY SECURITIES
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July 1, 2017 to July 31, 2017 |
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Employee Transactions (1) |
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| 625 |
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| $ | 15.83 |
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August 1, 2017 to August 31, 2017 |
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Employee Transactions (1) |
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| 222 |
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| $ | 14.68 |
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September 1, 2017 to September 30, 2017 |
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Employee Transactions (1) |
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| 68 |
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| $ | 13.54 |
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Totals July 1, 2017 to September 30, 2017 |
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Employee Transactions (1) |
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| 915 |
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| $ | 15.38 |
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Period | Total Number of Shares Purchased | Average Price Paid per Share | |||||||
April 1, 2020 to April 30, 2020 | |||||||||
Employee Transactions (1) | - | $ | - | ||||||
May 1, 2020 to May 31, 2020 | |||||||||
Employee Transactions (1) | - | $ | - | ||||||
June 1, 2020 to June 30, 2020 | |||||||||
Employee Transactions (1) | - | $ | - | ||||||
Totals April 1, 2020 to June 30, 2020 | |||||||||
Employee Transactions (1) | - | $ | - | ||||||
(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 and the LTIP performance shares earned during the period.shares. Frontier’s stock compensation plans provide that the value of shares withheld shall be based on the average of the high and low price of our common stock on the date the relevant transaction occurs, for shares vested prior to May 2017. Beginning in May 2017, the value of the shares withheld shall be based on the closing price of our common stock on the date the relevant transaction occurs.
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
(a) | Exhibits: | |
10.1 | ||
31.1 | ||
31.2 | ||
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Cover Page from Frontier’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in iXBRL and contained in Exhibit 101. |
SIGNATURE
Pursuant to the requirements 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.
FRONTIER COMMUNICATIONS CORPORATION | |
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By: /s/ Donald Daniels | |
Donald Daniels | |
Senior Vice President and | |
(Principal Accounting Officer) | |
Date: | |