(1) Summary of Significant Accounting Policies:
(a)
a) Basis of Presentation and Use of Estimates:
Frontier Communications CorporationParent, Inc. 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. Certain reclassifications of amounts previously reported have been made to conform to the current presentation, as described in Note 2 – Recent Accounting Literature. 2020. 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 lossincome (loss) and cash flows for any interim periods are not necessarily indicative of results that may be expected for the full year.
We operate in 1 reportable segment. Frontier provides both regulated and unregulated voice, data and video services to consumer, business, and wholesale customers and is typically the incumbent voice services provider in its service areas.
For our interim financial statements as of and for the period ended September 30, 2017,2021, 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 application of fresh start accounting, allowance for doubtful accounts,credit losses, asset impairments, indefinite-lived intangibles, depreciation and amortization, income taxes, business combinations, and pension and other postretirement benefits, among others. For information about our use of estimates as a result of fresh start accounting, see Note 4.
We operate in one reportable segment.Chapter 11 Bankruptcy Emergence
On April 14, 2020 (the “Petition Date”), Frontier provides both regulatedCommunications Corporation, a Delaware corporation (“Old Frontier”), and unregulated voice, data and video services to consumer, commercial and wholesale customers and is typicallyits subsidiaries (collectively with Old Frontier, the incumbent voice services provider in its service areas.
On July 10, 2017, we effected a one for fifteen reverse stock split“Debtors”), commenced cases under chapter 11 (the “Chapter 11 Cases”) of our common stock. The reverse stock split reducedtitle 11 of the number of common shares issued (which includes outstanding shares and treasury shares) from approximately 1,193,000,000 shares to 80,000,000 shares, and reduced shares outstanding from 1,178,000,000 shares to 79,000,000 shares. In addition, and at the same time, the total number of shares of common stock that Frontier is authorized to issue changed from 1,750,000,000 shares to 175,000,000 shares. There was no changeUnited States Code (the “Bankruptcy Code”) in the par valueU.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). On August 27, 2020, the Bankruptcy Court confirmed the Fifth Amended Joint Plan of Reorganization of Frontier Communications Corporation and its Debtor Affiliates Pursuant to Chapter 11 of the common stock,Bankruptcy Code (the “Plan” or the “Plan of Reorganization”), which was filed with the Bankruptcy Court on August 21, 2020, and no fractional shares were issued. All shareon April 30, 2021 (the “Effective Date”), the Debtors satisfied the conditions precedent to consummation of the Plan as set forth in the Plan, and per share amountsthe Debtors emerged from the Chapter 11 Cases without any need for further action or order of the Bankruptcy Court. See Note 3 for additional information related to our emergence from Chapter 11 Cases.
Fresh Start Accounting
Upon emergence from bankruptcy, we adopted fresh start accounting in accordance with Accounting Standards Codification (ASC) Topic 852 – Reorganizations (ASC 852) and became a new entity for financial reporting purposes. As a result, the consolidated financial statements after the Effective Date are not comparable with the consolidated financial statements on or before that date as indicated by the “black line” division in the financial statements and footnotes have been retroactively adjusted for all periods presentedfootnote tables, which emphasizes the lack of comparability between amounts presented. References to give effect“Successor” relate to our financial position and results of operations after the Effective Date. References to “Predecessor” refer to the reverse stock split. financial position and results
of operations of Old Frontier and its subsidiaries on or before the Effective Date. See Note 4 for additional information related to fresh start accounting.
During the Predecessor period, ASC 852 was applied in preparing the consolidated financial statements. ASC 852 requires the financial statements, for periods subsequent to the commencement of the Chapter 11 Cases, to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. ASC 852 requires certain additional reporting for financial statements prepared between the bankruptcy filing date and the date of emergence from bankruptcy, including: (i) Reclassification of pre-petition liabilities that are unsecured, under-secured or where it cannot be determined that the liabilities are fully secured, to a separate line item on the consolidated balance sheet called, "Liabilities subject to compromise"; and (ii) Segregation of “Reorganization items, net” as a separate line on the consolidated statements of comprehensive loss, included within income from continuing operations.
Upon application of fresh start accounting, we allocated the reorganization value to our individual assets and liabilities, except for deferred income taxes, based on their estimated fair values in conformity with ASC Topic 805, Business Combinations. The amount of deferred taxes was determined in accordance with ASC Topic 740, Income Taxes. The Effective Date fair values of our assets and liabilities differed materially from their recorded values as reflected on the historical balance sheets, see Note 4.
b)Changes in Accounting Policies:
The accounting policy differences between Predecessor and Successor include:
Universal Service Fund and Other Surcharges - Frontier collects various taxes, Universal Service Fund (USF) surcharges (primarily federal USF), and certain other taxes, from its customers and subsequently remits them to governmental authorities. The Predecessor recorded USF and other taxes on a gross basis on the consolidated statement of operations, included within “Revenue” and “Network access expense”. After emergence, the Successor records these USF and other taxes on a net basis.
Provision for Bad Debt – The Predecessor reported the provision for bad debt as a reduction of revenue. After emergence, the Successor reports bad debt expense as an operating expense included in “Selling, general, and administrative expenses”.
Contract Acquisition Costs - During the Predecessor period, certain commissions to obtain new customers were deferred and amortized over four years, which represented the estimated customer contract period. As a result of fresh start accounting, that assumption was reevaluated and the period of benefit for our reverse stock splitretail customers was determined to be less than one year. As such, these costs are now expensed as incurred.
Actuarial Losses on Defined Benefit Plans - Historically, actuarial gains (losses) were recognized as they occurred and included in “Accumulated other comprehensive income (loss)”, and were subject to amortization over the conversion ratesestimated average remaining service period of participants. As part of fresh start accounting, Frontier has made an accounting policy election to recognize these gains and losses immediately in the period they occur as Investment and other income (loss) on the consolidated statement of operations.
Government Grants Revenue - Certain governmental grants that were historically presented on a net basis as part of capital expenditures, are now presented on a gross basis and included in ”Revenue” on the consolidated statement of operations.
Administrative Expenses – Historically, the Predecessor capitalized certain administrative expenses, that following emergence, are expensed during the period incurred and included in “Selling, general, and administrative expense” on the consolidated statement of operations.
c) Going Concern:
In accordance with the requirements of Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements Going Concern (ASU 2014-15)”, and ASC 205, “Presentation of Financial Statements”, the Company has the responsibility to evaluate at each reporting period, including interim periods, whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations. In its evaluation for this report, management considered the Company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the Company’s conditional and unconditional obligations due within one year following the date of issuance of this Quarterly Report on Form 10-Q.
During the pendency of the Chapter 11 Cases, the Predecessor’s ability to continue as a going concern was contingent upon a variety of factors, including the Bankruptcy Court’s approval of the Plan and the Predecessor’s ability to successfully implement the Plan. As a result of the effectiveness of the Plan, the Company believes it has the ability to meet its obligations for at least one year from the date of issuance of this Form 10-Q. Accordingly, the accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course business.
d) Impact of COVID-19:
The 2019 novel coronavirus (“COVID-19”) and measures taken to prevent its spread across the globe have impacted our Series A Preferred Stockbusiness in several ways. While overall the operational and financial impacts to Frontier of the COVID-19 pandemic as of September 30, 2021 were proportionately adjusted.not significant, we continue to closely monitor the evolution of the pandemic, including new COVID-19 variants, as well as the ongoing impact to our employees, our customers, our suppliers and our results of operations.
(b) In an effort to reduce the economic impacts of COVID-19, the United States federal government has responded with multiple stimulus bills. In addition, some of the states we operate in have issued executive orders as a result of COVID-19 that further impact our business. State and federal governments and health authorities, may continue to recommend or mandate measures that could impact our operations.
Frontier’s response to COVID-19 has included comprehensive operational safety precautions for our employees and customers. To date, we have not experienced significant disruptions in our workforce due to COVID-19 related absences or legislative or regulatory changes. As a federal contractor of the U.S. government, we are required to comply with the recent executive order mandating employees be fully vaccinated by the required dates. We have implemented a program for our non-union employees to facilitate compliance with these requirements.
Through September 30, 2021, we have not experienced any material disruptions in our supply chain. However, the challenges and continuing uncertainty of the COVID-19 pandemic could result in further impacts to our business and operations, such as disruptions in our supply chain, inflation in pricing for key materials or labor, or other adverse changes. We continue to closely track our customers’ payment activity as well as external factors 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 consumer 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.
e) Revenue Recognition:
Revenue for data & Internet services, voice services, video services and switched and non-switched access services is recognized whenas services are provided or when products are delivered to customers. RevenueServices that isare billed in advance includesinclude monthly recurring network access services (including data services), special access services, and monthly recurring voice, video, and related charges. Revenue is recognized by measuring progress toward the complete satisfaction of the Company’s performance obligations. 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 fees
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 may differ from the timing of the customer’s payment.
Bundled Service and Allocation of Discounts
When customers purchase more than one service, revenue for each is determined by allocating the total transaction price based upon the relative stand-alone selling price of each service. We frequently offer service discounts as an incentive to customers, which reduce the total transaction price. Any incentives which are considered cash equivalents (e.g. gift cards) that are granted will similarly result in a reduction of the total transaction price. Cash equivalent incentives are accounted for on a portfolio basis and are recognized in the month they are awarded to customers.
Customer Incentives
In the process of acquiring and/or retaining customers, we may issue a variety of 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 separate performance obligations. While these incentives are free to the customer, a portion of the consideration received from the customer is ascribed to them based upon their related direct and incremental costsrelative stand-alone selling price. These types of incentives are initially deferred and recognized asaccounted for on a portfolio basis with both revenue and expense recognized in the month they are awarded to the customer. The earned revenue associated with these incentives is reflected in “Other” revenue while the associated costs are reflected in “Network access expenses”.
Upfront Fees
All non-refundable upfront fees assessed to our customers provide them with a material right to renew; therefore, they are deferred by creating a contract liability and amortized into “Data and Internet service” for fees charged to our wholesale customers and “Other revenue” for fees charged to all other customers over the average term ofcustomer life using a portfolio approach.
Customer Acquisition Costs
Sales commission expenses are recognized as incurred. According to ASC 606, incremental costs in obtaining a contract with a customer relationship. We recognizeare deferred and recorded as currenta contract asset if the period expenseof benefit is expected to be greater than one year. For our retail customers, this period of benefit has been determined to be less than one year. As such, the portion of installationCompany applies the practical expedient that allows such costs that exceeds installation fee revenue.to be expensed as incurred.
Taxes, Surcharges and Subsidies
Frontier collects various taxes, Universal Service Fund (USF) surcharges (primarily federal USF), and certain other surcharges, from its customers and subsequently remits these taxes to governmental authorities. Substantially all of these taxes are recorded throughDuring the consolidated balance sheetpredecessor period, USF and presented on a net basis in our consolidated statements of operations. We also collect Universal Service Fund (USF)other surcharges from customers (primarily federal USF) that we have recorded on a gross basis in our consolidated statements of operationsamounted to $83 million for the four months ended April 30, 2021, and included within “Revenue” and “Network related expenses” of $52$58 million and $60 million, and $160 million and $161$165 million for the three and nine months ended September 30, 2017 and 2016, respectively.2020.
In June 2015, weFrontier accepted the FCC’sFCC offer of support to price cap carriers under the Connect America Fund (CAF) Phase II offer of support,program, 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 theprovide long-term support for broadband in high cost of establishing and delivering communications services to certain unserved or underserved areas. We are recognizing theserecognize FCC’s CAF Phase II 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 $17 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 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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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 annually as of December 31, or more frequently as circumstances warrant, to determine whether there are any impairment losses. We test for goodwill impairment at the “operating segment” level, as that term is defined in GAAP.
We determined that we have one operating segment based on a number of factors that our management uses to evaluate and run our business operations, including similarities of customers, products and technology. We tested goodwill for impairment“Other current assets” as of September 30, 2017 as a result of the continued decline2021 and $33 million and $58 million are included in share price of“Other assets” on 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 resultsconsolidated balance sheet 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 2017 in conjunction with our goodwill impairment assessment.2021 and December 31, 2020, respectively.
g)Definite and Indefinite Lived Intangible Assets:
Intangible assets are initially recorded at estimated fair value. Frontier amortizeshistorically amortized its acquired customer lists and certain other finite-lived intangible assets over their estimated useful lives on thean accelerated methodbasis. Upon emergence from bankruptcy, customer relationship intangibles were established for business and wholesale customers. These intangibles are amortized on a straight-line basis over their assigned useful life of sum of the years digits.between 11 and 16 years. Additionally, trademark and tradename assets established upon emergence are amortized on a straight-line basis over 5 years. 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. Upon emergence from bankruptcy, lease asset and liability balances were adjusted to fair value.
(2) Recent Accounting Literature:
RecentRecently Adopted Accounting Pronouncements Not Yet Adopted
Revenue RecognitionFinancial Instrument Credit Losses
In May 2014, theJune 2016, The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers.”2016-13, “Financial Instruments – Credit Losses” (CECL or ASU 2016-13). This standard, along with its related amendments, requires companies to recognize revenue to depictupdate the transfer of promised goods or services to customers in an amount that reflects the consideration to which they expect to be entitled in exchange 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.
The FASB allows two adoption methods under ASC 606. Companies are permitted to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. We currently plan to adopt the standard in the first quarter of 2018, using the
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
“modified retrospective method.” Under that method, we will apply the rules 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 prior to the adoption of the standard.
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, the FASB issued ASU No. 2016 – 02, “Leases (Topic 842).” This standard establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. Upon implementation, lessees will need to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. It will be critical to identify leases embedded in a contract to avoid misstating the lessee’s balance sheet. For incomecurrent financial statement purposes, the FASB retained a dualimpairment model requiring leasesentities to be classified as either operating or finance. Classification will beuse a forward-looking approach based on criteria that are largely similarexpected losses to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar toestimate credit losses on certain types of financial instruments, including trade receivables. For the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. Existing sale-leaseback guidance, including guidance for real estate, is replaced with a new model applicable to both lessees and lessors. The new guidanceCompany, ASU 2016-13 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years using modified retrospective application. Early application is permitted. 2022, with early adoption permitted. Upon emergence from the Chapter 11 Cases, effective as of April 30, 2021, Frontier isadopted the standard as part of its fresh start accounting policy changes. The adoption of CECL did not result in the initial stagesa material impact to our financial position or results of evaluating the potential impact this new standard may have on the consolidated financial statements.operations.
Compensation – Retirement BenefitsRecent Accounting Pronouncements Not Yet Adopted
Reference Rate Reform
In March 2017,2020, the FASB issued ASU No. 2017-07, “Improving2020-04, "Reference Rate Reform (Topic 848): Facilitation of the PresentationEffects of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”Reference Rate Reform on Financial Reporting". This standard was establishedprovides optional expedients, and allows for certain exceptions to improveexisting GAAP, for contract modifications triggered by the presentationexpected market transition of net periodic pension costcertain benchmark interest rates to alternative reference rates. The standard applies to contracts and net periodic postretirement benefit cost by requiringother arrangements that an employer disaggregatereference the service cost componentLondon Interbank Offering Rate (LIBOR) or any other rates ending after December 31, 2022. Frontier is evaluating the impact of periodic benefit costthe adoption of this standard, including optional expedients, on our consolidated financial statements.
(3) Emergence from the other componentsChapter 11 Cases:
On April 14, 2020, the Debtors commenced the Chapter 11 Cases in Bankruptcy Court. The Chapter 11 Cases were jointly administered under the caption In re Frontier Communications Corporation., et al., Case No. 20-22476 (RDD).
On May 15, 2020, the Debtors filed a proposed Joint Plan of net benefit cost.Reorganization and related Disclosure Statement, each of which were amended on June 26, 2020, June 29, 2020 and June 30, 2020. On May 15, 2020, the Debtors also filed a proposed order approving the Disclosure Statement and various plan solicitation materials, including the solicitation and voting procedures, which were revised on June 29, 2020 (including modifications to some of the exhibits). On June 30, 2020, the Bankruptcy Court entered the modified order approving the adequacy of the Disclosure Statement and the solicitation and notice procedures and the forms of voting ballots and notices in connection therewith. The amendmentsorder 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. On August 21, 2020, the Debtors filed the Plan with the Bankruptcy Court. On August 27, 2020, the Bankruptcy Court entered the Order Confirming the Plan (the “Confirmation Order”).
On the Effective Date, the Debtors satisfied all conditions precedent required for consummation of the Plan as set forth in the update also provide explicit guidancePlan, the Plan became effective in accordance with its terms and the Debtors emerged from the Chapter 11 Cases without any need for further action or order of the Bankruptcy Court.
On the Effective Date, pursuant to the terms of the Plan, all of the obligations under Old Frontier’s unsecured senior note indentures were cancelled, and in connection with emergence, Frontier issued 244,401,000 shares of common stock that were transferred to holders of the allowed senior notes claims (as defined by the Plan) and the Restructuring Support Agreement was automatically terminated.
Reorganization items incurred as a result of the Chapter 11 Cases presented separately in the accompanying consolidated statements of operations were as follows:
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| Gain on settlement of liabilities subject to compromise | $ | 5,274 |
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| Reorganization items, net | $ | 4,171 |
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The Company incurred significant costs associated with the reorganization, primarily legal and professional fees. Subsequent to the Petition Date, these costs were expensed as incurred and significantly affected our consolidated results of operations. From the Petition Date to the Effective date, these costs were included in Reorganization items, net on howour consolidated statement of operations. For the periods prior to present the service cost componentPetition date and following the Effective Date, these costs were included in Restructuring costs and other componentscharges on our consolidated statement of net benefit costoperations. Refer to Note 12.
(4) Fresh Start Accounting:
In connection with our emergence from bankruptcy and in accordance with ASC Topic 852, we qualified for and adopted fresh start accounting on the income statementEffective Date. We were required to adopt fresh start accounting because (i) the holders of existing voting shares of the Predecessor received less than 50% of the voting shares of the Successor, and allow only(ii) the service cost componentsreorganization value of net benefit costour assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims.
The adoption of fresh start accounting resulted in a new reporting entity for financial reporting purposes with no beginning retained earnings or deficit. The cancellation of all outstanding shares of Old Frontier common stock on the Effective Date and issuance of new shares of common stock of the Successor caused a related change of control of the Company under ASC 852.
Upon the application of fresh start accounting, Frontier allocated the reorganization value to its individual assets based on their estimated fair values. Each asset and liability existing as of the Effective Date, other than deferred taxes, have been stated at the fair value, and determined at appropriate risk-adjusted interest rates. Deferred taxes were determined in conformity with applicable accounting standards.
Reorganization value represents the fair value of the Successor’s assets before considering liabilities. Our reorganization value is derived from an estimate of enterprise value. Enterprise value represents the estimated fair value of an entity’s long-term debt and shareholders’ equity. In support of the Plan, the enterprise value of the Successor was estimated to be eligible for capitalization.approximately $12.5 billion. The new guidance is effective for annual periods beginning after December 15, 2017,valuation analysis was prepared using financial information and financial projections and applying standard valuation techniques, including interim periods within those annual periods and requires the presentationa risked net asset value analysis.
The Effective Date estimated fair values of certain of the income statement to be applied retrospectively.Company's assets and liabilities differed materially from their recorded values as reflected on the historical balance sheets. As a result of the standard, pension settlement costs and certain benefit costs which are currently included in operating expense, would be reported as other non-operating expense and will no longer be capitalized. This will have a material impact on previously reported operating income and may have a material impact to operating income in future periods, however, the impact to pre-tax income is not expected to be material.application of fresh
start accounting and the effects of the implementation of the Plan, the Company’s consolidated financial statements after April 30, 2021 are not comparable to the Company’s consolidated financial statements as of or prior to that date.
Recently Adopted Accounting Pronouncements
Reorganization Value
Share-Based Payments - ScopeAs set forth in the Plan of Modification Accounting
In May 2017,Reorganization, the FASB issued ASU No. 2017-09, Scopeenterprise value of Modification Accounting which amends the scope of modification accounting for share-based payment arrangements. This standard provides guidanceSuccessor Company was estimated to be between $10.5 billion and $12.5 billion. Based on the typesestimates and assumptions discussed below, the Company estimated the enterprise value to be $12.5 billion as of changesthe Effective Date. The Company based their enterprise value on projections which included higher capital expenditures to enhance the network and would result in higher revenue and Earnings before interest, taxes, depreciation, and amortization (“EBITDA”).
Management, with the assistance of its valuation advisors, estimated the enterprise value (“EV”) of the Successor Company, which was approved by the Bankruptcy Court, using various valuation methodologies, including a Discounted Cash Flow analysis (DCF), the Guideline Public Company Method (GPCM), and the Guideline Transaction Method (GTM). Under the DCF analysis, the enterprise value was estimated by discounting the projections’ unlevered free cash flow by the Weighted Average Cost of Capital (WACC), the Company’s estimated rate of return. A terminal value was estimated by applying a Gordon Growth Model to the terms or conditionsnormalized level of share-based payment awardscash flows in the terminal period. The Gordon Growth Model was based on the WACC and the perpetual growth rate, and the terminal value was added back to whichthe discounted cash flows.
Under the GPCM, the Company’s enterprise value was estimated by performing an entity would be requiredanalysis of publicly traded companies that operate in a similar industry. A range of Enterprise Value / EBITDA (EV/EBITDA) multiples were selected based on the financial and operating attributes of Frontier relative to apply modificationthe comparable publicly traded companies. The selected range of multiples were applied to the Company’s forecasted EBITDA to estimate the enterprise value of the Company.
The GTM approach is similar to the GPCM, in that it relies on EV/EBITDA multiples but rather than of publicly traded companies, the multiples are based on precedent transactions. A range of multiples was derived by analyzing the operating and financial attributes of the acquired companies and the implied EV/EBITDA multiples. This range of multiples were then applied to the forecasted EBITDA of the Company to arrive an enterprise value.
The following table reconciles the enterprise value to the estimated fair value of the Successor common stock as of the Effective Date:
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| ($ in millions and shares in thousands, except per share data) |
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| Enterprise value | $ | 12,500 |
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| Plus: Cash and cash equivalents and restricted cash |
| 940 |
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| Less: Fair value of debt and other liabilities |
| (7,267) |
|
| Less: Pension and other postretirement benefits |
| (1,774) |
|
| Less: Deferred tax liability |
| (291) |
|
| Fair value of Successor stockholders’ equity | $ | 4,108 |
|
| Shares issued upon emergence |
| 244,401 |
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| Per share value | $ | 17 |
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The reconciliation of the Company’s enterprise value to reorganization value as of the Effective Date is as follows:
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| ($ in millions) |
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| Enterprise value | $ | 12,500 |
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| Plus: Cash and cash equivalents and restricted cash |
| 940 |
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| Plus: Current liabilities (excluding debt, finance leases, and non-operating liabilities) |
| 1,179 |
|
| Plus: Long term liabilities (excluding debt, finance leases, deferred tax liability) |
| 307 |
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| Reorganization value | $ | 14,926 |
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The adjustments set forth in the following unaudited Consolidated Balance Sheet reflect the consummation of the transactions contemplated by the Plan (reflected in the column “Reorganization Adjustments”) as well as fair value adjustments as a result of the adoption of fresh start accounting under(reflected in the column “Fresh Start Adjustments”).
The following table reflects the preliminary reorganization and application of ASC 718. Specifically, an entity would852 on our consolidated balance sheet as of April 30, 2021:
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| (Unaudited) |
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| (Unaudited) |
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| ($ in millions) |
| Predecessor |
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| Reorganization |
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| Fresh Start |
|
| Successor |
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| April 30, 2021 |
|
| Adjustments |
|
| Adjustments |
|
| April 30, 2021 |
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| ASSETS |
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| Current assets: |
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| Cash and cash equivalents |
| $ | 2,059 |
|
| $ | (1,169) | (1) |
| $ | - |
|
| $ | 890 |
|
| Accounts receivable, net |
|
| 516 |
|
|
| - |
|
|
| - |
|
|
| 516 |
|
| Contract acquisition costs |
|
| 91 |
|
|
| - |
|
|
| (91) | (8) |
|
| - |
|
| Prepaid expenses |
|
| 92 |
|
|
| - |
|
|
| - |
|
|
| 92 |
|
| Income taxes and other current assets |
|
| 45 |
|
|
| - |
|
|
| (3) | (8) |
|
| 42 |
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| Total current assets |
|
| 2,803 |
|
|
| (1,169) |
|
|
| (94) |
|
|
| 1,540 |
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| Property, plant and equipment, net |
|
| 13,020 |
|
|
| - |
|
|
| (4,473) | (9) |
|
| 8,547 |
|
| Other intangibles, net |
|
| 578 |
|
|
| - |
|
|
| 3,863 | (10) |
|
| 4,441 |
|
| Other assets |
|
| 526 |
|
|
| (8) | (1) |
|
| (120) | (8)(11) |
|
| 398 |
|
| Total assets |
| $ | 16,927 |
|
| $ | (1,177) |
|
| $ | (824) |
|
| $ | 14,926 |
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| LIABILITIES AND EQUITY (DEFICIT) |
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| Current liabilities: |
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|
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| Long-term debt due within one year |
| $ | 5,782 |
|
| $ | (5,767) | (3) |
| $ | - |
|
| $ | 15 |
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| Accounts payable |
|
| 518 |
|
|
| (6) | (2) |
|
| - |
|
|
| 512 |
|
| Advanced billings |
|
| 208 |
|
|
| - |
|
|
| - |
|
|
| 208 |
|
| Accrued other taxes |
|
| 185 |
|
|
| - |
|
|
| - |
|
|
| 185 |
|
| Accrued interest |
|
| 81 |
|
|
| (1) | (2) |
|
| - |
|
|
| 80 |
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| Pension and other postretirement benefits |
|
| 48 |
|
|
| - |
|
|
| - |
|
|
| 48 |
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| Other current liabilities |
|
| 309 |
|
|
| 53 | (2) |
|
| (36) | (11) |
|
| 326 |
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| Total current liabilities |
|
| 7,131 |
|
|
| (5,721) |
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|
| (36) |
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|
| 1,374 |
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|
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|
|
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| Deferred income taxes |
|
| 389 |
|
|
| 70 | (14) |
|
| (168) | (14) |
|
| 291 |
|
| Pension and other postretirement benefits |
|
| 2,163 |
|
|
| - |
|
|
| (437) | (13) |
|
| 1,726 |
|
| Other liabilities |
|
| 440 |
|
|
| - |
|
|
| (28) | (11) |
|
| 412 |
|
| Long-term debt |
|
| - |
|
|
| 6,738 | (3) |
|
| 277 | (12) |
|
| 7,015 |
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| Total liabilities not subject to compromise |
|
| 10,123 |
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|
| 1,087 |
|
|
| (392) |
|
|
| 10,818 |
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| Liabilities subject to compromise |
|
| 11,570 |
|
|
| (11,570) | (7) |
|
| - |
|
|
| - |
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| Total liabilities |
|
| 21,693 |
|
|
| (10,483) |
|
|
| (392) |
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|
| 10,818 |
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| Equity (Deficit): |
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| Shareholders' equity of Frontier: |
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|
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|
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| Successor common stock |
|
| - |
|
|
| 2 | (5) |
|
| - |
|
|
| 2 |
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| Predecessor common stock |
|
| 27 |
|
|
| (27) | (4) |
|
| - |
|
|
| - |
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| Successor additional paid-in capital |
|
| - |
|
|
| 4,106 | (5) |
|
| - |
|
|
| 4,106 |
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| Predecessor additional paid-in capital |
|
| 4,818 |
|
|
| (4,818) | (4) |
|
| - |
|
|
| - |
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| Retained earnings (deficit) |
|
| (8,855) |
|
|
| 10,028 | (6) |
|
| (1,173) | (15) |
|
| - |
|
| Accumulated other comprehensive income (loss), net of tax |
|
| (741) |
|
|
| - |
|
|
| 741 | (16) |
|
| - |
|
| Treasury common stock |
|
| (15) |
|
|
| 15 | (4) |
|
| - |
|
|
| - |
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| Total equity (deficit) |
|
| (4,766) |
|
|
| 9,306 |
|
|
| (432) |
|
|
| 4,108 |
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| Total liabilities and equity (deficit) |
| $ | 16,927 |
|
| $ | (1,177) |
|
| $ | (824) |
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| $ | 14,926 |
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Reorganization Adjustments
In accordance with the Plan of Reorganization, the following adjustments were made:
(1) Reflects net cash payments as of the Effective Date from implementation of the Plan as follows:
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| ($ in millions) |
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| Sources: |
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|
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| Net proceeds from Incremental Exit Term Loan Facility |
| $ | 220 |
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| Release of restricted cash from other assets to cash |
|
| 8 |
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| Total sources |
|
| 228 |
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|
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|
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|
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| Uses: |
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|
|
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| Payments of Excess to Unsecured senior notes holders |
|
| (1,313) |
|
| Payments of pre-petition accounts payable and contract cure payments |
|
| (62) |
|
| Payments of professional fees and other bankruptcy related costs |
|
| (22) |
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| Total uses |
|
| (1,397) |
|
| Net uses of cash |
| $ | (1,169) |
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(2) Reflects the reinstatement of accounts payable and accrued expenses upon emergence, as well as payments made on the Effective Date.
(3) Reflects the conversion of our DIP-to-Exit term loan facility, DIP-to-Exit First Lien Notes, and DIP-to-Exit Second Lien Notes. Also represent the reclassification of the debt from current liabilities during bankruptcy to non-current liabilities based on the maturity of the debt recorded by the Company.
(4) Reflects the cancellation of Predecessor common stock, additional paid in capital and treasury stock.
(5) Reflects the issuance of Successor common stock and additional paid in capital to the unsecured senior note holders.
(6) Reflects the cumulative impact of reorganization adjustments.
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| ($ in millions) |
|
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|
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|
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| Gain on settlement of Liabilities Subject to Compromise | $ | 5,274 |
|
| Cancellation of Predecessor equity |
| 4,754 |
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|
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|
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| Net impact on accumulated deficit | $ | 10,028 |
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(7) As part of the Plan of Reorganization, the Bankruptcy Court approved the settlement of claims reported within Liabilities subject to compromise in the Company’s Consolidated balance sheet at their respective allowed claim amounts.
The table below indicates the disposition of Liabilities subject to compromise:
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| ($ in millions) |
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| Liabilities subject to compromise pre-emergence | $ | 11,570 |
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| Reinstated on the Effective Date: |
|
|
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| Accounts payable |
| (66) |
|
| Other current liabilities |
| (59) |
|
| Less: total liabilities reinstated |
| (125) |
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| Amounts settled per the Plan of Reorganization |
|
|
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| Issuance of take back debt |
| (750) |
|
| Payment for settlement of unsecured senior noteholders |
| (1,313) |
|
| Equity issued at emergence to unsecured senior noteholders |
| (4,108) |
|
| Total amounts settled |
| (6,171) |
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| Gain on settlement of Liabilities Subject to Compromise | $ | 5,274 |
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Fresh Start Adjustments
In accordance with the application of fresh start accounting, the following adjustments were made:
(8)Reflects unamortized deferred commissions paid to acquire new customers that are eliminated upon emergence as this is not apply modification accounting ifa probable future benefit for the Successor. Costs to obtain customers have been reflected as part of intangible assets. Adjustment also reflects the elimination of certain contract assets and contract liabilities.
(9)Property Plant & Equipment – Reflects the decrease in net book value of property and equipment to the estimated fair value as of the Effective Date.
Personal property valued consisted of outside and inside plant network equipment, computers and software, vehicles, office furniture, fixtures and equipment, computers and software, and construction-in-progress. The fair value of our personal property was estimated using the cost approach, while the income approach was considered to assess economic sufficiency to support asset values. As a part of the valuation process, the third-party advisors’ diligence procedures included using internal data to identify and value assets.
Real property valued consisted of land, buildings, and leasehold improvements. The fair value was estimated using the cost approach and sales comparison (market) approach, with consideration of economic sufficiency to support certain asset values.
The following table summarizes the components of property and equipment, net as of April 30, 2021, and the fair value vesting conditions, and classificationas of the awards areEffective Date:
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| Predecessor |
| Fair Value |
|
| Successor |
| ($ in millions) |
| Historical Value |
| Adjustment |
|
| Fair Value |
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| Land |
| $ | 209 |
| $ | 40 |
| $ | 249 |
| Buildings and leasehold improvements |
|
| 2,134 |
|
| (958) |
|
| 1,176 |
| General support |
|
| 1,635 |
|
| (1,462) |
|
| 173 |
| Central office/electronic circuit equipment |
|
| 8,333 |
|
| (7,364) |
|
| 969 |
| Poles |
|
| 1,359 |
|
| (843) |
|
| 516 |
| Cable, fiber and wire |
|
| 11,824 |
|
| (8,755) |
|
| 3,069 |
| Conduit |
|
| 1,611 |
|
| (282) |
|
| 1,329 |
| Construction work in progress |
|
| 1,048 |
|
| 18 |
|
| 1,066 |
| Property, plant and equipment |
| $ | 28,153 |
| $ | (19,606) |
| $ | 8,547 |
| Less: Accumulated depreciation |
|
| (15,133) |
|
| 15,133 |
|
| - |
| Property, plant and equipment, net |
| $ | 13,020 |
| $ | (4,473) |
| $ | 8,547 |
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(10)Reflects 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 including in any interim period. Frontier has adopted this standard during the second quarter 2017, with no impact to our share-based payment awards.
Intangibles – Goodwill
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” This standard was established to simplify how an entity is required to test goodwill for impairment by eliminating Step 2from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value adjustment to recognize trademark, trade name and customer relationship.
For purposes of a reporting unit’s goodwill withestimating the carrying amountfair values of that goodwill. Undercustomer relationships, the amendments in this Update,Company utilized an entity should perform its annual,Income Approach, specifically, the Multi-Period Excess Earnings method, or interim, goodwill impairment test by comparingMPEEM. The MPEEM estimates fair value based on the present value of the incremental after-tax cash flows attributable only to the subject intangible assets after deducting contributory asset charges. The cash flows attributable to the customer relationships were adjusted for contributory asset charges related to the working capital, fixed assets, trade name/trademarks and assembled workforce. The discount rate utilized to present-value the after-tax cash flows was based on the overall weighted cost of capital of the Company as well as the asset specific risks of the intangible assets.
For purposes of estimating the fair value of trademarks and tradenames, an Income approach was used, specifically, the Relief from Royalty Method. The estimated royalty rates were historical third-party transactions regarding the licensing of similar type of assets as well as a reporting unit with its carrying amount. An entity should recognize an impairment charge forreview of historical assumptions used in prior transactions. The selected royalty rates were applied to the amountrevenue generated by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocatedtrademarks and tradenames to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclosedetermine the amount of goodwill allocatedroyalty payments saved as a result of owning these assets. The forecasted cash flows were based on the Company’s projected revenues and the resulting royalty savings were discounted using a rate based on the overall weighted cost of capital of the Company as well as the asset specific risks of the intangible assets.
(11)Reflects the fair value adjustment to each reporting unitthe right of use assets and lease liabilities. Upon application of fresh start accounting, the Company revalued its right-of-use assets and lease liabilities using the incremental borrowing rate applicable to the Company after emergence from bankruptcy and commensurate with its new capital structure. In addition, the Company decreased the right-of-use assets to recognize $4 million related to the unfavorable lease contracts.
(12)Reflects the fair value adjustment to adjust Long-term debt as of the Effective Date. This adjustment is to state the Company's debt at estimated fair values.
(13)Reflects a zero remeasurement of pension and Other Postretirement Benefits related accounts as part of fresh start accounting considerations at emergence.
(14)Reflects the impact of fresh start adjustments on deferred taxes. Frontier purchased the assets, including the stock of subsidiaries, of Frontier Communications Corporation (“Predecessor’s Parent”) at the time of emergence. The Predecessor’s Parent’s federal and state net operating loss carryforwards are expected to have been utilized as a result of the taxable gain realized upon emergence. To the extent not utilized to offset taxable gain, such net operating loss carryforwards are expected to be reduced in accordance with Section 108 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”). As part of the taxable purchase, elections were made under Code section 338(h)(10) to step up the value of assets in certain subsidiaries to fair market value. All other subsidiaries carried over their deferred taxes. The adjustments reflect a $1.5 billion reduction in deferred tax assets for federal and state net operating loss carryforwards, a reduction in valuation allowance and a reduction in deferred tax liabilities.
(15)Reflects the cumulative impact of the fresh start adjustments as discussed above and the elimination of Predecessor accumulated earnings.
(16)Reflects the derecognition of accumulated other comprehensive loss.
(5) Revenue Recognition:
We categorize our products, services and other revenues into the following categories:
Data and Internet services include broadband services for consumer 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 consumer and business customers. Voice services also include the long-distance voice origination and termination services that we provide to our business customers and other carriers;
Video services include revenues generated from services provided directly to consumer customers as linear terrestrial television services, through DISH® satellite TV service, and through partnerships with over-the-top (OTT) video providers. Video services also includes pay per view revenues, video on demand, equipment rentals, and video advertising. The Company has made the strategic decision to limit sales of new traditional TV services, focusing on our broadband products and OTT video options;
Other customer revenue includes switched access revenue, sales of customer premise equipment to our business customers, rents collected for collocation services, and revenue from other services and fees. Switched access revenue includes revenues derived from allowing other carriers to use our network to originate and/or negative carrying amountterminate 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; and
Subsidy and other regulatory revenue includes revenues generated from cost subsidies from state and federal authorities, including the Connect America Fund Phase II.
The following tables provide a summary of net assets. An entity still hasrevenues, by category. Prior year revenues in the optionfollowing tables include revenues for the Northwest Operations for the three and nine months ended September 30, 2020 (prior to performits disposal):
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| Successor |
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| Predecessor |
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| For the three months |
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| For the three months |
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| ended September 30, |
|
| ended September 30, |
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| ($ in millions) | 2021 |
|
| 2020 |
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| Data and Internet services | $ | 834 |
|
| $ | 838 |
|
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|
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| Voice services |
| 411 |
|
|
| 500 |
|
|
|
|
| Video services |
| 149 |
|
|
| 186 |
|
|
|
|
| Other |
| 99 |
|
|
| 103 |
|
|
|
|
| Revenue from contracts with customers (1) |
| 1,493 |
|
|
| 1,627 |
|
|
|
|
| Subsidy and other revenue (2) |
| 83 |
|
|
| 99 |
|
|
|
|
| Total revenue | $ | 1,576 |
|
| $ | 1,726 |
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| Successor |
|
| Predecessor |
|
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| For the three months |
|
| For the three months |
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|
| ended September 30, |
|
| ended September 30, |
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|
|
| ($ in millions) | 2021 |
|
| 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consumer (3) | $ | 800 |
|
| $ | 865 |
|
|
|
|
| Business and wholesale (3) |
| 693 |
|
|
| 762 |
|
|
|
|
| Revenue from contracts with customers (1) |
| 1,493 |
|
|
| 1,627 |
|
|
|
|
| Subsidy and other revenue (2) |
| 83 |
|
|
| 99 |
|
|
|
|
| Total revenue | $ | 1,576 |
|
| $ | 1,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Successor |
|
| Predecessor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the five months |
|
| For the four months |
| For the nine months |
|
|
| ended September 30, |
|
| ended April 30, |
| ended September 30, |
|
| ($ in millions) | 2021 |
|
| 2021 |
| 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Data and Internet services | $ | 1,390 |
|
| $ | 1,125 |
| $ | 2,644 |
|
| Voice services |
| 694 |
|
|
| 647 |
|
| 1,595 |
|
| Video services |
| 254 |
|
|
| 223 |
|
| 608 |
|
| Other |
| 161 |
|
|
| 125 |
|
| 328 |
|
| Revenue from contracts with customers (1) |
| 2,499 |
|
|
| 2,120 |
|
| 5,175 |
|
| Subsidy and other revenue (2) |
| 138 |
|
|
| 111 |
|
| 285 |
|
| Total revenue | $ | 2,637 |
|
| $ | 2,231 |
| $ | 5,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Successor |
|
| Predecessor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the five months |
|
| For the four months |
| For the nine months |
|
|
| ended September 30, |
|
| ended April 30, |
| ended September 30, |
|
| ($ in millions) | 2021 |
|
| 2021 |
| 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Consumer (3) | $ | 1,343 |
|
| $ | 1,133 |
| $ | 2,746 |
|
| Business and wholesale (3) |
| 1,156 |
|
|
| 987 |
|
| 2,429 |
|
| Revenue from contracts with customers (1) |
| 2,499 |
|
|
| 2,120 |
|
| 5,175 |
|
| Subsidy and other revenue (2) |
| 138 |
|
|
| 111 |
|
| 285 |
|
| Total revenue | $ | 2,637 |
|
| $ | 2,231 |
| $ | 5,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Lease revenue included in Revenue from contracts with customers was $16 million for the qualitative assessmentthree months ended September 30, 2021, $26 million for a reporting unitthe five months ended September 30, 2021, $21 million for the four months ended April 30, 2021, and $16 million and $50 million for the three and nine months ended September 30, 2020, respectively.
(2)Includes $15 million and $25 million in transition services revenue in connection with the divestiture of the Northwest Operations for the three and nine months ended September 30, 2020, respectively.
(3)Due to determine if the quantitative impairment test is necessary. Frontier early adopted this standardchanges in methodology during the second quarter of 2017 in conjunction with our goodwill impairment assessment. See Note 1 and Note 6 for further discussion. 2021, historical periods have been updated to reflect the comparable amounts.
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 ASUfollowing is parta summary of the FASB’s ongoing simplification initiative, which is designed to reduce costchanges in the contract assets 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, 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 $10 million of taxes paid on behalf of employees related to shares withheld from “Cash flows provided from (used by) operations” to “Cash flows used by financing activities” in accordance with the new standard. contract liabilities:
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|
|
| Contract Assets |
| Contract Liabilities |
|
| ($ in millions) |
| Current |
| Noncurrent |
| Current |
| Noncurrent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at December 31, 2020 (Predecessor) |
| $ | 6 |
| $ | 9 |
| $ | 58 |
| $ | 20 |
|
| Revenue recognized included |
|
|
|
|
|
|
|
|
|
|
|
|
|
| in opening contract balance |
|
| (4) |
|
| - |
|
| (23) |
|
| (3) |
|
| Cash received, excluding amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
| recognized as revenue |
|
| - |
|
| - |
|
| 22 |
|
| 2 |
|
| Balance at April 30, 2021 (Predecessor) |
| $ | 2 |
| $ | 9 |
| $ | 57 |
| $ | 19 |
|
| Fresh start accounting adjustments |
|
| (2) |
|
| (9) |
|
| (42) |
|
| (18) |
|
| Balance at April 30, 2021 (Predecessor) |
| $ | - |
| $ | - |
| $ | 15 |
| $ | 1 |
|
|
|
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|
|
|
|
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|
|
|
| Balance at April 30, 2021 (Successor) |
| $ | - |
| $ | - |
| $ | 15 |
| $ | 1 |
|
| Revenue recognized included |
|
|
|
|
|
|
|
|
|
|
|
|
|
| in opening contract balance |
|
| - |
|
| - |
|
| (13) |
|
| (1) |
|
| Credits granted, excluding amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
| recognized as revenue |
|
| - |
|
| - |
|
| 17 |
|
| 9 |
|
| Reclassified between current |
|
|
|
|
|
|
|
|
|
|
|
|
|
| and concurrent |
|
| - |
|
| - |
|
| 1 |
|
| (1) |
|
| Balance at September 30, 2021 (Successor) |
| $ | - |
| $ | - |
| $ | 20 |
| $ | 8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contract Assets |
| Contract Liabilities |
| ($ in millions) |
| Current |
| Noncurrent |
| Current |
| Noncurrent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at December 31, 2019 (Predecessor) |
| $ | 37 |
| $ | 8 |
| $ | 41 |
| $ | 21 |
| Revenue recognized included |
|
|
|
|
|
|
|
|
|
|
|
|
| in opening contract balance |
|
| (27) |
|
| - |
|
| (47) |
|
| (10) |
| Cash received, excluding amounts |
|
|
|
|
|
|
|
|
|
|
|
|
| recognized as revenue |
|
| - |
|
| - |
|
| 64 |
|
| 9 |
| Credits granted, excluding amounts |
|
|
|
|
|
|
|
|
|
|
|
|
| recognized as revenue |
|
| 3 |
|
| - |
|
| - |
|
| - |
| Reclassified between current |
|
|
|
|
|
|
|
|
|
|
|
|
| and concurrent |
|
| - |
|
| - |
|
| 1 |
|
| (1) |
| Balance at September 30, 2020 (Predecessor) |
| $ | 13 |
| $ | 8 |
| $ | 59 |
| $ | 19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) Acquisitions:The unsatisfied obligations for retail customers consist of amounts in advance billings, which are expected to be earned within the following monthly billing cycle. Unsatisfied obligations for wholesale customers are based on a point-in-time calculation and determined by the number of circuits provided and the contractual price. These wholesale customer obligations change from period to period based on new circuits added as well as circuits that are terminated.
The CTF Acquisition
On April 1, 2016, Frontier acquiredfollowing table includes estimated revenue expected to be recognized in the wireline operations of Verizon Communications, Inc. in California, Texas and Florida (the CTF Operations) for a purchase price of $10,540 million in cash and assumed debt (the CTF Acquisition), pursuantfuture related to performance obligations that are unsatisfied (or partially unsatisfied) at the February 5, 2015 Securities Purchase Agreement, as amended. The final allocationend 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 $9,871 million.reporting period:
| | | |
| | | |
($ in millions)
| | |
| | | |
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 |
| | | |
|
|
|
|
|
|
|
|
| Successor |
|
| ($ in millions) |
| Revenue from contracts with customers |
|
| 2021 (remaining three months) |
| $ | 385 |
|
| 2022 |
|
| 512 |
|
| 2023 |
|
| 323 |
|
| 2024 |
|
| 152 |
|
| 2025 |
|
| 81 |
|
| Thereafter |
|
| 121 |
|
| Total |
| $ | 1,574 |
|
|
|
|
|
|
|
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 price 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, and a $98 million increase in Goodwill.
The total consideration exceeded the net estimated fair value of the assets acquired and liabilities assumed by $2,606 million, which we recognized as goodwill. This goodwill is attributable to strategic benefits, including enhanced financial and operational scale, market diversification and leveraged combined networks that we expect to realize. This amount of goodwill associated with the CTF Acquisition will be deductible for income tax purposes.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The following unaudited pro forma financial information presents the combined results of operations of Frontier and the CTF Operations as if the CTF Acquisition had occurred as of January 1, 2016. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the CTF Acquisition been completed as of January 1, 2016. In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the future financial position or operating results of Frontier. The unaudited pro forma financial information excludes acquisition and integration costs and does not give effect to any estimated and potential cost savings or other operating efficiencies that may result from the CTF Acquisition.
| | | | | |
| | | | | |
| | | | | |
| | (Unaudited)
|
| | For the nine months ended
|
($ 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 expenses that are incremental and directly related to the acquisition, which were incurred to integrate the network and information technology platforms. Integration costs also include costs to achieve synergies and operational efficiencies directly associated with the acquisition.
Frontier incurred operating expenses related to the CTF Acquisition as follows:
| | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
($ in millions) | | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | | | | | |
Acquisition costs | | $ | - | | $ | - | | $ | - | | $ | 23 |
Integration costs | | | 1 | | | 122 | | | 15 | | | 364 |
Total acquisition and | | | | | | | | | | | | |
integration costs | | $ | 1 | | $ | 122 | | $ | 15 | | $ | 387 |
| | | | | | | | | | | | |
We also invested $19 million and $99 million in capital expenditures related to the CTF Acquisition during the nine months ended September 30, 2017 and 2016, respectively.
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(4)(6) Accounts Receivable:
The components of accounts receivable, net are as follows:
| | | | | | |
| | | | | | |
($ 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Successor |
|
| Predecessor |
|
|
|
|
|
|
|
|
|
|
|
| ($ in millions) |
| September 30, 2021 |
|
| December 31, 2020 |
|
| |
|
|
|
|
|
|
|
|
| Retail and wholesale |
| $ | 424 |
|
| $ | 608 |
|
| Other |
|
| 77 |
|
|
| 75 |
|
| Less: Allowance for credit losses |
|
| (49) |
|
|
| (130) |
|
| Accounts receivable, net |
| $ | 452 |
|
| $ | 553 |
|
|
|
|
|
|
|
|
|
|
|
