(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
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
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
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
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.
Surcharges and Subsidies
Frontier collects various taxes from its customers and subsequently remits these taxes to governmental authorities. Substantially all of these taxes are recorded through the consolidated balance sheet and presented on a net basis in our consolidated statements of operations. We also collect Universal Service
Fund (USF) surcharges from customers (primarily federal USF), 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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| | Data and Internet services include broadband services for consumer and commercial customers. We provide 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”);
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| | 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 consumer and commercial customers. Voice services also include the long distance voice origination and termination services that we provide to our commercial customers and other carriers;
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| | Video services include services provided directly to consumer customers through the FiOS® and Vantage video brands, and through DISH® satellite TV services;
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| | Other includes sales of customer premise equipment to our commercial customers and directory services, less our provision for bad debts; and
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| | Switched Access and Subsidy revenues include revenues derived from allowing other carriers to use our network to originate and/or terminate their local and long 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 cost subsidies from state and federal authorities, including the Connect America Fund Phase II.
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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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| | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended | |
| | September 30, | | September 30, | |
| | | | | | | | | | | | | |
($ in millions) | | 2017 | | 2016 | | 2017 | | 2016 | |
| | | | | | | | | | | | | |
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 | |
Other | | | 84 | | | 73 | | | 231 | | | 218 | |
Customer revenue | | | 2,060 | | | 2,319 | | | 6,325 | | | 5,889 | |
Switched access and subsidy | | | 191 | | | 205 | | | 586 | | | 598 | |
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.
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
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;
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
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
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.
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:
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| ($ in millions) |
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| June 30, 2020 |
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| Accounts payable |
| $ | 59 |
|
| Other current liabilities |
|
| 92 |
|
| Accounts payable, and other current liabilities |
|
| 151 |
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|
| Debt subject to compromise |
|
| 10,949 |
|
| Accrued interest on debt subject to compromise |
|
| 497 |
|
| Long-term debt and accrued interest |
|
| 11,446 |
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| Total liabilities subject to compromise |
| $ | 11,597 |
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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:
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| ($ in millions) |
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| June 30, 2020 |
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| Write-off of debt issuance costs and |
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| original issue net discount on debt subject to compromise |
| $ | 85 |
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| Debtor-in-possession financing costs |
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| 19 |
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| Professional fees and other bankruptcy related costs |
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| 38 |
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| Reorganization items, net |
| $ | 142 |
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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 $10 million of taxes paid on behalf of employees related to shares withheld from “Cash flows provided from (used by) operations” to “Cash flows used by financing activities” in accordance with the new standard. Connect America Fund Phase II.
The following tables provide a summary of revenues, by category:
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| For the three months ended June 30, |
| For the six months ended June 30, |
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| ($ in millions) |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
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| Data and Internet services |
| $ | 874 |
| $ | 963 |
| $ | 1,806 |
| $ | 1,930 |
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| Voice services |
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| 523 |
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| 629 |
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| 1,095 |
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| 1,279 |
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| Video services |
|
| 200 |
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| 260 |
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| 422 |
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| 528 |
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| Other |
|
| 108 |
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| 120 |
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| 225 |
|
| 244 |
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| Revenue from contracts with customers (1) |
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| 1,705 |
|
| 1,972 |
|
| 3,548 |
|
| 3,981 |
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| Subsidy and other revenue (2) |
|
| 96 |
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| 95 |
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| 186 |
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| 187 |
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| Total revenue |
| $ | 1,801 |
| $ | 2,067 |
| $ | 3,734 |
| $ | 4,168 |
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| For the three months ended June 30, |
| For the six months ended June 30, |
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| ($ in millions) |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
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| Consumer |
| $ | 899 |
| $ | 1,050 |
| $ | 1,870 |
| $ | 2,127 |
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| Commercial |
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| 806 |
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| 922 |
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| 1,678 |
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| 1,854 |
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| Revenue from contracts with customers (1) |
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| 1,705 |
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| 1,972 |
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| 3,548 |
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| 3,981 |
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| Subsidy and other revenue (2) |
|
| 96 |
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| 95 |
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| 186 |
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| 187 |
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| Total revenue |
| $ | 1,801 |
| $ | 2,067 |
| $ | 3,734 |
| $ | 4,168 |
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(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 $9,871 million.
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($ in millions)
| | |
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Current assets
| | $
| 353 |
Property, plant & equipment
| | | 6,096 |
Goodwill
| | | 2,606 |
Other intangibles - primarily customer list
| | | 2,262 |
Current liabilities
| | | (579) |
Long-term debt
| | | (544) |
Other liabilities
| | | (323) |
Total net assets acquired
| | $
| 9,871 |
| | | |
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 $98 million increase in Goodwill.six months ended June 30, 2020.
The following unaudited pro forma financial information presentsis a summary of the combined results of operations of Frontierchanges in the contract assets and the CTF Operations as if the CTF Acquisition had occurred as of January 1, 2016. contract liabilities:
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| Contract Assets |
| Contract Liabilities |
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| ($ in millions) |
| Current |
| Noncurrent |
| Current |
| Noncurrent |
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| Balance at December 31, 2019 |
| $ | 37 |
| $ | 8 |
| $ | 41 |
| $ | 21 |
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| Revenue recognized included |
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| in opening contract balance |
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| (18) |
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| - |
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| (33) |
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| (7) |
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| Cash received, excluding amounts |
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| recognized as revenue |
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| - |
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| - |
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| 42 |
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| 7 |
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| Credits granted, excluding amounts |
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|
|
|
|
|
|
|
|
|
| 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.
| | | | | |
| | | | | |
| | | | | |
| | (Unaudited)
|
| | For the nine months ended
|
($ in millions, except per share amounts)
| | September 30, 2016
|
| | | | | |
Revenue
| | | $
| 7,846 | |
| | | | | |
Operating income
| | | $
| 1,129 | |
| | | | | |
Net loss attributable to Frontier common shareholders
| | | $
| (164) | |
| | | | | |
Basic and diluted net loss per share attributable
| | | | | |
to Frontier common shareholders
| | | $
| (2.10) | |
| | | | | |
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:
| | | | | | |
| | | | | | |
($ in millions) | | September 30, 2017 | | December 31, 2016 |
| | | | | | |
Retail and wholesale | | $ | 768 | | $ | 979 |
Other | | | 81 | | | 90 |
Less: Allowance for doubtful accounts | | | (69) | | | (131) |
Accounts receivable, net | | $ | 780 | | $ | 938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ($ in millions) |
| June 30, 2020 |
| December 31, 2019 |
|
| |
|
|
|
|
|
|
|
| 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
($ in millions) | | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | | | | | |
Bad debt expense | | $ | 26 | | $ | 56 | | $ | 83 | | $ | 104 |
| | | | | | | | | | |
(5)
(6) Property, Plant and Equipment:
Property, plant and equipment, net is as follows:
| | | | | | |
| | | | | | |
($ in millions) | | September 30, 2017 | | December 31, 2016 |
| | | | | | |
Property, plant and equipment | | $ | 26,124 | | $ | 25,541 |
Less: Accumulated depreciation | | | (11,749) | | | (10,639) |
Property, plant and equipment, net | | $ | 14,375 | | $ | 14,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ($ in millions) |
| June 30, 2020 |
|
| December 31, 2019 |
|
| |
|
|
|
|
|
|
|
|
| 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 $75 million which was recognized against “Accumulated Depreciation” in our consolidated balance sheet during 2019.
Depreciation expense is principally based on the composite group method. Depreciation expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the three months ended June 30, |
| For the six months ended June 30, |
|
| ($ in millions) |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation expense |
| $ | 314 |
| $ | 342 |
| $ | 630 |
| $ | 695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
($ in millions) | | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | | | | | |
Depreciation expense | | $ | 376 | | $ | 323 | | $ | 1,131 | | $ | 1,009 |
| | | | | | | | | | | | |
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 $52 million, which are included in “Other liabilities”.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(6) (7) Goodwill and Other Intangibles:
The activity in
All goodwill from January 1, 2017 to September 30, 2017 was as follows:
| | | |
| | | |
($ in millions)
| | | |
| | | |
Balance at January 1, 2017
| | $
| 9,674 |
CTF Acquisition adjustments
| | | 98 |
Impairment
| | | (670) |
Balance at September 30, 2017
| | $
| 9,102 |
| | | |
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$9,154 million as of SeptemberJune 30, 2017.2020 and December 31, 2019.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The components of other intangibles are as follows:
| | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Gross Carrying | | Accumulated | | Net Carrying | | Gross Carrying | | Accumulated | | Net Carrying |
($ in millions) | | Amount | | Amortization | | Amount | | Amount | | Amortization | | Amount |
| | | | | | | | | | | | | | | | | | |
Other Intangibles: | | | | | | | | | | | | | | | | | | |
Customer base | | $ | 5,188 | | $ | (3,137) | | $ | 2,051 | | $ | 5,088 | | $ | (2,604) | | $ | 2,484 |
Trade name | | | 122 | | | - | | | 122 | | | 122 | | | - | | | 122 |
Royalty agreement | | | 72 | | | (22) | | | 50 | | | 72 | | | (16) | | | 56 |
Total other intangibles | | $ | 5,382 | | $ | (3,159) | | $ | 2,223 | | $ | 5,282 | | $ | (2,620) | | $ | 2,662 |
| | | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2020 |
| December 31, 2019 |
|
|
|
| Gross Carrying |
| Accumulated |
| Net Carrying |
| Gross Carrying |
| Accumulated |
| Net Carrying |
|
| ($ in millions) |
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
($ in millions) | | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | | | | | |
Amortization expense | | $ | 163 | | $ | 255 | | $ | 539 | | $ | 460 |
| | | | | | | | | | | | |
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)
(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.
(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 $10,949 million of debt classified in Liabilities subject to compromise at June 30, 2020) is estimated based upon quoted market prices at the reporting date for those financial instruments.
| | | | | | | | | | | | |
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| | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
| | September 30, 2017 | | December 31, 2016 |
| June 30, 2020 |
| December 31, 2019 |
| | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) | | | Carrying Amount | | | Fair Value | | | Carrying Amount | | | Fair Value |
|
| Carrying Amount |
|
| Fair Value |
|
| Carrying Amount |
|
| Fair Value |
| | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
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.
