UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172022
or
☐¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to__________
Commission file number: 001-11001
FRONTIER COMMUNICATIONS CORPORATIONPARENT, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
401 Merritt 7 | ||
Norwalk, Connecticut | 06851 | |
(Address of principal executive offices) | (Zip Code) | |
(203) 614-5600
(Registrant's telephone number, including area code)code: (203) 614-5600
N/ASecurities registered pursuant to Section 12(b) of the Act:
(Former name, former address and former fiscal year, if changed since last report)
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common Stock, par value $0.01 per share | FYBR | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X x No ___¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X x No ___¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☒x Accelerated filer ☐¨ Non-accelerated filer ☐¨
Smaller reporting company ☐¨ Emerging growth company ☐¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act☐¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No X x
The number of shares outstanding of the registrant’s Common Stock as of October 27, 2017August 1, 2022 was 78,458,000.244,985,000.
FRONTIER COMMUNICATIONS CORPORATIONPARENT, INC. AND SUBSIDIARIES
Table of Contents
Index
Page | |
Part I. Financial Information (Unaudited) | |
Item 1. Financial Statements | |
Consolidated Balance Sheets as of | 2 |
3 | |
4 | |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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Part II. Other Information | |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
($ in millions and shares in thousands, except for per-share amounts)
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| (Unaudited) |
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| September 30, 2017 |
| December 31, 2016 | ||
ASSETS |
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Current assets: |
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|
Cash and cash equivalents |
| $ | 286 |
| $ | 522 |
Accounts receivable, less allowances of $69 and $131, respectively |
|
| 780 |
|
| 938 |
Prepaid expenses |
|
| 98 |
|
| 88 |
Income taxes and other current assets |
|
| 98 |
|
| 108 |
Total current assets |
|
| 1,262 |
|
| 1,656 |
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|
Property, plant and equipment, net |
|
| 14,375 |
|
| 14,902 |
Goodwill |
|
| 9,102 |
|
| 9,674 |
Other intangibles, net |
|
| 2,223 |
|
| 2,662 |
Other assets |
|
| 114 |
|
| 119 |
Total assets |
| $ | 27,076 |
| $ | 29,013 |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Long-term debt due within one year |
| $ | 166 |
| $ | 363 |
Accounts payable |
|
| 509 |
|
| 698 |
Advanced billings |
|
| 277 |
|
| 301 |
Accrued content costs |
|
| 130 |
|
| 164 |
Accrued other taxes |
|
| 177 |
|
| 134 |
Accrued interest |
|
| 205 |
|
| 437 |
Pension and other postretirement benefits |
|
| 23 |
|
| 23 |
Other current liabilities |
|
| 306 |
|
| 324 |
Total current liabilities |
|
| 1,793 |
|
| 2,444 |
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Deferred income taxes |
|
| 2,253 |
|
| 2,516 |
Pension and other postretirement benefits |
|
| 1,647 |
|
| 1,602 |
Other liabilities |
|
| 369 |
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| 372 |
Long-term debt |
|
| 17,604 |
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| 17,560 |
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Equity: |
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Preferred stock, $0.01 par value (50,000 authorized shares, |
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11.125%, Series A, 19,250 shares issued and outstanding) |
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| - |
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| - |
Common stock, $0.25 par value (175,000 authorized shares, |
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79,532 issued and 78,462 and 78,170 outstanding, |
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at September 30, 2017 and December 31, 2016, respectively) |
|
| 20 |
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| 20 |
Additional paid-in capital |
|
| 5,124 |
|
| 5,561 |
Accumulated deficit |
|
| (1,234) |
|
| (460) |
Accumulated other comprehensive loss, net of tax |
|
| (349) |
|
| (387) |
Treasury common stock |
|
| (151) |
|
| (215) |
Total equity |
|
| 3,410 |
|
| 4,519 |
Total liabilities and equity |
| $ | 27,076 |
| $ | 29,013 |
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(Unaudited) | ||||||||
June 30, 2022 | December 31, 2021 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 678 | $ | 2,127 | ||||
Short-term investments | 2,300 | - | ||||||
Accounts receivable, less allowances of $45 and $57, respectively | 420 | 458 | ||||||
Prepaid expenses | 79 | 73 | ||||||
Income taxes and other current assets | 25 | 30 | ||||||
Total current assets | 3,502 | 2,688 | ||||||
Property, plant and equipment, net | 10,108 | 9,199 | ||||||
Other intangibles, net | 4,067 | 4,227 | ||||||
Other assets | 358 | 367 | ||||||
Total assets | $ | 18,035 | $ | 16,481 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Long-term debt due within one year | $ | 15 | $ | 15 | ||||
Accounts payable | 818 | 535 | ||||||
Advanced billings | 199 | 197 | ||||||
Accrued other taxes | 174 | 183 | ||||||
Accrued interest | 120 | 76 | ||||||
Pension and other postretirement benefits | 46 | 46 | ||||||
Other current liabilities | 407 | 399 | ||||||
Total current liabilities | 1,779 | 1,451 | ||||||
Deferred income taxes | 481 | 387 | ||||||
Pension and other postretirement benefits | 1,427 | 1,672 | ||||||
Other liabilities | 422 | 403 | ||||||
Long-term debt | 9,130 | 7,968 | ||||||
Total liabilities | 13,239 | 11,881 | ||||||
Equity: | ||||||||
Common stock, $0.01 par value (1,750,000 authorized shares, 244,969 | ||||||||
and 244,416 shares issued and outstanding at June 30, 2022 and | ||||||||
December 31, 2021, respectively) | 2 | 2 | ||||||
Additional paid-in capital | 4,152 | 4,124 | ||||||
Retained earnings | 580 | 414 | ||||||
Accumulated other comprehensive income, net of tax | 62 | 60 | ||||||
Total equity | 4,796 | 4,600 | ||||||
Total liabilities and equity | $ | 18,035 | $ | 16,481 | ||||
The accompanying Notes are an integral part of these unaudited Consolidated Financial Statements.
PART I. FINANCIAL INFORMATION (Continued)
CONSOLIDATED STATEMENTS OF OPERATIONSINCOME
FOR THE THREE ($ in millions and shares in thousands, except for per-share amounts)
(Unaudited)
Successor | Successor | Predecessor | ||||||||||
For the three months | For the two months | For the one month | ||||||||||
ended June 30, | ended June 30, | ended April 30, | ||||||||||
2022 | 2021 | 2021 | ||||||||||
Revenue | $ | 1,459 | $ | 1,061 | $ | 555 | ||||||
Operating expenses: | ||||||||||||
Cost of service | 546 | 396 | 210 | |||||||||
Selling, general, and administrative expenses | 427 | 269 | 129 | |||||||||
Depreciation and amortization | 290 | 179 | 119 | |||||||||
Restructuring costs and other charges | 30 | 11 | 5 | |||||||||
Total operating expenses | 1,293 | 855 | 463 | |||||||||
Operating income | 166 | 206 | 92 | |||||||||
Investment and other income (loss), net | 122 | (2) | (1) | |||||||||
Reorganization items, net | - | - | 4,196 | |||||||||
Interest expense (See Note 8) | (118) | (62) | (29) | |||||||||
Income before income taxes | 170 | 142 | 4,258 | |||||||||
Income tax expense (benefit) | 69 | 43 | (223) | |||||||||
Net income | $ | 101 | $ | 99 | $ | 4,481 | ||||||
Basic net earnings per share | ||||||||||||
attributable to Frontier common shareholders | $ | 0.41 | $ | 0.41 | $ | 42.81 | ||||||
Diluted net earnings per share | ||||||||||||
attributable to Frontier common shareholders | $ | 0.41 | $ | 0.41 | $ | 42.68 | ||||||
Total weighted average shares outstanding - basic | 244,723 | 244,401 | 104,662 | |||||||||
Total weighted average shares outstanding - diluted | 244,723 | 244,401 | 105,002 | |||||||||
The accompanying Notes are an integral part of these unaudited Consolidated Financial Statements.
PART I. FINANCIAL INFORMATION (Continued)
CONSOLIDATED STATEMENTS OF INCOME
($ in millions and shares in thousands, except for per-share amounts)
(Unaudited)
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| For the three months ended |
| For the nine months ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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Revenue |
| $ | 2,251 |
| $ | 2,524 |
| $ | 6,911 |
| $ | 6,487 |
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Operating expenses: |
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Network access expenses |
|
| 390 |
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| 440 |
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| 1,209 |
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| 1,053 |
Network related expenses |
|
| 497 |
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| 527 |
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| 1,468 |
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| 1,399 |
Selling, general and administrative expenses |
|
| 486 |
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| 582 |
|
| 1,561 |
|
| 1,535 |
Depreciation and amortization |
|
| 539 |
|
| 578 |
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| 1,670 |
|
| 1,469 |
Goodwill impairment |
|
| - |
|
| - |
|
| 670 |
|
| - |
Acquisition and integration costs |
|
| 1 |
|
| 122 |
|
| 15 |
|
| 387 |
Pension settlement costs |
|
| 15 |
|
| - |
|
| 77 |
|
| - |
Restructuring costs and other charges |
|
| 14 |
|
| 11 |
|
| 55 |
|
| 11 |
Total operating expenses |
|
| 1,942 |
|
| 2,260 |
|
| 6,725 |
|
| 5,854 |
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Operating income |
|
| 309 |
|
| 264 |
|
| 186 |
|
| 633 |
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Investment and other income, net |
|
| 2 |
|
| 3 |
|
| 5 |
|
| 14 |
Loss (gain) on extinguishment of debt and debt exchanges |
|
| (1) |
|
| 7 |
|
| 89 |
|
| 7 |
Interest expense |
|
| 381 |
|
| 386 |
|
| 1,157 |
|
| 1,145 |
|
|
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|
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Loss before income taxes |
|
| (69) |
|
| (126) |
|
| (1,055) |
|
| (505) |
Income tax benefit |
|
| (31) |
|
| (46) |
|
| (280) |
|
| (212) |
|
|
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Net loss |
|
| (38) |
|
| (80) |
|
| (775) |
|
| (293) |
Less: Dividends on preferred stock |
|
| 54 |
|
| 54 |
|
| 161 |
|
| 161 |
Net loss attributable to |
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Frontier common shareholders |
| $ | (92) |
| $ | (134) |
| $ | (936) |
| $ | (454) |
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Basic net loss per share |
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attributable to Frontier common shareholders |
| $ | (1.19) |
| $ | (1.73) |
| $ | (12.06) |
| $ | (5.87) |
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Diluted net loss per share |
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attributable to Frontier common shareholders |
| $ | (1.19) |
| $ | (1.73) |
| $ | (12.07) |
| $ | (5.87) |
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Total weighted average shares outstanding - basic |
|
| 77,797 |
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| 77,612 |
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| 77,714 |
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| 77,608 |
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Total weighted average shares outstanding - diluted |
|
| 77,797 |
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| 77,612 |
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| 77,875 |
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| 77,608 |
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Successor | Successor | Predecessor | |||||||||
For the six months | For the two months | For the four months | |||||||||
ended June 30, | ended June 30, | ended April 30, | |||||||||
2022 | 2021 | 2021 | |||||||||
Revenue | $ | 2,906 | $ | 1,061 | $ | 2,231 | |||||
Operating expenses: | |||||||||||
Cost of service | 1,099 | 396 | 830 | ||||||||
Selling, general, and administrative expenses | 862 | 269 | 537 | ||||||||
Depreciation and amortization | 574 | 179 | 506 | ||||||||
Restructuring costs and other charges | 84 | 11 | 7 | ||||||||
Total operating expenses | 2,619 | 855 | 1,880 | ||||||||
Operating income | 287 | 206 | 351 | ||||||||
Investment and other income (loss), net | 199 | (2) | 1 | ||||||||
Reorganization items, net | - | - | 4,171 | ||||||||
Interest expense (See Note 8) | (221) | (62) | (118) | ||||||||
Income before income taxes | 265 | 142 | 4,405 | ||||||||
Income tax expense (benefit) | 99 | 43 | (136) | ||||||||
Net income | $ | 166 | $ | 99 | $ | 4,541 | |||||
Basic net earnings per share | |||||||||||
attributable to Frontier common shareholders | $ | 0.68 | $ | 0.41 | $ | 43.42 | |||||
Diluted net earnings per share | |||||||||||
attributable to Frontier common shareholders | $ | 0.68 | $ | 0.41 | $ | 43.28 | |||||
Total weighted average shares outstanding - basic | 244,592 | 244,401 | 104,584 | ||||||||
Total weighted average shares outstanding - diluted | 244,831 | 244,401 | 104,924 |
The accompanying Notes are an integral part of these unaudited Consolidated Financial Statements.
PART I. FINANCIAL INFORMATION (Continued)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSINCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
($ ($ in millions)
(Unaudited)
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| For the three months ended |
| For the nine months ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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Net loss |
| $ | (38) |
| $ | (80) |
| $ | (775) |
| $ | (293) |
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Pension settlement costs, net of tax |
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| 12 |
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| - |
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| 48 |
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| - |
Other comprehensive income (loss), net of tax |
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| (32) |
|
| (61) |
|
| (10) |
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| (50) |
Net current-period other comprehensive income (loss) |
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| (20) |
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| (61) |
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| 38 |
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| (50) |
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Comprehensive loss |
| $ | (58) |
| $ | (141) |
| $ | (737) |
| $ | (343) |
Successor | Successor | Predecessor | ||||||||||
For the three months | For the two months | For the one month | ||||||||||
ended June 30, | ended June 30, | ended April 30, | ||||||||||
2022 | 2021 | 2021 | ||||||||||
Net income | $ | 101 | $ | 99 | $ | 4,481 | ||||||
Other comprehensive income, net of tax | 4 | 41 | 348 | |||||||||
Comprehensive income | $ | 105 | $ | 140 | $ | 4,829 | ||||||
Successor | Successor | Predecessor | ||||||||||
For the six months | For the two months | For the four months | ||||||||||
ended June 30, | ended June 30, | ended April 30, | ||||||||||
2022 | 2021 | 2021 | ||||||||||
Net income | $ | 166 | $ | 99 | $ | 4,541 | ||||||
Other comprehensive income, net of tax | 2 | 41 | 359 | |||||||||
Comprehensive income | $ | 168 | $ | 140 | $ | 4,900 | ||||||
The accompanying Notes are an integral part of these unaudited Consolidated Financial Statements.
PART I. FINANCIAL INFORMATION (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
($ ($ in millions and shares in thousands)
(Unaudited)
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| For the nine months ended September 30, 2017 | |||||||||||||||||||||||||
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| Accumulated |
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| |
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| Additional |
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| Other |
| Treasury |
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| Preferred Stock |
| Common Stock |
| Paid-In |
| Accumulated |
| Comprehensive |
| Common Stock |
| Total | |||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Loss |
| Shares |
| Amount |
| Equity | |||||||
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Balance January 1, 2017 (See Note 1) |
| 19,250 |
| $ | - |
| 79,532 |
| $ | 20 |
| $ | 5,561 |
| $ | (460) |
| $ | (387) |
| (1,362) |
| $ | (215) |
| $ | 4,519 |
Cumulative-effect adjustment from adoption of ASU 2016-09 |
| - |
|
| - |
| - |
|
| - |
|
| - |
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| 1 |
|
| - |
| - |
|
| - |
|
| 1 |
Stock plans |
| - |
|
| - |
| - |
|
| - |
|
| (57) |
|
| - |
|
| - |
| 292 |
|
| 64 |
|
| 7 |
Dividends on common stock |
| - |
|
| - |
| - |
|
| - |
|
| (219) |
|
| - |
|
| - |
| - |
|
| - |
|
| (219) |
Dividends on preferred stock |
| - |
|
| - |
| - |
|
| - |
|
| (161) |
|
| - |
|
| - |
| - |
|
| - |
|
| (161) |
Net loss |
| - |
|
| - |
| - |
|
| - |
|
| - |
|
| (775) |
|
| - |
| - |
|
| - |
|
| (775) |
Pension settlement costs, net of tax |
| - |
|
| - |
| - |
|
| - |
|
| - |
|
| - |
|
| 48 |
| - |
|
| - |
|
| 48 |
Other comprehensive income, net of tax |
| - |
|
| - |
| - |
|
| - |
|
| - |
|
| - |
|
| (10) |
| - |
|
| - |
|
| (10) |
Balance September 30, 2017 |
| 19,250 |
| $ | - |
| 79,532 |
| $ | 20 |
| $ | 5,124 |
| $ | (1,234) |
| $ | (349) |
| (1,070) |
| $ | (151) |
| $ | 3,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2022 (Successor) | ||||||||||||||||||
Accumulated | ||||||||||||||||||
Additional | Other | |||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | Total | ||||||||||||||
Shares | Amount | Capital | Earnings | Income | Equity | |||||||||||||
Balance at January 1, 2022 | 244,416 | $ | 2 | $ | 4,124 | $ | 414 | $ | 60 | $ | 4,600 | |||||||
Stock plans | 60 | - | 15 | - | - | 15 | ||||||||||||
Net income | - | - | - | 65 | - | 65 | ||||||||||||
Other comprehensive | ||||||||||||||||||
loss, net of tax | - | - | - | - | (2) | (2) | ||||||||||||
Balance at March 31, 2022 | 244,476 | $ | 2 | $ | 4,139 | $ | 479 | $ | 58 | $ | 4,678 | |||||||
Stock plans | 493 | - | 13 | - | - | 13 | ||||||||||||
Net income | - | - | - | 101 | - | 101 | ||||||||||||
Other comprehensive | ||||||||||||||||||
income, net of tax | - | - | - | - | 4 | 4 | ||||||||||||
Balance at June 30, 2022 | 244,969 | $ | 2 | $ | 4,152 | $ | 580 | $ | 62 | $ | 4,796 | |||||||
For the six months ended June 30, 2021 | |||||||||||||||||||||||
Accumulated | |||||||||||||||||||||||
Additional | Other | Treasury | Total | ||||||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive | Common Stock | Equity | ||||||||||||||||||
Shares | Amount | Capital | Deficit | Income (Loss) | Shares | Amount | (Deficit) | ||||||||||||||||
Balance at January 1, 2021 | 106,025 | $ | 27 | $ | 4,817 | $ | (8,975) | $ | (755) | (1,232) | $ | (14) | $ | (4,900) | |||||||||
Stock plans | - | - | - | - | - | (122) | (1) | (1) | |||||||||||||||
Net income | - | - | - | 60 | - | - | - | 60 | |||||||||||||||
Other comprehensive | |||||||||||||||||||||||
income, net of tax | - | - | - | - | 11 | - | - | 11 | |||||||||||||||
Balance at March 31, 2021 | 106,025 | $ | 27 | $ | 4,817 | $ | (8,915) | $ | (744) | (1,354) | $ | (15) | $ | (4,830) | |||||||||
Stock plans | - | - | 1 | - | - | - | - | 1 | |||||||||||||||
Net income | - | - | - | 4,481 | - | - | - | 4,481 | |||||||||||||||
Other comprehensive | |||||||||||||||||||||||
income, net of tax | - | - | - | - | 348 | - | - | 348 | |||||||||||||||
Cancellation of | (106,025) | (27) | (4,818) | 4,434 | 396 | 1,354 | 15 | - | |||||||||||||||
Issuance of Successor | 244,401 | 2 | 4,106 | - | - | - | - | 4,108 | |||||||||||||||
Balance at April 30, 2021 | 244,401 | $ | 2 | $ | 4,106 | $ | - | $ | - | - | $ | - | $ | 4,108 | |||||||||
Balance at April 30, 2021 | 244,401 | $ | 2 | $ | 4,106 | $ | - | $ | - | - | $ | - | $ | 4,108 | |||||||||
Stock plans | - | - | - | - | - | - | - | - | |||||||||||||||
Net income | - | - | - | 99 | - | - | - | 99 | |||||||||||||||
Other comprehensive | |||||||||||||||||||||||
income, net of tax | - | - | - | - | 41 | - | - | 41 | |||||||||||||||
Balance at June 30, 2021 | 244,401 | $ | 2 | $ | 4,106 | $ | 99 | $ | 41 | - | $ | - | $ | 4,248 |
The accompanying Notes are an integral part of these unaudited Consolidated Financial Statements.
PART I. FINANCIAL INFORMATION (Continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
($ in millions)
(Unaudited)
Successor | Successor | Predecessor | ||||||||||
For the six months ended June 30, | For the two months ended June 30, | For the four months ended April 30, | ||||||||||
2022 | 2021 | 2021 | ||||||||||
Cash flows provided from (used by) operating activities: | ||||||||||||
Net Income | $ | 166 | $ | 99 | $ | 4,541 | ||||||
Adjustments to reconcile net income to net cash provided | ||||||||||||
Depreciation and amortization | 574 | 179 | 506 | |||||||||
Stock-based compensation expense | 35 | - | (1) | |||||||||
Non-cash reorganization items, net | - | - | (5,467) | |||||||||
Lease Impairment | 44 | - | - | |||||||||
Bad debt expense | 14 | 6 | - | |||||||||
Other adjustments | (13) | (5) | 1 | |||||||||
Deferred income taxes | 93 | 37 | (148) | |||||||||
Change in accounts receivable | 24 | 6 | 36 | |||||||||
Change in pension and other post retirement liabilities | (242) | 12 | (12) | |||||||||
Change in accounts payable and other liabilities | 77 | 39 | (156) | |||||||||
Change in prepaid expenses, income taxes, and | (15) | 7 | 46 | |||||||||
Net cash provided from (used by) operating activities | 757 | 380 | (654) | |||||||||
Cash flows provided from (used by) investing activities: | ||||||||||||
Capital expenditures | (1,088) | (269) | (500) | |||||||||
Proceeds on sale of assets | 1 | - | 9 | |||||||||
Purchase of short-term investments | (2,600) | - | - | |||||||||
Sale of short-term investments | 300 | - | - | |||||||||
Other | 2 | - | 1 | |||||||||
Net cash used by investing activities | (3,385) | (269) | (490) | |||||||||
Cash flows provided from (used by) financing activities: | ||||||||||||
Long-term debt principal payments | (7) | (4) | (1) | |||||||||
Proceeds from long-term debt borrowings | 1,200 | - | 225 | |||||||||
Financing costs paid | (17) | - | (4) | |||||||||
Finance lease obligation payments | (10) | (4) | (7) | |||||||||
Taxes paid on behalf of employees for shares withheld | (7) | - | - | |||||||||
Other | (1) | 1 | (16) | |||||||||
Net cash provided from (used by) financing activities | 1,158 | (7) | 197 | |||||||||
Increase (decrease) in cash, cash equivalents, and | (1,470) | 104 | (947) | |||||||||
Cash, cash equivalents, and restricted cash at January 1, | 2,178 | 940 | 1,887 | |||||||||
Cash, cash equivalents, and restricted cash at June 30, | $ | 708 | $ | 1,044 | $ | 940 | ||||||
Supplemental cash flow information: | ||||||||||||
Cash paid during the period for: | ||||||||||||
Interest | $ | 198 | $ | 84 | $ | 84 | ||||||
Income tax payments, net | $ | 9 | $ | 24 | $ | 9 | ||||||
Reorganization items, net | $ | - | $ | - | $ | 1,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 | ||
|
|
|
|
|
|
|
Cash flows provided from (used by) operating activities: |
|
|
|
|
|
|
Net loss |
| $ | (775) |
| $ | (293) |
Adjustments to reconcile net loss to net cash provided from (used by) |
|
|
|
|
|
|
operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
| 1,670 |
|
| 1,469 |
Loss on extinguishment of debt and debt exchanges |
|
| 89 |
|
| 7 |
Pension settlement costs |
|
| 77 |
|
| - |
Pension/OPEB costs |
|
| 22 |
|
| 59 |
Stock-based compensation expense |
|
| 10 |
|
| 21 |
Amortization of deferred financing costs |
|
| 26 |
|
| 38 |
Other adjustments |
|
| (11) |
|
| - |
Deferred income taxes |
|
| (286) |
|
| (163) |
Goodwill impairment |
|
| 670 |
|
| - |
Change in accounts receivable |
|
| 161 |
|
| (56) |
Change in accounts payable and other liabilities |
|
| (471) |
|
| (108) |
Change in prepaid expenses, income taxes and other current assets |
|
| 3 |
|
| (12) |
Net cash provided from operating activities |
|
| 1,185 |
|
| 962 |
|
|
|
|
|
|
|
Cash flows provided from (used by) investing activities: |
|
|
|
|
|
|
Capital expenditures - Business operations |
|
| (846) |
|
| (960) |
Capital expenditures - Integration activities |
|
| (19) |
|
| (99) |
Cash paid for the CTF Acquisition |
|
| - |
|
| (9,886) |
Proceeds on sale of assets |
|
| 109 |
|
| - |
Other |
|
| 6 |
|
| - |
Net cash used by investing activities |
|
| (750) |
|
| (10,945) |
|
|
|
|
|
|
|
Cash flows provided from (used by) financing activities: |
|
|
|
|
|
|
Proceeds from long-term debt borrowings |
|
| 1,500 |
|
| 1,625 |
Long - term debt payments |
|
| (1,662) |
|
| (113) |
Financing costs paid |
|
| (15) |
|
| (38) |
Premium paid to retire debt |
|
| (80) |
|
| - |
Dividends paid on common stock |
|
| (219) |
|
| (370) |
Dividends paid on preferred stock |
|
| (161) |
|
| (161) |
Capital lease obligation payments |
|
| (30) |
|
| (8) |
Taxes paid on behalf of employees for shares withheld |
|
| (5) |
|
| (10) |
Other |
|
| 1 |
|
| 9 |
Net cash provided from (used by) financing activities |
|
| (671) |
|
| 934 |
|
|
|
|
|
|
|
Decrease in cash, cash equivalents, and restricted cash |
|
| (236) |
|
| (9,049) |
Cash, cash equivalents, and restricted cash at January 1, |
|
| 522 |
|
| 9,380 |
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash at September 30, |
| $ | 286 |
| $ | 331 |
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
Cash paid (received) during the period for: |
|
|
|
|
|
|
Interest |
| $ | 1,373 |
| $ | 1,277 |
Income tax refunds, net |
| $ | (4) |
| $ | (35) |
The accompanying Notes are an integral part of these unaudited Consolidated Financial Statements.
(1) Summary of Significant AccountingAccounting 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. 2021. 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.
In 2021, we recategorized our previous operating expenses categories (“Network access expenses” and “Network related expense”) into one expense line: “Cost of service”. All historical periods presented have been updated to conform to the new categorization. In addition, certain reclassifications of prior period balances have been made to conform to the current period presentation. For our interim financial statements as of and for the period ended SeptemberJune 30, 2017,2022, 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)(“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.
We operateChapter 11 Bankruptcy Emergence
As described in one reportable segment. Frontier provides both regulatedNote 3 Emergence from the Chapter 11 Cases, and unregulated voice, dataNote 4 Fresh Start Accounting, to our consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2021, on April 30, 2021, (the “Effective Date”), the Company emerged from bankruptcy. Accordingly, the consolidated financial information has been prepared in conformity with Accounting Standards Codification Subtopic 852-10 (ASC 852), Reorganizations, for the Successor as a new entity with assets, liabilities, and video services to consumer, commercial and wholesale customers and is typically the incumbent voice services provider in its service areas.a capital structure having carrying amounts not comparable with prior periods.
On July 10, 2017, we effected a one for fifteen reverse stock split of our common stock. The reverse stock split reduced the number of common shares issued (which includes outstanding shares and treasury shares) from approximately 1,193,000,000 shares to 80,000,000 shares, and reduced shares outstanding from 1,178,000,000 shares to 79,000,000 shares. In addition, and at the same time, the total number of shares of common stock that Frontier is authorized to issue changed from 1,750,000,000 shares to 175,000,000 shares. There was no change
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Reorganization items incurred in the par valuefirst four months of 2021 as a result of the common stock,Chapter 11 Cases included a gain on settlement of liabilities subject to compromise of $5,274 million, fresh start valuation adjustment charges of $1,038 million, debtor-in-possession financing costs of $15 million and no fractional shares$50 million in professional fees and other bankruptcy related costs presented separately in the accompanying consolidated statements of income.
The Company incurred significant costs associated with the reorganization, primarily legal and professional fees. Subsequent to April 14, 2020 (the “Petition Date”), these costs were issued. All shareexpensed as incurred and per share amountssignificantly affected our consolidated results of operations. From the Petition Date to the Effective date, these costs were included in “Reorganization items, net” on our consolidated statement of income. For the periods prior to the Petition date and following the Effective Date, these costs have been included in “Restructuring costs and other charges” on our consolidated statement of income. Refer to Note 9.
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 Frontier Communications Corporation and its subsidiaries on or before the Effective Date (“Old Frontier”).
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 income, included within “Revenue” and “Cost of service 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 our Series A Preferred Stockparticipants. 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 income.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Government Grants Revenue - Certain governmental grants that were proportionately adjusted.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 income.
(b) 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 income.
c) 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
7
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
revenue in our consolidated statements of operationsincome 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 “Cost of services”.
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, using a portfolio approach over the average term ofcustomer life.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
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 operations and included within “Revenue” and “Network related expenses” of $52 million and $60 million, and $160 million and $161amounted to $83 million for the three and ninefour months ended SeptemberApril 30, 2017 and 2016, respectively.2021.
In June 2015, weFrontier accepted the FCC’sFCC offer of support to price cap carriers under the Connect America Fund (CAF)(“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 programwas intended to subsidize theprovide long-term support for broadband build commitments in high cost of establishing and delivering communications services to certain unserved or underserved areas. We are recognizing theserecognized FCC’s CAF Phase II subsidies into revenue on a straight linestraight-line basis over the seven-year funding term which is consistent with howended on December 31, 2021. We have accrued an amount for any potential shortfall in the costs related to these subsidies are being and are expectedhousehold build commitment that we deem to be incurred. CAFprobable and reasonably estimated, and we do not expect that any potential penalties, if ultimately incurred, will be material in comparison to the established accrual.
In May 2022, Frontier accepted the FCC offer under the Rural Digital Opportunity Fund (“RDOF”) Phase II is a multi-yearI program, which requires usprovides funding over a ten-year period to deploysupport the construction of broadband networks in rural communities across the country. Frontier accepted $37 million in annual support through 2032 in return for the Company’s commitment to make broadband available to households within the RDOF eligible areas. We will recognize the FCC’s RDOF Phase I subsidies into revenue on a specified number of households in each ofstraight-line basis over the states whereten-year funding was accepted. Failureterm which will end March 31, 2032. The Company is required to meet ourcomplete the RDOF deployment obligations atby December 31, 2028. Thereafter, the end ofFCC will review carriers’ RDOF program completion data, and if the program in 2020 would result in aFCC determines that the Company did not satisfy applicable FCC RDOF requirements, Frontier could be required to return of a portion of the funds previously received and may be subject to certain other requirements and obligations. We will accrue an amount for any potential shortfall in the household build commitment that we deem to be probable and reasonably estimated.
d)Cash Equivalents:
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Restricted cash of $17 million is included in “Other current assets” as of December 31, 2021, and $30 million and $34 million are included in “Other assets” on our consolidated balance sheet as of June 30, 2022 and December 31, 2021, respectively.
e) Short-Term Investments:
Given the long-term nature of our fiber build, we have invested cash into short-term investments to improve interest income while preserving funding received.flexibility. We regularly evaluate our ability to meet our broadband deployment obligations and adjust revenue accordingly.
We categorize our products, serviceshave classified these short-term deposits and other revenues among the following five categories:investments that have original maturities of greater than three months but less than one year as short-term investments.
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|
|
|
|
|
|
|
|
|
As of June 30, 2022, short-term investments of $2,300 million are comprised of term deposits earning interest in excess of traditional bank deposit rates, maturing between July 15, 2022, and November 15, 2022, and placed with banks with A-1/P-1 or equivalent credit quality. These short-term investments are in scope of ASC 320, Investments - Debt Securities. The short-term investments’ original maturity is greater than 90 days but less than one year, and they are classified as held to maturity, recorded as current assets, and are accounted for at amortized cost.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
f)Definite and Indefinite Lived Intangible Assets:
The following table provides a summary of revenues from external customers by the categories of Frontier’s productsIntangible assets are initially recorded at estimated fair value. Old Frontier historically amortized its acquired customer lists and services:
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| For the three months ended |
| For the nine months ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
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($ 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 |
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Total revenue |
| $ | 2,251 |
| $ | 2,524 |
| $ | 6,911 |
| $ | 6,487 |
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(c)Goodwill and Other Intangibles:
Goodwill represents the excess of purchase price over the fair value of identifiable tangible and intangible net assets acquired in a business combination. We have undertaken studies to determine the fair values of assets and liabilities acquired as well as to allocate the purchase price to assets and liabilities, including property, plant and equipment, goodwill andcertain 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 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 2017 in conjunction with our goodwill impairment assessment.
Frontier amortizes 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 lives 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, asor more often if indicators of December 31impairment arise, to assessdetermine whether any potentialthere is evidence that indicates an impairment exists and whether factorscondition may exist that would necessitate a change in useful life and a different amortization period.
g)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.
We assess potential impairments to our leases annually, or as indicators exist, if indicators of impairment arise to determine whether there is evidence that indicate an impairment condition may exist. We continue to review our real estate portfolio and, during the first quarter of 2022, determined to either terminate or market for sublease certain facilities leases, which triggered an impairment of $44 million for our finance and operating lease assets recorded as restructuring charges and other costs. See Note 9 for further details.
(2) Recent Accounting Literature:
Recent Accounting Pronouncements Not Yet Adopted
Revenue RecognitionReference Rate Reform
In May 2014,March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers.”Reporting". This standard along with itsprovides optional expedients, and allows for certain exceptions to existing GAAP, for contract modifications triggered by the expected market transition of certain benchmark interest rates to alternative reference rates. The standard applies to contracts and other arrangements that reference the London Interbank Offering Rate (LIBOR) or any other rates ending after December 31, 2022. Frontier is evaluating the impact of the adoption of this standard, including optional expedients, on our consolidated financial statements.
Government Assistance
In November 2021, the FASB issued ASU 2021-10, which requires business entities to disclose information about certain government assistance they receive. Such disclosure requirements include the nature of the transactions and the related amendments, requires companiesaccounting policy used, the line items on the balance sheet and income statement that are affected and the amounts applicable to recognize revenue to depict 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 annualeach financial statement line item and interim reporting periods beginning with the first quarter of 2018. significant
“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 assetterms 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 adoptionconditions 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 standardtransactions. ASU 2021-10 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 income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. Existing sale-leaseback guidance, including guidance for real estate, is replaced with a new model applicable to both lessees and lessors. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years using modified retrospective application. Early application is permitted. Frontier is in the initial stages of evaluating the potential impact this new standard may have on the consolidated financial statements.
Compensation – Retirement Benefits
In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. This standard was established to improve the presentation of net periodic pension cost and net periodic 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. The amendments in the update also provide explicit guidance on how to present the service cost component and other components of net benefit cost in the income statement and allow only the service cost components of net benefit cost to be eligible for capitalization. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods and requires2021 (year ending December 31, 2022 for the presentationCompany). Early adoption is permitted. The Company is currently evaluating the impact the adoption of the income statement to be applied retrospectively. 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. ThisASU 2021-10 will have on its disclosures.
(3) 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 material impactnumber 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 previously reported operating incomedemand, equipment rentals, and may havevideo 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, rents collected for colocation 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 terminate their local and long-distance voice traffic. These services are primarily billed on a material impact to operating income in future periods, however,minutes-of-use basis applying tariffed rates filed with the impact to pre-tax income is not expected to be material.FCC or state agencies; and
Subsidy and other regulatory revenue include revenues generated from cost subsidies from state and federal authorities, including CAF II and RDOF.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
NOTES TO CONSOLIDATED
The following tables provide a summary of revenues, by category:
Successor | Successor | Predecessor | ||||||||||
For the three months ended June 30, | For the two months ended June 30, | For the one month ended April 30, | ||||||||||
($ in millions) | 2022 | 2021 | 2021 | |||||||||
Data and Internet services | $ | 847 | $ | 556 | $ | 283 | ||||||
Voice services | 381 | 283 | 160 | |||||||||
Video services | 134 | 105 | 54 | |||||||||
Other | 80 | 62 | 30 | |||||||||
Revenue from contracts with customers (1) | 1,442 | 1,006 | 527 | |||||||||
Subsidy and other revenue (2) | 17 | 55 | 28 | |||||||||
Total revenue | $ | 1,459 | $ | 1,061 | $ | 555 | ||||||
Successor | Successor | Predecessor | ||||||||||
For the three months ended June 30, | For the two months ended June 30, | For the one month ended April 30, | ||||||||||
($ in millions) | 2022 | 2021 | 2021 | |||||||||
Consumer | $ | 791 | $ | 543 | $ | 283 | ||||||
Business and wholesale | 651 | 463 | 244 | |||||||||
Revenue from contracts with customers (1) | 1,442 | 1,006 | 527 | |||||||||
Subsidy and other revenue (2) | 17 | 55 | 28 | |||||||||
Total revenue | $ | 1,459 | $ | 1,061 | $ | 555 | ||||||
PART I. FINANCIAL STATEMENTS INFORMATION (Continued)
(Unaudited)
Recently Adopted Accounting Pronouncements
Successor | Successor | Predecessor | ||||||||||
For the six months ended June 30, | For the two months ended June 30, | For the four months ended April 30, | ||||||||||
($ in millions) | 2022 | 2021 | 2021 | |||||||||
Data and Internet services | $ | 1,683 | $ | 556 | $ | 1,125 | ||||||
Voice services | 767 | 283 | 647 | |||||||||
Video services | 271 | 105 | 223 | |||||||||
Other | 163 | 62 | 125 | |||||||||
Revenue from contracts with customers (1) | 2,884 | 1,006 | 2,120 | |||||||||
Subsidy and other revenue (2) | 22 | 55 | 111 | |||||||||
Total revenue | $ | 2,906 | $ | 1,061 | $ | 2,231 | ||||||
Successor | Successor | Predecessor | ||||||||||
For the six months ended June 30, | For the two months ended June 30, | For the four months ended April 30, | ||||||||||
($ in millions) | 2022 | 2021 | 2021 | |||||||||
Consumer | $ | 1,567 | $ | 543 | $ | 1,133 | ||||||
Business and wholesale | 1,317 | 463 | 987 | |||||||||
Revenue from contracts with customers (1) | 2,884 | 1,006 | 2,120 | |||||||||
Subsidy and other revenue (2) | 22 | 55 | 111 | |||||||||
Total revenue | $ | 2,906 | $ | 1,061 | $ | 2,231 |
Share-Based Payments - Scope of Modification Accounting
In May 2017, 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 changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions,
(1)Lease revenue included in “Revenue from contracts with customers” was $16 million 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 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 of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge$32 million for the amount by whichthree and six months ended June 30, 2022, respectively, $11 million for the carrying amount exceedstwo months ended June 30, 2021, and $5 million and $26 million for the reporting unit’s fair value; however,one and four months ended April 30, 2021, respectively.
(2)Subsidy and other revenue for the loss recognized shouldthree and six months ended June 30, 2022, does not exceedinclude revenue from CAF II as the total amount of goodwill allocatedprogram ended in 2021. We began 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 requirementsreceive funding for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Frontier early adopted this standard duringRDOF in the second quarter of 2017 in conjunction with our goodwill impairment assessment. See Note 1 and Note 6 for further discussion. 2022.
Compensation – Stock Compensation
(3) Acquisitions:
The CTF Acquisition
On April 1, 2016, Frontier acquired the wireline operations of Verizon Communications, Inc. in California, Texas and Florida (the CTF Operations) forfollowing is a purchase price of $10,540 million in cash and assumed debt (the CTF Acquisition), pursuant to the February 5, 2015 Securities Purchase Agreement, as amended. The final allocationsummary of the purchase price presented below representschanges in the effectcontract assets and contract liabilities:
Contract Assets | Contract Liabilities | |||||||||||||
($ in millions) | Current | Noncurrent | Current | Noncurrent | ||||||||||
Balance at December 31, 2021 (Successor) | $ | - | $ | - | $ | 27 | $ | 11 | ||||||
Revenue recognized included | ||||||||||||||
in opening contract balance | - | - | (20) | (5) | ||||||||||
Credits granted, excluding amounts | ||||||||||||||
recognized as revenue | - | - | 18 | 11 | ||||||||||
Reclassified between current | ||||||||||||||
and noncurrent | - | - | 2 | (2) | ||||||||||
Balance at June 30, 2022 (Successor) | $ | - | $ | - | $ | 27 | $ | 15 | ||||||
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 | ||||||
Balance at April 30, 2021 (Successor) | $ | - | $ | - | $ | 15 | $ | 1 | ||||||
Revenue recognized included | ||||||||||||||
in opening contract balance | - | - | (4) | (1) | ||||||||||
Cash received, excluding amounts | ||||||||||||||
recognized as revenue | - | - | 8 | 4 | ||||||||||
Reclassified between current | ||||||||||||||
and noncurrent | - | - | (1) | 1 | ||||||||||
Balance at June 30, 2021 (Successor) | $ | - | $ | - | $ | 18 | $ | 5 |
The unsatisfied obligations for retail customers consist of recordingamounts in advance billings, which are expected to be earned within the fair value of assets acquired and liabilities assumed as of the date of the CTF Acquisition,following monthly billing cycle. Unsatisfied obligations for wholesale customers are based on a point-in-time calculation and determined by the total transaction cash considerationnumber of $9,871 million.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.
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The fair value estimates related to the allocation of the purchase price to Other intangibles were revised and updated during the first quarter of 2017 from the previous estimates as of December 31, 2016. The allocation that was reported as of December 31, 2016 for Other intangibles increased $100 million, from $2,162 million to $2,262 million. These measurement period adjustments resulted in $20 million of amortization expense during the first quarter of 2017 that would have been recorded in 2016 if the adjustments had been recognized as of the acquisition date. Other adjustments to the allocation of the purchase 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 $98 million increase in Goodwill.
The following unaudited pro forma financial information presents the combined results of operations of Frontier and the CTF Operations as if the CTF Acquisition had occurred as of January 1, 2016. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the CTF Acquisition been completed as of January 1, 2016. In addition, the unaudited pro forma financial information is not indicative of, nor does it purporttable includes estimated revenue expected to project,be recognized in the future financial position or operating results of Frontier. The unaudited pro forma financial information excludes acquisition and integration costs and does not give effectrelated to any estimated and potential cost savings or other operating efficiencies that may result from the CTF Acquisition.
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Acquisition and Integration Costs
Acquisition costs include financial advisory, accounting, regulatory, legal and other related costs. Integration costs include expensesperformance obligations that are incremental and directly related tounsatisfied at the acquisition, which were incurred to integrateend of the network and information technology platforms. Integration costs also include costs to achieve synergies and operational efficiencies directly associated with the acquisition. reporting period:
Frontier incurred operating expenses related to the CTF Acquisition as follows:
($ in millions) | Revenue from contracts with customers | ||||
2022 (remaining six months) | $ | 461 | |||
2023 | 407 | ||||
2024 | 270 | ||||
2025 | 135 | ||||
2026 | 83 | ||||
Thereafter | 91 | ||||
Total | $ | 1,447 | |||
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| For the three months ended September 30, |
| For the nine months ended September 30, | ||||||||
($ in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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Acquisition costs |
| $ | - |
| $ | - |
| $ | - |
| $ | 23 |
Integration costs |
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| 1 |
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| 122 |
|
| 15 |
|
| 364 |
Total acquisition and |
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integration costs |
| $ | 1 |
| $ | 122 |
| $ | 15 |
| $ | 387 |
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We also invested $19 million and $99 million in capital expenditures related to the CTF Acquisition during the nine months ended September 30, 2017 and 2016, respectively.
13
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(4)(4) Accounts Receivable:
The components of accounts receivable, net are as follows:
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($ in millions) |
| September 30, 2017 |
| December 31, 2016 | ||
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Retail and wholesale |
| $ | 768 |
| $ | 979 |
Other |
|
| 81 |
|
| 90 |
Less: Allowance for doubtful accounts |
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| (69) |
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| (131) |
Accounts receivable, net |
| $ | 780 |
| $ | 938 |
($ in millions) | June 30, 2022 | December 31, 2021 | ||||||
Retail and wholesale | $ | 406 | $ | 441 | ||||
Other | 59 | 74 | ||||||
Less: Allowance for doubtful accounts | (45) | (57) | ||||||
Accounts receivable, net | $ | 420 | $ | 458 | ||||
We maintain an allowance for doubtful accountscredit losses based on our estimate of ourthe estimated ability to collect accounts receivable. During 2017, we resolved settlements with carriers resulting in a reduction to our reserves of approximately $35 million. Bad debtThe allowance for credit losses is increased by recording an expense which is recorded as a reductionfor the provision for bad debts for retail customers, and through decreases to revenue at the time of billing for wholesale customers. The allowance is decreased when customer accounts are written off, or when customers are given credits.
The provision for bad debts was $14 million for the six months ended June 30, 2022, $6 million for the two months ended June 30, 2021, and $4 million and $14 million for the one and four months ended April 30, 2021, respectively.
In accordance with ASC 326, Frontier performs its calculation to estimate expected credit losses, utilizing rates that are consistent with the Company’s write offs (net of recoveries) because such events affect the entity’s loss given default experience.
Activity in the allowance for credit losses for the six months ended June 30, 2022 was as follows:follows:
($ in millions) | ||||
Balance at December 31, 2021 | $ | 57 | ||
Provision for bad debt | 14 | |||
Amounts charged to revenue | 17 | |||
Write offs charged against the allowance | (43) | |||
Balance at June 30, 2022 | $ | 45 | ||
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| For the three months ended September 30, |
| For the nine months ended September 30, | ||||||||
($ in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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Bad debt expense |
| $ | 26 |
| $ | 56 |
| $ | 83 |
| $ | 104 |
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PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
(5) Property, Plant and Equipment:
Property, plant and equipment, net is as follows:
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($ in millions) |
| September 30, 2017 |
| December 31, 2016 | ||
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Property, plant and equipment |
| $ | 26,124 |
| $ | 25,541 |
Less: Accumulated depreciation |
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| (11,749) |
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| (10,639) |
Property, plant and equipment, net |
| $ | 14,375 |
| $ | 14,902 |
($ in millions) | June 30, 2022 | December 31, 2021 | ||||||
Property, plant and equipment | $ | 11,024 | $ | 9,707 | ||||
Less: Accumulated depreciation | (916) | (508) | ||||||
Property, plant and equipment, net | $ | 10,108 | $ | 9,199 | ||||
Depreciation expense is principally based on the composite group method. Depreciation expense was as follows:
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| For the three months ended September 30, |
| For the nine months ended September 30, | ||||||||
($ in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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Depreciation expense |
| $ | 376 |
| $ | 323 |
| $ | 1,131 |
| $ | 1,009 |
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Successor | Successor | Predecessor | ||||||||||
For the three months ended June 30, | For the two months ended June 30, | For the one month ended April 30, | ||||||||||
($ in millions) | 2022 | 2021 | 2021 | |||||||||
Depreciation expense | $ | 211 | $ | 127 | $ | 99 | ||||||
Successor | Successor | Predecessor | ||||||||||
For the six months ended June 30, | For the two months ended June 30, | For the four months ended April 30, | ||||||||||
($ in millions) | 2022 | 2021 | 2021 | |||||||||
Depreciation expense | $ | 414 | $ | 127 | $ | 407 | ||||||
We adopted new estimated remaining useful lives for certain plant assets as of October 1, 2016, asAs a result of an annual independent studyapplying fresh start accounting on the Effective Date, Frontier’s fixed assets were reduced from $13.0 billion to $8.5 billion. For the six months ended June 30, 2022, the decrease in depreciation expense was principally a result of the estimated remaining useful lives of our plant assets, with an insignificant impact to depreciation expense.
reduced asset base following this fresh start fair value adjustment. In 2017,July 2022, we sold certain properties,a property that was subject to leaseback, generating $102approximately $70 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 overproceeds.
During the related lease terms of two years. For the ninesix months ended SeptemberJune 30, 2017, amortization2022, our capital expenditures were $1,088 million. In addition, we had $250 million of these deferred gains totaled $14 million, which are included in “Selling, general and administrative expenses” on our consolidated income statement. We have remaining deferred gain balances of $52 million, which are included in “Other liabilities”.
14
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(6) Goodwill and Other Intangibles:
The activity in goodwill from January 1, 2017 to September 30, 2017 was as follows:
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We are required to perform impairment tests related to our goodwill annually, which we performcapital expenditures that were received but not paid as of December 31, or sooner if an indicator of impairment occurs. Due to the continued decline in our stock price we had triggering events in each of the three quarters in 2017.June 30, 2022.
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, 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 $670 million. (6) Other Intangibles:
Our first and third quarter quantitative assessments indicated that the fair value of the enterprise exceeded its carrying value and, therefore, no indication of impairment existed in either period.
The market multiples approach that we use incorporates significant estimates and assumptions related to the forecasted results for the remainder of the year including revenues, expenses, and the achievement of other cost synergies. Our assessment includes many qualitative factors that require significant judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding the need for, or size of, an impairment. Continued declines in our profitability or cash flows or in the sustained, historically low trading prices of our common stock may result in further impairment.
We also considered whether the carrying values of finite-lived intangible assets and property plant and equipment may not be recoverable or whether the carrying value of certain indefinite-lived intangible assets were impaired, noting no additional impairment was present as of September 30, 2017.
15
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The components of other intangibles are as of June 30, 2022 and December 31, 2021 was follows:
June 30, 2022 | December 31, 2021 | |||||||||||||||||||
Gross Carrying | Accumulated | Net Carrying | Gross Carrying | Accumulated | Net Carrying | |||||||||||||||
($ in millions) | Amount | Amortization | Amount | Amount | Amortization | Amount | ||||||||||||||
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Intangibles: | ||||||||||||||||||||
Customer Relationships - Business | $ | 800 | $ | (85) | $ | 715 | $ | 800 | $ | (48) | $ | 752 | ||||||||
Customer Relationships - Wholesale | 3,491 | (254) | 3,237 | 3,491 | (146) | 3,345 | ||||||||||||||
Trademarks & Tradenames | 150 | (35) | 115 | 150 | (20) | 130 | ||||||||||||||
Total other intangibles | $ | 4,441 | $ | (374) | $ | 4,067 | $ | 4,441 | $ | (214) | $ | 4,227 | ||||||||
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Amortization expense was as follows:
Successor | Successor | Predecessor | ||||||||||
For the three months ended June 30, | For the two months ended June 30, | For the one month ended April 30, | ||||||||||
($ in millions) | 2022 | 2021 | 2021 | |||||||||
Amortization expense | $ | 79 | $ | 52 | $ | 20 | ||||||
Successor | Successor | Predecessor | ||||||||||
For the six months ended June 30, | For the two months ended June 30, | For the four months ended April 30, | ||||||||||
($ in millions) | 2022 | 2021 | 2021 | |||||||||
Amortization expense | $ | 160 | $ | 52 | $ | 99 | ||||||
Following our emergence from bankruptcy, we amortize our intangible assets on a straight-line basis, over the assigned useful lives of 16 years for our wholesale customer relationships, 11 years for our business customer relationships, and 5 years for our trademarks and tradenames.
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| For the three months ended September 30, |
| For the nine months ended September 30, | ||||||||
($ in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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Amortization expense |
| $ | 163 |
| $ | 255 |
| $ | 539 |
| $ | 460 |
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AmortizationFor the Predecessor, amortization expense was primarily represents the amortization offor 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 was an indefinite-lived intangible asset that was not subject to amortization.
(7) Fair Value of Financial Instruments:
The following table summarizes the carrying amounts and estimated fair values for total long-term debt at SeptemberJune 30, 20172022 and December 31, 2016.2021. For the other financial instruments including cash, short-term investments, 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 total long-term debt is estimated based upon quoted market prices at the reporting date for those financial instruments.
June 30, 2022 | December 31, 2021 | |||||||||||
($ in millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||
Total debt | $ | 8,970 | $ | 7,995 | $ | 7,777 | $ | 7,996 |
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| September 30, 2017 |
| December 31, 2016 | ||||||||
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($ in millions) |
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Long-term debt |
| $ | 17,604 |
| $ | 15,515 |
| $ | 17,560 |
| $ | 17,539 |
(
(8)
(8) Long-Term Debt:
Chapter 11 Restructuring
The filing of the Chapter 11 Cases constituted an event of default that accelerated substantially all then-outstanding obligations under Old Frontier’s debt agreements and notes as follows:
the amended and restated credit agreement, dated as of February 27, 2017 (as amended, the JPM Credit Agreement),
the 8.000% first lien secured notes due April 1, 2027 (the Original First Lien Notes),
the 8.500% second lien secured notes due April 1, 2026 (the Original Second Lien Notes),
the unsecured notes and debentures and the secured and unsecured debentures of the Company’s subsidiaries.
As of the Effective Date, amounts that were outstanding under the JPM Credit Agreement, the Original First Lien Notes, and the Original Second Lien Notes were repaid in full.
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 under the Plan).
Interest expense for the one and four months ended April 30, 2021 recorded on our Predecessor statements of income was lower than contractual interest of $112 million and $450 million, respectively, because we ceased accruing interest on the Petition Date in accordance with the terms of the Plan and ASC Topic 852.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
The activity in our long-term debt from January 1, 2017 through September 30, 2017 is summarized as follows:
| For the six months ended |
| ||||||||||||
Principal | ||||||||||||||
January 1, | Payments | New | June 30, | |||||||||||
($ in millions) | 2022 | and Retirements | Borrowings | 2022 | ||||||||||
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Secured debt issued by Frontier | $ | 6,927 | $ | (7) | $ | 1,200 | $ | 8,120 | ||||||
Secured debt issued by subsidiaries | 100 | - | - | 100 | ||||||||||
Unsecured debt issued by subsidiaries | 750 | - | - | 750 | ||||||||||
Principal outstanding | $ | 7,777 | $ | (7) | $ | 1,200 | $ | 8,970 | ||||||
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Less: Debt Issuance Costs | (13) |
| (30) | |||||||||||
Less: Current Portion | (15) |
| (15) | |||||||||||
Plus: Unamortized fair value adjustments (1) | 219 | 205 | ||||||||||||
Total Long-term debt | $ | 7,968 |
| $ | 9,130 | |||||||||
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| Nine months ended September 30, 2017 |
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($ in millions) |
| January 1, 2017 |
| Payments and Retirements |
| New Borrowings |
| September 30, 2017 |
| Interest Rate at | ||||
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Senior and Subsidiary Unsecured Debt |
| $ | 15,900 |
| $ | (1,544) |
| $ | - |
| $ | 14,356 |
| 9.22% |
Senior Secured Debt |
|
| 2,151 |
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| (114) |
|
| 1,500 |
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| 3,537 |
| 4.90% |
Secured Subsidiary Debt |
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| 100 |
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| - |
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| - |
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| 100 |
| 8.50% |
Other Secured Debt |
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| 19 |
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| (3) |
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| - |
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| 16 |
| 5.25% |
Rural Utilities Service Loan Contracts |
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| 8 |
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| (1) |
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| - |
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| 7 |
| 6.15% |
Total Long-Term Debt |
| $ | 18,178 |
| $ | (1,662) |
| $ | 1,500 |
| $ | 18,016 |
| 8.36% |
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Less: Debt Issuance Costs |
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| (209) |
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| (190) |
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Less: Debt Premium/(Discount) |
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| (46) |
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| (56) |
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Less: Current Portion |
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| (363) |
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| (166) |
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| $ | 17,560 |
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| $ | 17,604 |
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* Interest rate includes amortization(1)Upon emergence, we adjusted the carrying value of our debt to fair value. The adjustment consisted of the elimination of the existing unamortized debt issuance costs and debt premiums or discounts.unamortized discounts and recording a balance of $236 million as a fair value adjustment. The fair value accounting adjustment is being amortized into interest rates at September 30, 2017 represent a weighted average of multiple issuances.expense using the effective interest method.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Additional information regarding our seniorsecured and unsecured total long-term debt senior secured debtas of June 30, 2022 and subsidiary debtDecember 31, 2021 is as follows:
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| September 30, 2017 |
| December 31, 2016 | ||||||
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| Principal |
| Interest |
| Principal |
| Interest | ||
($ in millions) |
| Outstanding |
| Rate |
| Outstanding |
| Rate | ||
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Senior Unsecured Debt Due: |
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4/15/2017 |
| $ | - |
| 8.250% |
| $ | 210 |
| 8.250% |
10/1/2018 |
|
| 578 |
| 8.125% |
|
| 583 |
| 8.125% |
3/15/2019 |
|
| 428 |
| 7.125% |
|
| 434 |
| 7.125% |
4/15/2020 |
|
| 619 |
| 8.500% |
|
| 1,169 |
| 8.500% |
9/15/2020 |
|
| 303 |
| 8.875% |
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| 1,066 |
| 8.875% |
7/1/2021 |
|
| 490 |
| 9.250% |
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| 500 |
| 9.250% |
9/15/2021 |
|
| 775 |
| 6.250% |
|
| 775 |
| 6.250% |
4/15/2022 |
|
| 500 |
| 8.750% |
|
| 500 |
| 8.750% |
9/15/2022 |
|
| 2,188 |
| 10.500% |
|
| 2,188 |
| 10.500% |
1/15/2023 |
|
| 850 |
| 7.125% |
|
| 850 |
| 7.125% |
4/15/2024 |
|
| 750 |
| 7.625% |
|
| 750 |
| 7.625% |
1/15/2025 |
|
| 775 |
| 6.875% |
|
| 775 |
| 6.875% |
9/15/2025 |
|
| 3,600 |
| 11.000% |
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| 3,600 |
| 11.000% |
11/1/2025 |
|
| 138 |
| 7.000% |
|
| 138 |
| 7.000% |
8/15/2026 |
|
| 2 |
| 6.800% |
|
| 2 |
| 6.800% |
1/15/2027 |
|
| 346 |
| 7.875% |
|
| 346 |
| 7.875% |
8/15/2031 |
|
| 945 |
| 9.000% |
|
| 945 |
| 9.000% |
10/1/2034 |
|
| 1 |
| 7.680% |
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| 1 |
| 7.680% |
7/1/2035 |
|
| 125 |
| 7.450% |
|
| 125 |
| 7.450% |
10/1/2046 |
|
| 193 |
| 7.050% |
|
| 193 |
| 7.050% |
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| 13,606 |
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| 15,150 |
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Senior Secured Debt Due: |
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10/24/2019 (1) |
|
| 254 |
| 5.115% (Variable) |
|
| 280 |
| 4.145% (Variable) |
3/31/2021 (2) |
|
| 1,503 |
| 3.990% (Variable) |
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| 1,564 |
| 3.270% (Variable) |
10/12/2021 (3) |
|
| 284 |
| 5.115% (Variable) |
|
| 307 |
| 4.145% (Variable) |
6/15/2024 (4) |
|
| 1,496 |
| 4.990% (Variable) |
|
| - |
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| 3,537 |
|
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| 2,151 |
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Subsidiary Debt Due: |
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05/15/2027 |
|
| 200 |
| 6.750% |
|
| 200 |
| 6.750% |
02/01/2028 |
|
| 300 |
| 6.860% |
|
| 300 |
| 6.860% |
2/15/2028 |
|
| 200 |
| 6.730% |
|
| 200 |
| 6.730% |
10/15/2029 |
|
| 50 |
| 8.400% |
|
| 50 |
| 8.400% |
11/15/2031 |
|
| 100 |
| 8.500% |
|
| 100 |
| 8.500% |
|
|
| 850 |
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| 850 |
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Total |
| $ | 17,993 |
| 8.1% (5) |
| $ | 18,151 |
| 8.3% (5) |
June 30, 2022 | December 31, 2021 | ||||||||||||
Principal | Interest | Principal | Interest | ||||||||||
($ in millions) | Outstanding | Rate | Outstanding | Rate | |||||||||
Secured debt issued by Frontier | |||||||||||||
Term loan due 10/8/2027 | $ | 1,457 | 4.813% (Variable) | $ | 1,464 | 4.500% (Variable) | |||||||
First lien notes due 10/15/2027 | 1,150 | 5.875% | 1,150 | 5.875% | |||||||||
First lien notes due 5/1/2028 | 1,550 | 5.000% | 1,550 | 5.000% | |||||||||
First lien notes due 5/12/2030 | 1,200 | 8.750% | - | n/a | |||||||||
Second lien notes due 11/1/2029 | 750 | 5.875% | 750 | 5.875% | |||||||||
Second lien notes due 5/1/2029 | 1,000 | 6.750% | 1,000 | 6.750% | |||||||||
Second lien notes due 1/15/2030 | 1,000 | 6.000% | 1,000 | 6.000% | |||||||||
IDRB due 5/1/2030 | 13 | 6.200% | 13 | 6.200% | |||||||||
Secured debt issued by Frontier | 8,120 | 6,927 | |||||||||||
Secured debt issued by subsidiaries | |||||||||||||
Debentures due 11/15/2031 | 100 | 8.500% | 100 | 8.500% | |||||||||
Secured debt issued by subsidiaries | 100 | 100 | |||||||||||
Unsecured debt issued by subsidiaries | |||||||||||||
Debentures due 5/15/2027 | 200 | 6.750% | 200 | 6.750% | |||||||||
Debentures due 2/1/2028 | 300 | 6.860% | 300 | 6.860% | |||||||||
Debentures due 2/15/2028 | 200 | 6.730% | 200 | 6.730% | |||||||||
Debentures due 10/15/2029 | 50 | 8.400% | 50 | 8.400% | |||||||||
Unsecured debt issued by subsidiaries | 750 | 750 | |||||||||||
Principal outstanding | $ | 8,970 | 6.163% (1) | $ | 7,777 | 5.702% (1) | |||||||
(1) Represents borrowings under the 2014 CoBank Credit Agreement, as defined below.
(2) Represents borrowings under the JPM Credit Agreement Term Loan A, as defined below.
(3) Represents borrowings under the 2016 CoBank Credit Agreement, as defined below.
(4) Represents borrowings under the JPM Credit Agreement Term Loan B, as defined below.
(5) Interest rate represents a weighted average of the stated interest rates of multiple issuances.
Credit Facilities and Term Loans
18
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
In September 2017, Frontier used proceeds from Term Loan B (see definitionSummaries of our various credit and note discussion below) to retire $24 million of 8.500% Notes due 2020, $10 million of 9.250% Notes due 2021, $6 million of 7.125% Notes due 2019,debt agreements, including our credit agreements and $5 million of 8.125% Notes due 2018. Frontier recorded a gain of $1 million driven primarily by discounts on the retirement of the notes. On April 17, 2017, Frontier used cash available on hand to retire $210 million of 8.25% Senior Notes that matured on such date.
In June 2017, Frontier used cash proceeds from Term Loan B (see definition and note discussion below) to retire $763 million of 8.875% Notes due 2020 and $527 million of 8.500% Notes due 2020. Frontier recorded a loss on early extinguishment of debt of $90 million driven by premiums paid to retire theindentures for our senior secured first lien notes and unamortized original issuance costs.senior secured second lien notes, are contained in our Annual Report on Form 10-K. The summaries below and in our Form 10-K do not purport to be complete and are qualified in their entirety by reference to each agreement filed as an Exhibit to our Annual Report on Form 10-K.
Revolving Facility
On February 27, 2017,May 12, 2022, Frontier entered into an amendment (“Amendment No. 2”) to its Revolving Facility. The Amendment, among other things, increased the Revolving Facility by an additional $275 million, to a first amended and restated credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, pursuant to which Frontier combined itstotal of $900 million in aggregate principal amount of revolving credit agreement, dated as of June 2, 2014,commitments, and its term loan credit agreement, dated as of August 12, 2015. Underprovided that the JPM Credit Agreement, as furtherRevolving Facility be amended on June 15, 2017 by Increase Joinder No.1 (as so amended, the JPM Credit Agreement), Frontier hasto reflect Secured Overnight Financing Rate “SOFR” based interest rates (including a $1,625customary spread adjustment).
The $900 million senior secured term loan A facility (the Term Loan A) maturing on March 31, 2021, an $850 million undrawn secured revolving credit facility maturing on February 27, 2022 (the Revolver), and $1,500 million senior secured term loan B facility (the Term Loan B) maturing on June 15, 2024. The maturities of the Term Loan A, the Revolver, and the Term Loan B, in each case if still outstanding,Revolving Facility will be accelerated inavailable on a revolving basis until April 30, 2025.
At Frontier’s election, the following circumstances: (i) if, 91 days before the maturity date of any series of Senior Notes maturing in 2020, 2023 and 2024, more than $500 million in principal amount remains outstanding on such series; or (ii) if, 91 days before the maturity date of the first series of Senior Notes maturing in 2021 or 2022, more than $500 million in principal amount remains outstanding, in the aggregate, on the two series of Senior Notes maturing in such year. The determination of interest rates for each of the facilities under the JPM Credit AgreementRevolving Facility is based on margins over the Base Rate (as defined in the JPM Credit Agreement)alternate base rate or over LIBOR, at the election of Frontier. Interest rate margins on the Term Loan A and Revolver (ranging from 0.75% to 1.75% for Base Rate borrowings and 1.75% to 2.75% for LIBOR borrowings) are subject to adjustment based on Frontier’s Total Leverage Ratio (as defined in the JPM Credit Agreement).SOFR. The interest rate onmargin with respect to any SOFR loan under the Term Loan A as of September 30, 2017 was LIBOR plus 2.75%. InterestExit Revolving Facility is 3.50% or 2.50% with respect to any alternate base rate margins onloans, with a 0% SOFR floor.
Subject to customary exceptions and thresholds, the Term Loan B (2.75% for Base Rate borrowings and 3.75% for LIBOR borrowings) are not subject to adjustment. The security package under the JPM Credit AgreementRevolving Facility includes pledges of the equity interests in certain Frontierof our subsidiaries, and guaranties by certain Frontier subsidiaries. As of September 30, 2017, the revolving credit facility was fully available and no borrowings had been made thereunder. The revolving credit facility is available for general corporate purposes but may not be used to fund dividend payments.
Frontier has two senior secured credit agreements with CoBank, ACB,which as administrative agent, lead arranger and a lender, and the other lenders party thereto: the first, for a $350 million senior term loan facility drawn in 2014 (the 2014 CoBank Credit Agreement), matures on October 24, 2019, and the second, for a $315 million senior term loan facility drawn in October 2016 (the 2016 CoBank Credit Agreement), matures on October 12, 2021. We refer to the 2014 CoBank Credit Agreement and the 2016 CoBank Credit Agreement collectively as the CoBank Credit Agreements.
Repayment of the outstanding principal balance under eachissue date is limited to certain specified pledged entities and substantially all personal property of Frontier Video, which same assets also secure the CoBank Credit AgreementsFirst Lien Notes. The Revolving Facility is being made in quarterly installments ($9 million, with respect toguaranteed by the 2014 CoBank Credit Agreement, and $8 million, with respect tosame subsidiaries that guarantee the 2016 CoBank Credit Agreement), in each case with the remaining outstanding principal balance to be repaid on the applicable maturity date. Borrowings under each of the CoBank Credit Agreements bear interest based on the margins over the Base Rate (as defined in the applicable CoBank Credit Agreement) or over LIBOR, at the election of Frontier.
AsFirst Lien Notes. After giving effect to $133 million of September 30, 2017, we were in compliance with allletters of our indenture and credit facility covenants.
Our scheduled principal payments are as followsoutstanding as of SeptemberJune 30, 2017:
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| Principal | |
($ in millions) |
| Payments | |
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|
|
2017 (remaining three months) |
| $ | 42 |
2018 |
| $ | 743 |
2019 |
| $ | 828 |
2020 |
| $ | 1,132 |
2021 |
| $ | 2,558 |
2022 |
| $ | 2,703 |
Thereafter |
| $ | 10,010 |
2022, the Borrower has $767 million of available borrowing capacity under the Revolving Facility.
(9) Restructuring Costs and Other ChargesCharges:
As of September 30, 2017, restructuring related liabilities of $12 million pertaining to employee separation charges were included in “Other current liabilities” in our consolidated balance sheet.
Restructuring costs and other charges primarily consistingconsists of severance and other employee-relatedemployee costs of $46related to workforce reductions. It also includes professional fees related to our Chapter 11 Cases that were incurred after the emergence date as well as professional fees related to our restructuring and transformation that were incurred prior to the Petition Date.
During the six month period ended June 30, 2022, we incurred $84 million in connection withrestructuring charges and other costs consisting of $44 million of lease impairment costs from the strategic exit of certain facilities, $32 million of severance and employee costs resulting from workforce reductions, are includedand $8 million of costs related to other restructuring activities. Of the $32 million in “Restructuringseverance and employee costs, and other charges” in our consolidated statement of operations for the nine months ended September 30, 2017. Duringapproximately $26 million related to the second quarter of 2017, Frontier sold2022, as a result of larger workforce reductions.
As part of the Company's cost reduction strategy, certain real estate leases will not be retained, or will be marketed for sublease. The Company evaluated the related right-of-use assets and other lease related assets for impairment under ASC 360. In connection with this analysis, the Company reassessed its Frontier Secure Strategic Partnerships business at a lossleased real estate asset groups and estimated the fair value of the office space to be subleased under current market conditions. Where the carrying values of individual asset groups exceeded their fair values, an impairment charge was recognized for the difference.
During the four months ended April 30, 2021, we incurred $7 million of severance and employee costs resulting from workforce reductions. During the two months ended June 30, 2021, we incurred $11 million in expenses consisting of $2 million of severance and employee costs resulting from workforce reductions and $9 million which is also included in restructuring costs and other charges for the nine months ended September 30, 2017.of professional fees related to our balance sheet restructuring.
The following is a summary of the changes in the liabilities established for restructuring programs at September 30, 2017:
and other related programs:
($ in millions) | |||||
Balance at January 1, | $ | 7 | |||
| Severance expense | 32 | |||
Other costs | 8 | ||||
Cash payments during the period | (28) | ||||
| Balance at June 30, 2022 |
| |||
$ | 19 |
(10) Investment and Other Income:
(10) Income Taxes:
The following is a reconciliationsummary of the provision for income taxes computed at the federal statutory rate to income taxes computed at the effective rate: components of Investment and Other Income:
Successor | Successor | Predecessor | |||||||||||
For the three months ended June 30, | For the two months ended June 30, | For the one month ended April 30, | |||||||||||
($ in millions) | 2022 | 2021 | 2021 | ||||||||||
Interest and dividend income | $ | 6 | $ | - | $ | - | |||||||
Pension benefit | 25 | 13 | 2 | ||||||||||
OPEB costs | (5) | (17) | (1) | ||||||||||
OPEB remeasurement gain | 96 | - | - | ||||||||||
All other, net | - | 2 | (2) | ||||||||||
Total investment and other income (loss), net | $ | 122 | $ | (2) | $ | (1) | |||||||
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| For the three months ended |
| For the nine months ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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|
Consolidated tax provision at federal statutory rate |
| 35.0 | % |
| 35.0 | % |
| 35.0 | % |
| 35.0 | % |
State income tax provisions, net of federal income |
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|
|
|
|
|
|
|
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|
|
tax benefit |
| 2.8 |
|
| 4.2 |
|
| 1.7 |
|
| 4.3 |
|
Tax reserve adjustment |
| (1.0) |
|
| 6.3 |
|
| (0.2) |
|
| 0.7 |
|
Domestic production activities deduction |
| - |
|
| (9.5) |
|
| - |
|
| (2.4) |
|
Changes in certain deferred tax balances |
| 7.1 |
|
| (0.8) |
|
| 0.2 |
|
| 3.1 |
|
Goodwill impairment |
| - |
|
| - |
|
| (10.2) |
|
| - |
|
Shared-based payments |
| 0.1 |
|
| - |
|
| (0.2) |
|
| - |
|
Federal research and development tax credit |
| 1.5 |
|
| 1.5 |
|
| 0.3 |
|
| 1.2 |
|
All other, net |
| 0.1 |
|
| - |
|
| (0.1) |
|
| 0.1 |
|
Effective tax rate |
| 45.6 | % |
| 36.7 | % |
| 26.5 | % |
| 42.0 | % |
Successor | Successor | Predecessor | |||||||||||
For the six months ended June 30, | For the two months ended June 30, | For the four months ended April 30, | |||||||||||
($ in millions) | 2022 | 2021 | 2021 | ||||||||||
Interest and dividend income | $ | 8 | $ | - | $ | - | |||||||
Pension benefit | 50 | 13 | 6 | ||||||||||
OPEB costs | (8) | (17) | (4) | ||||||||||
OPEB remeasurement gain | 150 | - | - | ||||||||||
All other, net | (1) | 2 | (1) | ||||||||||
Total investment and other income (loss), net | $ | 199 | $ | (2) | $ | 1 | |||||||
Income taxes for the nine months ended September 30, 2017 includes the federal tax impact of $107 million related to the goodwill impairment recorded during the second quarter of 2017.
Income taxes for the nine months ended September 30, 2017 includes the impact of $2 million of income tax expense resulting from the adoption of ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.”
Amounts pertaining to income tax related accounts of $48 million and $55 million are included in “Income taxes and other current assets” in the consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively.
DuringIn the first nine monthshalf of 2017, we received net state2022, Frontier amended the medical coverage for certain postretirement benefit plans, primarily due to discount rate changes, which resulted in remeasurement gains of $150 million. Refer to Note 15 for further details.
Pension and OPEB benefit (costs) consist of interest income tax refunds(loss), expected return on plan assets, amortization of $4 million. In October 2017, we received federal tax refundsprior service costs (credit) and recognition of $48 million.actuarial gain (loss).
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(11) Net Loss Per Share:
All share and per share amounts in the tables below have been retroactively adjusted for all periods presented to give effect to the reverse stock split. See Note 1 – Summary of Significant Accounting Policies for additional details.
The reconciliation of the net loss per share calculation is as follows:
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| For the three months ended |
| For the nine months ended | ||||||||
| September 30, |
| September 30, | ||||||||
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($ in millions and shares in thousands, except per share amounts) | 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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Net loss used for basic and diluted loss |
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per share: |
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Net loss attributable to Frontier common shareholders | $ | (92) |
| $ | (134) |
| $ | (936) |
| $ | (454) |
Less: Dividends paid on unvested restricted stock awards |
| - |
|
| (1) |
|
| (2) |
|
| (3) |
Total basic net loss |
|
|
|
|
|
|
|
|
|
|
|
attributable to Frontier common shareholders | $ | (92) |
| $ | (135) |
| $ | (938) |
| $ | (457) |
Effect of loss related to dilutive stock units |
| - |
|
| - |
|
| (2) |
|
| - |
Total diluted net loss |
|
|
|
|
|
|
|
|
|
|
|
attributable to Frontier common shareholders | $ | (92) |
| $ | (135) |
| $ | (940) |
| $ | (457) |
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Basic loss per share: |
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Total weighted average shares and unvested restricted stock |
|
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awards outstanding - basic |
| 78,488 |
|
| 78,205 |
|
| 78,399 |
|
| 78,134 |
Less: Weighted average unvested restricted stock awards |
| (691) |
|
| (593) |
|
| (685) |
|
| (526) |
Total weighted average shares outstanding - basic |
| 77,797 |
|
| 77,612 |
|
| 77,714 |
|
| 77,608 |
|
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Basic net loss per share |
|
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attributable to Frontier common shareholders | $ | (1.19) |
| $ | (1.73) |
| $ | (12.06) |
| $ | (5.87) |
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Diluted loss per share: |
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|
|
|
Total weighted average shares outstanding - basic |
| 77,797 |
|
| 77,612 |
|
| 77,714 |
|
| 77,608 |
Effect of dilutive stock units |
| - |
|
| - |
|
| 161 |
|
| - |
Total weighted average shares outstanding - diluted |
| 77,797 |
|
| 77,612 |
|
| 77,875 |
|
| 77,608 |
|
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|
Diluted net loss per share |
|
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|
attributable to Frontier common shareholders | $ | (1.19) |
| $ | (1.73) |
| $ | (12.07) |
| $ | (5.87) |
In calculating diluted net loss per common share for the three and nine months ended September 30, 2016, the effect of all common stock equivalents is excluded from the computation as the effect would be antidilutive.
Stock Options
For the three and nine months ended September 30, 2017 and 2016, previously granted options to purchase 2,664 shares, issuable under employee compensation plans were excluded from the computation of diluted earnings (loss) per share (EPS) for those periods because the exercise prices were greater than the average market price of our common stock and, therefore, the effect would be antidilutive.
22
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Stock Units
At September 30, 2017 and 2016, we had 161,020 and 116,223 stock units, respectively, issued under the Non-Employee Directors’ Deferred Fee Equity Plan (Deferred Fee Plan), the Non-Employee Directors’ Equity Incentive Plan (Directors’ Equity Plan), the 2013 Equity Incentive Plan and the 2017 Equity Incentive Plan. These securities have not been included in the diluted EPS calculation for the three months ended September 30, 2017 and 2016 and the nine months ended September 30, 2016 because their inclusion would have an antidilutive effect. Compensation costs associated with the issuance of stock units were ($4) million for the nine months ended September 30, 2017. There were no compensation costs associated with the issuance of stock units for the nine months ended September 30, 2016.
Mandatory Convertible Preferred Stock
The impact of the common share equivalents associated with approximately 19,250,000 shares of Series A Preferred stock were not included in the diluted EPS calculation as of September 30, 2017 and 2016, as their impact was antidilutive.
(12) Stock Plans:
All share and per share amounts in the tables below have been retroactively adjusted for
Upon emergence, all periods presented to give effect to the reverse stock split. See Note 1 – Summary of Significant Accounting Policies for additional details.
At September 30, 2017, we had sevenoutstanding stock-based compensation plans under which grantsof Old Frontier were madeterminated and, awards remained outstanding. No further awards may be granted under sixin accordance with the Plan, the form of the plans: the 1996 EquityFrontier Communications Parent, Inc. 2021 Management Incentive Plan (the 1996 EIP),“2021 Incentive Plan”) was approved and adopted by the Amended and Restated 2000 EquityBoard. The Incentive Plan (the 2000 EIP),permits stock-based awards to be made to employees, directors, or consultants of the 2009 EquityCompany or its affiliates, as determined by the Compensation and Human Capital Committee of the Board. Under the 2021 Incentive Plan, (the 2009 EIP), the 2013 Equity Incentive Plan (the 2013 EIP), the Deferred Fee Plan and the Directors’ Equity Plan. At September15,600,000 shares of common stock have been reserved for issuance. As of June 30, 2017, there2022, unvested awards relating to approximately 2,327,000 shares were approximately 5,667,000 shares authorized for grant and approximately 4,381,000 shares available for grantoutstanding under the 2017 Equity Incentive Plan (the 2017 EIP and together with the 1996 EIP, the 2000 EIP, the 2009 EIP and the 2013 EIPS, the EIPs)long-term equityaward program or “Emergence LTI Program”. Our general policy is to issue treasury shares upon the grant of restricted shares and the exercise of options.
Performance Shares
On February 16, 2017, the Compensation Committee of our Boardof Directors granted approximately 157,400 performance shares under the Frontier Long Term Incentive Plan (the LTIP) and set the operating cash flow performance goal for 2017, which applies to the first year in the 2017-2019 measurement period, the second year of the 2016-2018 measurement period and the third year of the 2015-2017 measurement period.
The following summary presents information regarding LTIP target performance shares as of September 30, 2017 and changes during the nine months then ended with regard to LTIP shares awarded under the 2013 EIP and the 2017 EIP:
| ||
| ||
| ||
| ||
| ||
| ||
| ||
|
For purposes of determining compensation expense, the fair value of each performance share is measured at the end of each reporting period and, therefore, will fluctuate based on the price of Frontier common stock as well as performance relative to the targets. For the nine months ended September 30, 2017 and 2016, we recognized net compensation expense, reflected in “Selling, general and administrative expenses,” of $0 and $4 million, respectively, for the LTIP.
23
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Restricted Stock
The following summary presents information regarding unvested restricted stock as of September 30, 2017 and changes during the nine months then ended with regard to restricted stock granted under the 2013 EIP and the 2017 EIP2021 Incentive Plan:
2021 Incentive Plan | ||||||||||
Weighted | ||||||||||
Average | ||||||||||
Number of | Grant Date | Aggregate | ||||||||
Shares | Fair Value | Fair Value | ||||||||
(in thousands) | (per share) | (in millions) | ||||||||
Balance at January 1, 2022 | 2,483 | $ | 28.67 | $ | 72 | |||||
Restricted stock granted | 941 | $ | 25.87 | $ | 25 | |||||
Restricted stock vested | (817) | $ | 25.69 | $ | (22) | |||||
Restricted stock forfeited | (92) | $ | 25.91 |
| ||||||
Balance at June 30, 2022 | 2,515 | $ | 25.84 | $ | 67 | |||||
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|
| Weighted |
|
|
| |
|
|
|
| Average |
|
| ||
|
| Number of |
| Grant Date |
| Aggregate | ||
|
| Shares |
| Fair Value |
| Fair Value | ||
|
| (in thousands) |
| (per share) |
| (in millions) | ||
Balance at January 1, 2017 |
| 549 |
| $ | 78.00 |
| $ | 28 |
Restricted stock granted |
| 454 |
| $ | 47.77 |
| $ | 5 |
Restricted stock vested |
| (220) |
| $ | 79.78 |
| $ | (3) |
Restricted stock forfeited |
| (119) |
| $ | 61.21 |
|
|
|
Balance at September 30, 2017 |
| 664 |
| $ | 59.64 |
| $ | 8 |
For purposes of determining compensation expense, the fair value of each restricted stock grant is estimated based on the average of the high and low marketclosing price of a share of our common stock on the date of grant, for shares granted prior to May 10, 2017. Beginning on May 10, 2017, the fair value of eachgrant. The non-vested restricted stock grant is estimated basedunits granted in 2021 generally vest, and are expensed, on a ratable basis over three years from the closing price of a share of our common stock on thegrant date of the grant.award. Total remaining unrecognizedcompensation cost associated with unvested restricted stock awards that is deferred at SeptemberJune 30, 20172022 was $26$62 million and the weighted average vesting period over which this cost is expected to be recognized is approximately 1.52 years.
Shares of restricted stock granted during the first nine months of 2016 totaled 375,133. The total fair value of shares of restricted stock granted and vested at September 30, 2016 was approximately $23 million and $15 million, respectively. The total fair value of unvested restricted stock at September 30, 2016 was $37 million. The weighted average grant date fair value of restricted shares granted during the nine months ended September 30, 2016 was $78.60 per share.
We have granted restricted stock awards to employees in the form of our common stock. None of the restricted stock awards may be sold, assigned, pledged, or otherwise transferred, voluntarily or involuntarily, by the employees until the restrictions lapse, subject to limited exceptions. The restrictions are time-based. Compensation expense, including compensation related to non-employee directors, recognized in “Selling, general and administrative expenses”, of $19 million for the six month-period ended June 30, 2022, has been recorded in connection with restricted stock.
Performance Stock Units
Under the 2021 Incentive Plan, a target number of performance units are awarded to each participant with respect to the three-year performance period (a “Measurement Period”). The performance metrics under the 2021 and 2022 PSU grants consist of targets for (1) Adjusted Fiber EBITDA, (2) Fiber Locations Constructed and (3) Expansion Fiber Penetration. In addition, there is an overall relative total shareholder return (“TSR”) modifier, which is based on Frontier’s total return to stockholders over the Measurement Period relative to the S&P 400 Mid Cap Index. Each performance metric is weighted 33.3%, and targets for each metric are set for each of the three years during the Measurement Period. Achievement of the metrics will be measured separately, and the number of awards earned will be determined based on actual performance relative to the targets of each performance metric, plus the effect of the TSR modifier. Achievement is measured on a cumulative basis for each performance metric individually at the end of the three-year Measurement Period. The payout of the 2021 PSUs can range from 0% to a maximum award payout of 300% of the target units. The payout of the 2022 PSUs
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
can range from 0% to a maximum award payout of 200% of the target units. PSUs awards, to the extent earned, will be paid out in the form of common stock shortly following the end of the Measurement Period.
The number of shares of common stock or units earned at the end of the Measurement Period may be more or less than the number of target performance shares or units granted as a result of performance. An executive must maintain a satisfactory performance rating during the Measurement Period and must be employed by Frontier upon determination in order for the award to vest. The Compensation and Human Capital Committee will determine the number of shares earned for the Measurement Period in the first quarter of the year following the end of the Measurement Period.
Under ASC 718, Stock Based Compensation Expense, we establish a grant date and determine the fair value once the targets are finalized. All targets for the 2021 awards have been set and the fair value of the grants will be amortized over the vesting period. For the 2022 PSU awards, the targets related to two of the three performance metrics have not been established. As a result, as of June 30, 2022, we have recognized associated expense with respect to 1/3 of the aggregate outstanding 2022 PSU awards.
The following summary presents information regarding performance shares as of June 30, 2022 and changes during the six months then ended with regard to performance shares awarded under the 2021 Incentive Plan:
2021 Incentive Plan | |||||||||
Weighted | |||||||||
Average | |||||||||
Number of | Grant Date | Aggregate | |||||||
Shares | Fair Value | Fair Value | |||||||
(in thousands) | (per share) | (in millions) | |||||||
Balance at January 1, 2022 | 3,144 | $ | 25.62 | $ | 92 | ||||
Target performance shares awarded, net | 257 | $ | 25.85 | $ | 7 | ||||
Target performance shares earned | - | $ | - | $ | - | ||||
Target performance shares forfeited | (9) | $ | 25.61 | ||||||
Balance at June 30, 2022 | 3,392 | $ | 25.64 | $ | 90 | ||||
For purposes of determining compensation expense, the fair value of each performance share grant is estimated based on the closing price of a share of our common stock on the date of the grant, adjusted to reflect the fair value of the relative TSR modifier. For the six months ended June 30, 2022, we recognized net compensation expense, reflected in “Selling, general and administrative expenses,” of $14$16 million for each of the nine month periods ended September 30, 2017 and 2016, has been recorded in connection with these grants. related PSU awards.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
NOTES TO CONSOLIDATED
(12) Income Taxes:
The following is a reconciliation of the provision for income taxes computed at the federal statutory rate to income taxes computed at the effective rate:
Successor | Successor | Predecessor | |||||||||||||
For the three months ended June 30, | For the six months ended June 30, | For the two months ended June 30, | For the four months ended April 30, | ||||||||||||
2022 | 2022 | 2021 | 2021 | ||||||||||||
Consolidated tax provision at federal statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | 21.0 | % | |||||||
State income tax expense, net of federal | |||||||||||||||
income tax benefit | 15.0 | 12.0 | 3.7 | 0.5 | |||||||||||
Changes in certain deferred tax balances | 1.7 | 1.1 | - | - | |||||||||||
Restructuring cost | - | - | - | 0.3 | |||||||||||
Tax reserve adjustment | 0.3 | 0.4 | 0.6 | - | |||||||||||
Fresh start and reorganization adjustments | - | - | - | (24.9) | |||||||||||
Tax Credit | (0.6) | (0.8) | (1.3) | - | |||||||||||
Sec.162(m) - nondeductible Executive Compensation | 2.4 | 3.2 | - | - | |||||||||||
All other, net | 0.8 | 0.5 | 6.1 | - | |||||||||||
Effective tax rate | 40.6 | % | 37.4 | % | 30.1 | % | (3.1) | % | |||||||
Frontier considered positive and negative evidence in regard to evaluating certain state deferred tax assets during the second quarter of 2022, including the development of recent years of pre-tax book losses. On the basis of this evaluation, a valuation allowance of $41 million ($32 million net of federal benefit) was recorded as of June 30, 2022.
The effective rate for the three and six months ended June 30, 2022, increased as a result of increases to the state rate due to valuation allowances in certain states, arising from non-deductible interest expense primarily related to our $1.2 billion first lien note issuance.
The effective rate changes between the three and six months ended June 30, 2022, as compared to 2021 are primarily due to, as described more fully in Note 1, the Company emergence from bankruptcy on April 30, 2021, and consummation of a taxable disposition of substantially all of the assets and/or subsidiary stock of the Company and utilized substantially all of the Company’s Net Operating Losses (“NOLs”).
PART I. FINANCIAL STATEMENTS INFORMATION (Continued)
(Unaudited)
(13) Net Earnings Per Share:
The reconciliation of the net earnings per share calculation is as follows:
Successor | Successor | Predecessor | |||||||||
For the three months ended June 30, | For the two months ended June 30, | For the one month ended April 30, | |||||||||
($ in millions and shares in thousands, except per share amounts) | 2022 | 2021 | 2021 | ||||||||
Net income used for basic and diluted earnings | |||||||||||
per share: | |||||||||||
Total basic net income | |||||||||||
attributable to Frontier common shareholders | $ | 101 | $ | 99 | $ | 4,481 | |||||
Effect of loss related to dilutive stock units | - | - | - | ||||||||
Total diluted net income | |||||||||||
attributable to Frontier common shareholders | $ | 101 | $ | 99 | $ | 4,481 | |||||
Basic earnings per share: | |||||||||||
Total weighted average shares and unvested restricted stock | |||||||||||
awards outstanding - basic | 244,723 | 244,401 | 104,816 | ||||||||
Less: Weighted average unvested restricted stock awards | - | - | (154) | ||||||||
Total weighted average shares outstanding - basic | 244,723 | 244,401 | 104,662 | ||||||||
Basic net earnings per share | |||||||||||
attributable to Frontier common shareholders | $ | 0.41 | $ | 0.41 | $ | 42.81 | |||||
Diluted earnings per share: | |||||||||||
Total weighted average shares outstanding - basic | 244,723 | 244,401 | 104,662 | ||||||||
Effect of dilutive stock units | - | - | 340 | ||||||||
Effect of dilutive restricted stock awards | - | - | - | ||||||||
Total weighted average shares outstanding - diluted | 244,723 | 244,401 | 105,002 | ||||||||
Diluted net earnings per share | |||||||||||
attributable to Frontier common shareholders | $ | 0.41 | $ | 0.41 | $ | 42.68 | |||||
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Successor | Successor | Predecessor | |||||||||
For the six months ended June 30, | For the two months ended June 30, | For the four months ended April 30, | |||||||||
($ in millions and shares in thousands, except per share amounts) | 2022 | 2021 | 2021 | ||||||||
Net income used for basic and diluted earnings | |||||||||||
per share: | |||||||||||
Total basic net income | |||||||||||
attributable to Frontier common shareholders | $ | 166 | $ | 99 | $ | 4,541 | |||||
Effect of loss related to dilutive stock units | - | - | - | ||||||||
Total diluted net income | |||||||||||
attributable to Frontier common shareholders | $ | 166 | $ | 99 | $ | 4,541 | |||||
Basic earnings per share: | |||||||||||
Total weighted average shares and unvested restricted stock | |||||||||||
awards outstanding - basic | 244,592 | 244,401 | 104,799 | ||||||||
Less: Weighted average unvested restricted stock awards | - | - | (215) | ||||||||
Total weighted average shares outstanding - basic | 244,592 | 244,401 | 104,584 | ||||||||
Basic net earnings per share | |||||||||||
attributable to Frontier common shareholders | $ | 0.68 | $ | 0.41 | $ | 43.42 | |||||
Diluted earnings per share: | |||||||||||
Total weighted average shares outstanding - basic | 244,592 | 244,401 | 104,584 | ||||||||
Effect of dilutive stock units | - | - | 340 | ||||||||
Effect of dilutive restricted stock awards | 239 | - | - | ||||||||
Total weighted average shares outstanding - diluted | 244,831 | 244,401 | 104,924 | ||||||||
Diluted net earnings per share | |||||||||||
attributable to Frontier common shareholders | $ | 0.68 | $ | 0.41 | $ | 43.28 | |||||
In calculating diluted net income per common share for the six months ended June 30, 2022, the effect of all performance stock units is excluded from the computation as their respective performance metrics have not been satisfied as of June 30, 2022.
Stock Units
At June 30, 2021, the dilutive common stock equivalents consisted of stock units issued under the Non-Employee Directors’ Deferred Fee Equity Plan (Deferred Fee Plan), the Non-Employee Directors’ Equity Incentive Plan (Directors’ Equity Plan), the 2013 Equity Incentive Plan and the 2017 Equity Incentive Plan.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
(14) Comprehensive Income (Loss):
Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting shareholders’ investmentequity (deficit) and pension/postretirement benefit (OPEB) liabilities that, under GAAP, are excluded from net loss.
The components of accumulated other comprehensive loss,income (loss), net of tax, at September 30, 2017 and 2016, and changes for the nine months then ended, are as follows:
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($ in millions) |
| Pension Costs |
| OPEB Costs |
| Deferred Taxes on Pension and OPEB Costs |
| Total | ||||
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Balance at January 1, 2017 |
| $ | (647) |
| $ | 29 |
| $ | 231 |
| $ | (387) |
Other comprehensive income (loss) |
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| (34) |
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| 1 |
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| 12 |
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| (21) |
Amounts reclassified from accumulated other comprehensive loss to net loss |
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| 23 |
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| (7) |
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| (5) |
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| 11 |
Recognition of net actuarial loss for pension settlement costs in net loss |
|
| 77 |
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| - |
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| (29) |
|
| 48 |
Net current-period other comprehensive income (loss) |
|
| 66 |
|
| (6) |
|
| (22) |
|
| 38 |
Balance at September 30, 2017 |
| $ | (581) |
| $ | 23 |
| $ | 209 |
| $ | (349) |
Pension | OPEB | |||||||||
($ in millions) | Costs | Costs | Total | |||||||
Balance at January 1, 2022 (Successor) (1) | $ | - | $ | 60 | $ | 60 | ||||
Other comprehensive income | ||||||||||
before reclassifications | - | 6 | 6 | |||||||
Amounts reclassified from accumulated other | ||||||||||
comprehensive income to net income | - | (4) | (4) | |||||||
Net current-period other comprehensive | ||||||||||
income | - | 2 | 2 | |||||||
Balance at June 30, 2022 (Successor) (1) | $ | - | $ | 62 | $ | 62 | ||||
Pension | OPEB | |||||||||
($ in millions) | Costs | Costs | Total | |||||||
Balance at January 1, 2021 (Predecessor) (1) | $ | (699) | $ | (56) | $ | (755) | ||||
Other comprehensive income | ||||||||||
before reclassifications | 270 | 74 | 344 | |||||||
Amounts reclassified from accumulated other | ||||||||||
comprehensive loss to net income | 19 | (4) | 15 | |||||||
Net current-period other comprehensive | ||||||||||
income | 289 | 70 | 359 | |||||||
Cancellation of Predecessor equity | 410 | (14) | 396 | |||||||
Balance at April 30, 2021 (Predecessor) (1) | $ | - | $ | - | $ | - | ||||
Balance at April 30, 2021 (Successor) (1) | $ | - | $ | - | $ | - | ||||
Other comprehensive income | ||||||||||
before reclassifications | - | 42 | 42 | |||||||
Amounts reclassified from accumulated other | ||||||||||
comprehensive income to net income | - | (1) | (1) | |||||||
Net current-period other comprehensive | ||||||||||
income | - | 41 | 41 | |||||||
Balance at June 30, 2021 (Successor) (1) | $ | - | $ | 41 | $ | 41 |
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($ in millions) |
| Pension Costs |
| OPEB Costs |
| Deferred Taxes on Pension and OPEB Costs |
| Total | ||||
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Balance at January 1, 2016 |
| $ | (584) |
| $ | 20 |
| $ | 211 |
| $ | (353) |
Other comprehensive income (loss) |
|
| (105) |
|
| - |
|
| 40 |
|
| (65) |
Amounts reclassified from accumulated other comprehensive loss |
|
| 30 |
|
| (6) |
|
| (9) |
|
| 15 |
Net current-period other comprehensive income (loss) |
|
| (75) |
|
| (6) |
|
| 31 |
|
| (50) |
Balance at September 30, 2016 |
| $ | (659) |
| $ | 14 |
| $ | 242 |
| $ | (403) |
As a result
(1)Pension and OPEB amounts are net of the pension settlement accounting discussed in Note 14, the Frontier Communications Pension Plan (the Pension Plan) was remeasuredtax of $15 million and $234 million as of September 30, 2017. This remeasurement resulted in a decrease in the discount rate from 4.10% at March 31, 2017 to 3.8% atJanuary 1, 2022 and 2021, respectively and $17 million and $14 million as of June 30, 20172022 and September 30, 2017, in addition to census data changes resulting in the recording of a loss on remeasurement to Other comprehensive income (loss) during each of the quarters. For the nine months ended September 30, 2017, Frontier recorded a net loss on remeasurement of $32 million, to Other comprehensive income (loss). Additionally, Frontier recorded pension settlement charges totaling $77 million ($48 million net of tax) to Other comprehensive income (loss). Refer to Note 14 for details about the settlement accounting.2021, respectively.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The significant items reclassified from each componentcomponents of accumulated other comprehensive loss for the three and nine months ended September 30, 2017 and 2016 are as follows:
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| Amount Reclassified from |
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($ in millions) |
| Accumulated Other Comprehensive Loss (a) |
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Details about Accumulated Other |
| For the three months ended September 30, |
| For the nine months ended September 30, |
| Affected Line Item in the Statement Where Net Income (Loss) is Presented | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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Amortization of Pension Cost Items (b) |
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Actuarial gains (losses) |
| $ | (6) |
| $ | (9) |
| $ | (23) |
| $ | (30) |
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Pension settlement costs |
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| (15) |
|
| - |
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| (77) |
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| - |
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| (21) |
|
| (9) |
|
| (100) |
|
| (30) |
| Income (loss) before income taxes |
Tax impact |
|
| 8 |
|
| 3 |
|
| 37 |
|
| 11 |
| Income tax (expense) benefit |
|
| $ | (13) |
| $ | (6) |
| $ | (63) |
| $ | (19) |
| Net income (loss) |
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Amortization of OPEB Cost Items (b) |
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Prior-service costs |
| $ | 2 |
| $ | 2 |
| $ | 7 |
| $ | 7 |
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Actuarial gains (losses) |
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| 1 |
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| - |
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| - |
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| (1) |
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| 3 |
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| 2 |
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| 7 |
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| 6 |
| Income (loss) before income taxes |
Tax impact |
|
| (2) |
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| - |
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| (3) |
|
| (2) |
| Income tax (expense) benefit |
|
| $ | 1 |
| $ | 2 |
| $ | 4 |
| $ | 4 |
| Net income (loss) |
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Successor | Successor | Predecessor | ||||||||||
Amount Reclassified from | ||||||||||||
Accumulated Other | ||||||||||||
Comprehensive Loss (1) | ||||||||||||
($ in millions) | Affected Line Item in | |||||||||||
For the three months | For the two months | For the one month | the Statement Where | |||||||||
Details about Accumulated Other | ended June 30, | ended June 30, | ended April 30, | Net Income (Loss) | ||||||||
Comprehensive Loss Components | 2022 | 2021 | 2021 | is Presented | ||||||||
Amortization of Pension Cost Items | ||||||||||||
Actuarial losses | $ | - | $ | - | $ | (6) | ||||||
One-time loss on disposal | - | - | - | |||||||||
- | - | (6) | Income (Loss) before income taxes | |||||||||
Tax impact | - | - | 1 | Income tax benefit | ||||||||
$ | - | $ | - | $ | (5) | Net income (loss) | ||||||
Amortization of OPEB Cost Items | ||||||||||||
Prior-service costs | $ | 3 | $ | 1 | $ | 3 | ||||||
Actuarial losses | - | - | (2) | |||||||||
3 | 1 | 1 | Income (Loss) before income taxes | |||||||||
Tax impact | (1) | - | - | Income tax benefit | ||||||||
$ | 2 | $ | 1 | $ | 1 | Net income (loss) | ||||||
(a) Amounts in parentheses indicate losses.
Successor | Successor | Predecessor | ||||||||||
Amount Reclassified from | ||||||||||||
Accumulated Other | ||||||||||||
Comprehensive Loss (1) | ||||||||||||
($ in millions) | Affected Line Item in | |||||||||||
For the six months | For the two months | For the four months | the Statement Where | |||||||||
Details about Accumulated Other | ended June 30, | ended June 30, | ended April 30, | Net Income (Loss) | ||||||||
Comprehensive Loss Components | 2022 | 2021 | 2021 | is Presented | ||||||||
Amortization of Pension Cost Items | ||||||||||||
Actuarial losses | $ | - | $ | - | $ | (24) | ||||||
One-time loss on disposal | - | - | - | |||||||||
- | - | (24) | Income (Loss) before income taxes | |||||||||
Tax impact | - | - | 5 | Income tax benefit | ||||||||
$ | - | $ | - | $ | (19) | Net income (loss) | ||||||
Amortization of OPEB Cost Items | ||||||||||||
Prior-service costs | $ | 6 | $ | 1 | $ | 10 | ||||||
Actuarial losses | - | - | (5) | |||||||||
6 | 1 | 5 | Income (Loss) before income taxes | |||||||||
Tax impact | (2) | - | (1) | Income tax benefit | ||||||||
$ | 4 | $ | 1 | $ | 4 | Net income (loss) | ||||||
(b)(1) These accumulated other comprehensive loss components are included in the computation of net periodic pension and OPEB costs (see(See Note 1415 - Retirement Plans for additional details).
(14)
(15) Retirement Plans:
Frontier recognizes actuarial gains (losses) for our pension and postretirement plans in the period they occur. The components of net periodic benefit cost other than the service cost component for our plans as well as any actuarial gains or losses are included in “Investment and other income (loss)” on the consolidated statement of income.
The following tables provide the components of total pension benefit cost:
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Successor | Successor | Predecessor | |||||||||||||||||||||
Pension Benefits | |||||||||||||||||||||||
For the three months ended June 30, | For the two months ended June 30, | For the one month ended April 30, | |||||||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | ||||||||||||||||||||
Components of total pension benefit cost | |||||||||||||||||||||||
Service cost | $ | 20 | $ | 13 | $ | 8 | |||||||||||||||||
Interest cost on projected benefit obligation | 25 | 18 | 8 | ||||||||||||||||||||
Expected return on plan assets | (50) | (31) | (16) | ||||||||||||||||||||
Amortization of unrecognized loss | - | - | 6 | ||||||||||||||||||||
Total pension (benefit) cost | $ | (5) | $ | - | $ | 6 | |||||||||||||||||
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| Pension Benefits | |||||||||||||||||||||
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| For the three months ended |
| For the nine months ended | Successor | Successor | Predecessor | ||||||||||||||||
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| September 30, |
| September 30, | Pension Benefits | ||||||||||||||||||
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| For the six months ended June 30, | For the two months ended June 30, | For the four months ended April 30, | ||||||||
($ in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2022 | 2021 | 2021 | ||||||||||||
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Components of total pension benefit cost |
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Service cost |
| $ | 26 |
| $ | 16 |
| $ | 76 |
| $ | 63 | $ | 41 | $ | 13 | $ | 32 | |||||
Interest cost on projected benefit obligation |
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| 27 |
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| 24 |
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| 94 |
|
| 89 | 49 | 18 | 31 | ||||||||
Expected return on plan assets |
|
| (43) |
|
| (30) |
|
| (139) |
|
| (122) | (99) | (31) | (61) | ||||||||
Amortization of unrecognized loss |
|
| 6 |
|
| 9 |
|
| 23 |
|
| 30 | - | - | 24 | ||||||||
Net periodic pension benefit cost |
| $ | 16 |
| $ | 19 |
| $ | 54 |
| $ | 60 | |||||||||||
Pension settlement costs |
|
| 15 |
|
| - |
|
| 77 |
|
| - | |||||||||||
Total pension benefit cost |
| $ | 31 |
| $ | 19 |
| $ | 131 |
| $ | 60 | |||||||||||
Total pension (benefit) cost | $ | (9) | $ | - | $ | 26 | |||||||||||||||||
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The components of net periodic benefit cost other than the service cost component are included in “Investment and other income” on the consolidated statement of income.
The value of our pension plan assets decreased $545 million from $2,655 million at December 31, 2021 to $2,110 million at June 30, 2022. This decrease primarily resulted from changes in the market value of investments of $506 million including plan expenses, and benefit payments to participants of $113 million, partially offset by contributions of $74 million.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
The following tables provide the components of total postretirement benefit cost:
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Successor | Successor | Predecessor | |||||||||||||||||||||
Postretirement | |||||||||||||||||||||||
For the three months ended June 30, | For the two months ended June 30, | For the one month ended April 30, | |||||||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | ||||||||||||||||||||
Components of net periodic postretirement benefit cost | |||||||||||||||||||||||
Service cost | $ | 3 | $ | 3 | $ | 2 | |||||||||||||||||
Interest cost on projected benefit obligation | 8 | 5 | 2 | ||||||||||||||||||||
Amortization of prior service (benefit) | (3) | (1) | (3) | ||||||||||||||||||||
Remeasurement (gain) loss | (96) | 13 | - | ||||||||||||||||||||
Amortization of unrecognized loss | - | - | 2 | ||||||||||||||||||||
Net periodic postretirement (benefit) cost | $ | (88) | $ | 20 | $ | 3 | |||||||||||||||||
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| Postretirement Benefits | |||||||||||||||||||||
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| For the three months ended |
| For the nine months ended | Successor | Successor | Predecessor | ||||||||||||||||
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| September 30, |
| September 30, | Postretirement | ||||||||||||||||||
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| For the six months ended June 30, | For the two months ended June 30, | For the four months ended April 30, | ||||||||
($ in millions) |
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2022 | 2021 | 2021 | ||||||||||||
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Components of net periodic postretirement benefit cost |
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Service cost |
| $ | 5 |
| $ | 6 |
| $ | 16 |
| $ | 14 | $ | 7 | $ | 3 | $ | 7 | |||||
Interest cost on projected benefit obligation |
|
| 11 |
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| 10 |
|
| 30 |
|
| 27 | 14 | 5 | 9 | ||||||||
Amortization of prior service cost/(credit) |
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| (2) |
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| (2) |
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| (7) |
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| (7) | |||||||||||
Amortization of unrecognized (gain) loss |
|
| (1) |
|
| - |
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| - |
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| 1 | |||||||||||
Net periodic postretirement benefit cost |
| $ | 13 |
| $ | 14 |
| $ | 39 |
| $ | 35 | |||||||||||
Amortization of prior service (benefit) | (6) | (1) | (10) | ||||||||||||||||||||
Remeasurement (gain) loss | (150) | 13 | - | ||||||||||||||||||||
Amortization of unrecognized loss | - | - | 5 | ||||||||||||||||||||
Net periodic postretirement (benefit) cost | $ | (135) | $ | 20 | $ | 11 | |||||||||||||||||
In the first half of 2022, Frontier amended the medical coverage for certain postretirement benefit plans, which necessitated a remeasurement of its other postretirement benefit (OPEB) obligations. This remeasurement resulted in the recognition of a net actuarial gain of $150 million, which was driven primarily from a higher assumed discount rate relative to December 31, 2021. Upon emergence from bankruptcy, Frontier revised its accounting policy to recognize actuarial gains and losses in the period in which they occur. As such, this gain was recorded in “Investment and other income, net” on our consolidated statements of income.
During the first ninesix months ended June 30, 2022, we capitalized $11 million of pension and OPEB expense into the cost of our capital expenditures, as the costs relate to our engineering and plant construction activities. During the one month and four months of 2017 and 2016,April 30, 2021, we capitalized $20$1 million and $18$7 million, respectively, of pension and OPEB expense into the cost of our capital expenditures, as the costs relate to our engineering and plant construction activities.
The Pension Plan contains provisions that provide certain employees with the option of receiving a lump sum payment upon retirement. Frontier’s accounting policy is to record these payments as a settlement only if, in the aggregate, they exceed the sum of the annual service and interest costs for the Pension Plan’s net periodic pension benefit cost. During the three and ninetwo months ended September 30, 2017, lump sum pension settlement payments to terminated or retired individuals amounted to $87 million and $449 million, which exceeded the settlement threshold of $224 million, and as a result, Frontier recognized non-cash settlement charges totaling $77 million during the first nine months of 2017. The non-cash charge accelerated the recognition of a portion of the previously unrecognized actuarial losses in the Pension Plan. These non-cash charges increased our recorded net loss and accumulated deficit, with an offset to accumulated other comprehensive loss in shareholders’ equity. An additional pension settlement charge will be required in the fourth quarter of 2017, the amount of which will be dependent on the lump sum benefit payments made during the fourth quarter. As a result of the recognition of the settlement charges in the first nine months of 2017, the net pension plan liability was remeasured as of September 30, 2017, June 30, 20172021, we capitalized $4 million of pension and March 31, 2017 to be $717 million, $711 million and $665million, respectively, as compared to the $699 million measured and recorded at December 31, 2016. The remeasured funded status of the Pension Plan was approximately 80%, as of September 30, 2017, similar to December 31, 2016. Frontier did not record any adjustment to the pension plan liability, beyond the settlement charge, as a result of this remeasurement.OPEB expense.
Our Pension Plan assets decreased from $2,766 million at December 31, 2016 to $2,604 million at September 30, 2017, a decrease of $162 million, or 6%. This decrease was a result of benefit payments of $492 million, partially offset by positive investment returns of $270 million, net of investment management and administrative fees, and contributions in excess of the Differential (as defined below) of $60 million, during the first nine months of 2017.
As part of the CTF Acquisition, Verizon was required to make a cash payment to Frontier for the difference in assets initially transferred by Verizon into the Pension Plan and the related obligation (the Differential). In the third quarter of 2017, we received the $131 million Differential payment from Verizon, and have remitted an equivalent amount to the Pension Plan as of September 30, 2017. As the Differential was reflected as a receivable of the Pension Plan at December 31, 2016, the cash funding had no impact to plan assets.
(15) (16) Commitments and Contingencies:
Although from time to time we make short-term purchasing commitments to vendors with respect to capital expenditures, we generally do not enter into firm, written contracts for such activities. In connection with the accelerated fiber build, we have prioritized diversifying our vendor base and finalizing agreements with vendors for relevant labor and materials. Some of these agreements will have initial two-year terms with an option to extend for two years through 2025.
In June 2015, Frontier accepted the Federal Communications Commission’s (FCC) offer of support to price cap carriers under the Connect America Fund (CAF)FCC’s CAF Phase II program,offer in 25 states, which is intended to provide long-term support for broadband in high cost unserved or underserved areas. This program provides $332provided $313 million in annual support including $49 million in annual support related to the properties acquired in the CTF Acquisition, through 20202021, to make available 10 Mbps downstream/1 Mbps upstream broadband service to approximately 774,000 households across certainsome of the 2925 states where we now operate.
The deployment deadline was December 31, 2021, and final review and audit of households is not complete. To the extent it is determined we dodid not enable the required number of households with 10 Mbps downstream/1 Mbps upstream broadband service by the end of theor we were unable to satisfy other FCC CAF Phase II term, we wouldrequirements, Frontier will be required to return a portion of the funds previously received.
On April 20, 2017, the FCC issued an Order that will significantly alter how Commercial Data Services are regulated once the rules go into effect. Specifically, the Order adopted a test to determine, on a county-by-county basis, whether price cap ILECs’, like Frontier’s, DS1received and DS3 services will continue to be regulated. The test is likely to result in deregulation in a substantial number of our markets. Once implemented, the deregulation will allow Frontier to offer its DS1 and DS3 services in a manner that better responds to the competitive marketplace and allows for commercial negotiation. The areas that remain regulated may be subject to price fluctuations depending uponcertain other requirements and obligations. We have accrued an amount for any potential shortfall in the price cap formulahousehold build commitment that year. Multiple parties havewe deem to be probable and reasonably estimated, and we do not expect that any potential penalties, if ultimately incurred, will be material in comparison to the established accrual.
On January 30, 2020, the FCC adopted an order establishing RDOF, a competitive reverse auction to provide support to serve high cost areas. The FCC announced the results of its RDOF Phase I auction on December 7, 2020. Frontier was awarded approximately $371 million over ten years to build gigabit-capable broadband over a fiber-to-the-premises network to approximately 127,000 locations in 8 states (California, Connecticut, Florida, Illinois, New York, Pennsylvania, Texas, and West Virginia). The FCC approved Frontier’s Long Form application in March 2022 and Frontier began receiving funding in the second quarter of 2022. Frontier will be required to complete the buildout to these locations by December 31, 2028, with interim target milestones over this period.
On April 30, 2018, an amended consolidated class action complaint was filed in the United States District Court for the District of Connecticut on behalf of certain purported stockholders against Frontier, certain of its current and former directors and officers and the underwriters of certain Frontier securities offerings and in connection with certain disclosures relating to the CTF transaction. The complaint was brought on behalf of all persons who (1) acquired Frontier common stock between February 6, 2015 and February 28, 2018, inclusive, and/or (2) acquired Frontier common stock or Mandatory Convertible Preferred Stock. On March 8, 2019, the District Court granted in its entirety Frontier’s motion to dismiss the complaint and on March 24, 2020, the court denied plaintiffs’ motion for leave to amend. Plaintiffs appealed and requestedprior to oral argument, the parties reached an agreement in principle to resolve the matter. The settlement, which has obtained final court approval, will be covered by insurance and will have no material financial impact on the Company.
On May 19, 2021, the FTC, joined by the attorneys general of Arizona, Indiana, Michigan, North Carolina, and Wisconsin, and two California District Attorneys, filed a staycomplaint against Frontier in the Federal District Court for the Central District of California alleging that Frontier violated federal and state laws by knowingly misrepresenting in its advertisements the Internet speeds it was capable of delivering to DSL customers. On October 4, 2021, the court granted in part and denied in part Frontier’s motion dismiss by dismissing the non-California state claims, but permitting the FTC’s and California’s claims to proceed in the litigation. Frontier expressly denies any wrongdoing but, in the interest of resolving the matter, entered into a settlement with the FTC and California, which required Frontier to make a financial payment of approximately $9 million in costs and civil penalties, along with certain modifications to its DSL advertising and other practices. An accrual was established as of March 31, 2022 for the financial impact of this Order.settlement, which is not material to these
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
financial statements. The settlement was approved by the court and the financial payment was made in the second quarter of 2022.
On July 27, 2022, the Connecticut Public Utility Regulatory Authority (“PURA”) issued a Notice of Violation and Assessment of Civil Penalty Order to Cease and Desist (“NOV”) related to the underground excavation and placement of fiber facilities by Frontier cannot predictand its contractors in Connecticut. The NOV alleges that Frontier and its contractors failed to comply with certain state excavation regulations which created public safety and compliance issues. The NOV prescribes a $5 million fine, which the extentCompany will challenge in a contested proceeding. The NOV also orders Frontier to which these regulatory changesdiscontinue certain underground fiber deployment work until the Company submits a compliance plan to ensure compliance with the applicable regulations. Frontier is complying with the NOV and will resultseek relief from the underground fiber deployment restrictions. On August 1, 2022, the PURA responded to a Frontier motion, clarifying the restrictions and allowing certain underground construction activity to continue. While the Company does not believe that this matter will have a material impact on its fiber build or financial position, results of operations or cash flows, a prolonged ban on underground installations in changesConnecticut could adversely impact the Company’s ability to revenues at this time. meet its build targets in a timely manner.
WeIn addition, we are party to various legal proceedings (including individual actions, class and putative class actions)actions, and governmental investigations) arising in the normal course of our business covering a wide range of matters and types of claims including, but not limited to, general contracts,contract disputes, billing disputes, rights of access, taxes and surcharges, consumer protection, advertising, sales and the provision of services, intellectual property, including, trademark, copyright, and patent infringement, employment, shareholder, regulatory, tort, claims of competitors and disputes with other carriers. Litigation is subject to uncertainty and the outcome of individual matters is not predictable. However, we believe that the ultimate resolution of all such matters, after considering insurance coverage or other indemnities to which we are entitled, will not have a material adverse effect on our financial position, results of operations, or cash flows.
In October 2013, the California Attorney General’s Office notified certain Verizon companies, including one of the subsidiaries that we acquired in the CTF Acquisition, of potential violations of California state hazardous waste statutes primarily arising from the disposal of electronic components, batteries and aerosol cans at certain California facilities. We are cooperating with this investigation. We have accrued an amount for potential penalties that we deem to be probable and reasonably estimated, and we do not expect that any potential penalties, if ultimately incurred, will be material in comparison to the established accrual.
We accrue an expense for pending litigation when we determine that an unfavorable outcome is probable, and the amount of the loss can be reasonably estimated. Legal defense costs are expensed as incurred. None of our existing accruals for pending matters, after considering insurance coverage, is material. We monitor our pending litigation for the purpose of adjusting our accruals and revising our disclosures accordingly, when required. Litigation is, however, subject to uncertainty, and the outcome of any particular matter is not predictable. We will vigorously defend our interests in pending litigation, and as of this date, we believe that the ultimate resolution of all such matters, after considering insurance coverage or other indemnities to which we are entitled, will not have a material adverse effect on our consolidated financial position, results of operations, or our cash flows.flows.
In October 2013,We conduct certain of our operations in leased premises and also lease certain equipment and other assets pursuant to operating leases. The lease arrangements have terms ranging from 1 to 99 years and several contain rent escalation clauses providing for increases in monthly rent at specific intervals. When rent escalation clauses exist, we record annual rental expense based on the California Attorney General’s Office notified certain Verizon companies, including one oftotal expected rent payments on a straight-line basis over the subsidiarieslease term. Certain leases also have renewal options. Renewal options that we acquiredare reasonably assured are included in determining the CTF Acquisition, of potential violations of California state hazardous waste statutes primarily arising from the disposal of electronic components, batteries and aerosol cans at certain California facilities. We are cooperating with this investigation. We have accrued an amount for potential penalties lease term.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
that we deemWe are party to be probable and reasonably estimated, and we do not expect that any potential penalties, if ultimately incurred, will be material in comparisoncontracts with several unrelated long-distance carriers. The contracts provide fees based on traffic they carry for us subject to the established accrual. minimum monthly fees.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements,"forward-looking statements" related to future not past, events. Forward-looking statements address our expectedexpectations or beliefs concerning future businessevents, including, without limitation, our future operating and financial performance, our ability to comply with the covenants in the agreements governing our indebtedness and financial condition,other matters. These statements are made on the basis of management’s views and assumptions, as of the time the statements are made, regarding future events and performance and contain words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "see," "will," "would,"“expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “may,” “will,” “would,” or "target."“target.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertaintiesWe do not intend, nor do we undertake any duty, to update any forward-looking statements.
A wide range of factors could materially affect future developments and performance, including but not limited to:
our significant indebtedness, our ability to incur substantially more debt in the future, and covenants in the agreements governing our current indebtedness that could causemay reduce our actual resultsoperating and financial flexibility;
declines in Adjusted EBITDA relative to be materially different than those expressedhistorical levels that we are unable to offset;
our ability to successfully implement strategic initiatives, including our fiber buildout and other initiatives to enhance revenue and realize productivity improvements;
our ability to secure necessary construction resources, materials and permits for our fiber buildout initiative in a timely and cost-effective manner;
potential disruptions in our forward-looking statements include:supply chain and the effects of inflation resulting from the COVID-19 pandemic, the global microchip shortage, or otherwise, which could adversely impact our business and hinder our fiber expansion plans;
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our ability to effectively manage our operations, operating expenses, capital expenditures, debt service requirement and cash paid for income taxes and liquidity;
competition from cable, wireless and wireline carriers, satellite, fiber “overbuilders” and over the top companies, and the risk that we will not respond on a timely or profitable basis;
our ability to successfully adjust to changes in the communications industry, including the effects of technological changes and competition on our capital expenditures, products and service offerings;
risks related to disruption in our networks, infrastructure and information technology that result in customer loss and/or incurrence of additional expenses;
the impact of potential information technology or data security breaches or other cyber-attacks or other disruptions;
our ability to retain or attract new customers and to maintain relationships with customers, including wholesale customers;
our reliance on a limited number of key supplies and vendors;
declines in revenue from our voice services, switched and nonswitched access and video and data services that we cannot stabilize or offset with increases in revenue from other products and services;
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
our ability to secure, continue to use or renew intellectual property and other licenses used in our business;
our ability to hire or retain key personnel;
our ability to dispose of certain assets or asset groups or to make acquisition of certain assets on terms that are attractive to us, or at all;
the effects of changes in the availability of federal and state universal service funding or other subsidies to us and our competitors and our ability to obtain future subsidies;
our ability to meet our CAF II and RDOF obligations and the risk of penalties or obligations to return certain CAF II and RDOF funds;
our ability to defend against litigation and potentially unfavorable results from current pending and future litigation;
our ability to comply with applicable federal and state consumer protection requirements;
the effects of governmental legislation and regulation on our business, including costs, disruptions, possible limitations on operating flexibility and changes to the competitive landscape resulting from such legislation or regulation;
the impact of regulatory, investigative and legal proceedings and legal compliance risks;
our ability to effectively manage service quality in the states in which we operate and meet mandated service quality metrics;
the effects of changes in income tax rates, tax laws, regulations or rulings, or federal or state tax assessments, including the risk that such changes may benefit our competitors more than us, as well as potential future decreases in the value of our deferred tax assets;
the effects of changes in accounting policies or practices;
our ability to successfully renegotiate union contracts;
the effects of increased medical expenses and pension and postemployment expenses;
changes in pension plan assumptions, interest rates, discount rates, regulatory rules and/or the value of our pension plan assets;
the likelihood that our historical financial information may no longer be indicative of our future performance;
the impact of adverse changes in economic, political and market conditions in the areas that we serve, the U.S. and globally, including but not limited to, disruption in our supply chain, inflation in pricing for key materials or labor, or other adverse changes resulting from epidemics, pandemics and outbreaks of contagious diseases, including the COVID-19 pandemic, natural disasters, economic or political instability or other adverse public health developments;
potential adverse impacts of the COVID-19 pandemic on our business and operations, including potential disruptions to the work of our employees arising from health and safety measures such as social distancing, working remotely and recent applicable federal, state and local mandates and prohibitions, our ability to
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PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
effectively manage increased demand on our network, our ability to maintain relationships with our current or prospective customers and vendors and the ability of our vendors to perform under current or proposed arrangements with us;
potential adverse impacts of climate change and increasingly stringent environmental laws, rules and regulations, and customer expectations;
market overhang from the substantial common stock holdings by our former creditors;
certain provisions of Delaware law and our certificate of incorporation that may prevent efforts by our stockholders to change the direction or management of our company; and
certain other factors set forth in our other filings with the SEC.
Any of the foregoing events, or other events, could cause our results to vary from management’s forward-looking statements included in this report. You should consider these important factors, as well as the risks contained in our most recent Form 10-K and other filings with the SEC, in evaluating any statement in this report or otherwise made by us or on our behalf. The following information is unaudited and should be read in conjunction with the consolidated financial statements and related notes included in this report. We have no obligation to update or revise these forward-looking statements and do not undertake to do so.
Investors should also be aware that while we do, at various times, communicate with securities analysts, it is against our policy to disclose to them selectively any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by an analyst, irrespective of the content of the statement or report. To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
Item 2.Management’s Discussion and AnalysisAnalysis of Financial Condition and Results of Operations
On AprilFrontier Communications Parent, Inc. is a provider of communications services in the United States, with approximately 2.8 million broadband customers and 15,074 employees, operating in 25 states as of June 30, 2022. We offer a broad portfolio of communications services for consumer and business customers. These services include data and Internet services, video services, voice services, access services, and advanced hardware and network solutions.
Business Overview
Frontier’s purpose is to Build Gigabit AmericaTM by expanding and transforming our fiber network in order to meet the rapidly increasing demand for data from both our consumer and business customers. We believe that a fiber network has competitive advantages to be able to meet this growing demand, including faster download speeds, faster upload speeds, and lower latency levels than alternative broadband services.
In August 2021, we announced our plan to accelerate our fiber build to reach 10 million total fiber passings by December 31, 2025. We are prioritizing our fiber build activities to locations which we believe will provide the highest investment returns. Over time, we expect our business mix will shift significantly, with a larger percentage of revenue coming from fiber as we implement our expansion plan.
Our strategy focuses on four levers of value creation: fiber deployment, fiber broadband penetration, improving the customer experience, and operational efficiency. We accomplished the following objectives in the second quarter of 2022:
We built fiber to approximately 281,000 locations, resulting in approximately 4.4 million total locations passed with fiber as of June 30, 2022.
We accelerated our fiber build and announced that we expect to exceed our 2022 build target of 1 2016,million locations by an additional 100,000 to 200,000 locations. Our plan remains on track, within our established cost parameters, and we have solidified our fiber build supply chain with multi-year agreements with key labor and equipment partners.
We added 54,000 fiber broadband customer net additions, resulting in fiber broadband customer growth of 13.4% versus the second quarter of 2021.
oIn our Base Fiber Network of 3.2 million locations, we achieved broadband penetration of 43%, an increase of 140bps from the second quarter of 2021 and approaching our terminal penetration target of 45%.
oFiber locations constructed in 2020 reached broadband penetration of 22% and 44% after 12 and 24 months, respectively.
oFiber locations constructed in 2021 reached penetration of 17% after 12 months.
Fiber broadband customer net additions continued to outpace copper broadband customer net losses, resulting in 8,000 total broadband customer net additions.
We achieved sequential growth in consumer revenue for the first time in more than three years, led by strong fiber broadband growth.
We realized $201 million of gross annualized cost savings as of June 30, 2022 and remain on track to exceed our goal of $250 million of gross annual cost savings by 2023.
We successfully completed an offering of $1.2 billion first lien notes, further strengthening our acquisitionbalance sheet and securing funding for our fiber build through mid-2024.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
During the first half of Verizon’s wireline properties2022, markets remained volatile and the economic outlook remains uncertain. We continue to closely monitor market factors including potential disruptions in California, Texas,our supply chain, tightening labor markets, actual or perceived inflation, the cost of borrowing, and Florida (the CTF Acquisition,evolution of the CTF Operations).Frontier’s scopeongoing COVID-19 pandemic. We continuously evaluate the impact these and other factors may have on our business, including demand for our products and services, our ability to execute on our strategic priorities and our financial condition and results of operationsoperations. Through June 30, 2022 the overall operational and balance sheet changed materiallyfinancial impacts to our business have not been significant.
Financial Overview
We reported operating income of $166 million and Non-GAAP operating income of $298 million for the three months ended June 30, 2022 and 2021, respectively, a decrease of $132 million. After adjusting for the impact of fresh start accounting, our Non-GAAP operating income would have decreased by $127 million, as compared to the prior year period.
We reported operating income of $287 million and Non-GAAP operating income of $557 million for the six months ended June 30, 2022 and 2021, respectively, a decrease of $270 million. After adjusting for the impact of fresh start accounting, our Non-GAAP operating income would have decreased by $250 million, as compared to the prior year period.
Our operating results decreased primarily due to decreases in subsidy and other revenue, and lease impairment charges, partially offset by a reduction in depreciation and amortization expense as a result of the completionlower asset bases established upon our implementation of the CTF Acquisition. Historical financialfresh start accounting and operating data presented for Frontier includes the results of the CTF Operations that were acquired in the CTF Acquisition from the date of acquisition on April 1, 2016 and is not indicative of future operating results. The financial discussion below includes a comparative analysis of our results of operations on a historical basislower video content costs as of and for the nine months ended September 30, 2017 and 2016.
On July 10, 2017, we effected a one for fifteen reverse stock split of our common stock. The reverse stock split reduced the number of common shares issued (which includes outstanding shares and treasury shares) from approximately 1,193,000,000 sharescompared to 80,000,000 shares, and reduced shares outstanding from 1,178,000,000 shares to 79,000,000 shares. In addition, and at the same time, the total number of shares of common stock that Frontier is authorized to issue changed from 1,750,000,000 shares to 175,000,000 shares. There was no change in the par value of the common stock, and no fractional shares were issued. All share and per share amounts in the financial discussion below have been retroactively adjusted for all periods presented to give effect to the reverse stock split. As a result of our reverse stock split the conversion rates of our Series A Preferred Stock were proportionately adjusted.
Our financial results for the first nine months of 2017 include the CTF Operations for the first quarter of 2017. With the acquisition occurring April 1, 2016, there are no comparative results for the corresponding period in 2016. The table below reflects the results2021.
Presentation of operations for the CTFResults of Operations for the first quarter of 2017. In the narrative that follows for the nine month period, unless otherwise noted we will only discuss the remaining variance.
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32
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
The sections below include tables that present customer counts, average monthly consumer revenue per customer (ARPC)(“ARPC”) and consumer customer churn. We define churn which we define as the average of the number of consumer customer deactivations during the month divided by the number of consumer customers at the beginning of the month.
month and utilize the average of each monthly churn in the period. Management believes that consumer customer counts and average monthly revenue per customer are important factors in evaluating our consumer customer trends. Among the key services we provide to consumer customers are voice service, data service and video service. We continue to explore the potential to provide additional services to our customer base, with the objective of meeting all of our customers’ communications needs.
The following section should be read in conjunction with the unaudited interim consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2016.2021. The following charts present key customer metrics, disaggregation of revenue, and the results of operations of the consolidated company.
(a)Results of Operations
Unless otherwise indicated, the discussion of the customer metrics and components of operating income for the table that follows relates only to the Non-GAAP financial results for the three and six months ended June 30, 2022, as compared to the financial results for the three and six months ended June 30, 2021.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
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CUSTOMER RELATED METRICS
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| September 30, 2017 |
| December 31, 2016 |
| % Increase (Decrease) |
| September 30, 2016 |
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Customers (in thousands) |
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| 4,949 |
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| 5,393 |
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| 5,551 | (1) | (11) | % |
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Consumer customer metrics |
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Customers (in thousands) |
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| 4,486 |
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| 4,891 |
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| 5,035 | (1) | (11) | % |
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Net customer additions/(losses) |
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Average monthly consumer |
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revenue per customer |
| $ | 80.91 |
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Customer monthly churn |
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| 2.08% |
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Commercial customer metrics |
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Customers (in thousands) |
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| 463 |
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| 502 |
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| 516 | (1) | (10) | % |
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Broadband subscriber metrics |
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Broadband subscribers |
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| 4,362 | (2) | (8) | % |
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Net subscriber additions/(losses) |
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Video (excl. DISH) subscriber metrics |
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Video subscribers (in thousands) |
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| 1,222 | (2) | (20) | % |
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Net subscriber additions/(losses) |
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DISH subscriber metrics |
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DISH subscribers (in thousands) |
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| 244 |
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| 281 | (2) | (13) | % |
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Net subscriber additions/(losses) |
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Employees |
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| 23,181 | (3) |
| 28,332 |
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| 30,358 |
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Consumer customer metrics |
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Average monthly consumer |
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revenue per customer |
| $ | 80.73 |
| $ | 76.11 |
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Customer monthly churn |
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| 2.23% |
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| 15 | % |
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Customer Trends and Revenue Performance
As of or for the three months ended June 30, | |||||||||||
(Customer and Employee Metrics in thousands) | 2022 | 2021 | % Change | ||||||||
Customers | |||||||||||
Consumer | 3,159 | 3,196 | (1) | % | |||||||
Consumer Customer Metrics | |||||||||||
Net customer additions (losses) | (10) | (38) | (74) | % | |||||||
ARPC | $ | 83.35 | $ | 85.65 | (3) | % | |||||
Customer Churn | 1.53% | 1.54% | (1) | % | |||||||
Broadband Customer Metrics (1) | |||||||||||
Fiber Broadband | |||||||||||
Consumer customers | 1,438 | 1,263 | 14 | % | |||||||
Business customers | 102 | 95 | 7 | % | |||||||
Consumer net customer additions | 50 | 12 | 317 | % | |||||||
Consumer customer churn | 1.43% | 1.53% | (6) | % | |||||||
Consumer customer ARPU | $ | 63.35 | $ | 63.10 | 0 | % | |||||
Copper Broadband | |||||||||||
Consumer customers | 1,163 | 1,297 | (10) | % | |||||||
Business customers | 124 | 143 | (13) | % | |||||||
Consumer net customer additions (losses) | (41) | (30) | 37 | % | |||||||
Consumer customer churn | 1.73% | 1.67% | 3 | % | |||||||
Consumer customer ARPU | $ | 48.47 | $ | 44.80 | 8 | % | |||||
Other Metrics | |||||||||||
Employees | 15,074 | 16,005 | (6) | % | |||||||
For the six months ended June 30, | |||||||||||
(Customer and Employee Metrics in thousands) | 2022 | 2021 | % Change | ||||||||
Consumer Customer Metrics | |||||||||||
Net customer additions (losses) | (6) | (68) | (91) | % | |||||||
ARPC | $ | 82.51 | $ | 86.34 | (4) | % | |||||
Customer Churn | 1.44% | 1.49% | (3) | % | |||||||
Broadband Customer Metrics (1) | |||||||||||
Fiber Broadband | |||||||||||
Consumer net customer additions | 102 | 25 | 308 | % | |||||||
Consumer customer churn | 1.31% | 1.47% | (11) | % | |||||||
Consumer customer ARPU | $ | 62.76 | $ | 61.88 | 1 | % | |||||
Copper Broadband | |||||||||||
Consumer net customer additions | (71) | (52) | 37 | % | |||||||
Consumer customer churn | 1.63% | 1.65% | (1) | % | |||||||
Consumer customer ARPU | $ | 47.09 | $ | 43.98 | 7 | % | |||||
(1) | Amounts presented exclude related metrics for our wholesale customers. |
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Customers
We provide service and product optionsexperienced a decrease in our consumer and commercial offerings in eachcustomers of our markets. As of September 30, 2017, 68% of our consumer broadband customers were subscribed to at least one other service offering.
We had approximately 4,486,000 and 5,035,000 total consumer customers1% as of SeptemberJune 30, 2017 and 2016, respectively. Our consumer customer churn was 2.08% for the three months ended September 30, 2017 (1.92% for Frontier legacy and 2.33% for CTF Operations)2022, as compared to 2.08% (1.89% for Frontier legacy and 2.34% for CTF Operations) for the third quarter of 2016 and 2.24% (1.95% for Frontier legacy and 2.69% for CTF Operations) for the second quarter of 2017, respectively. prior year period.
The consolidated average monthly consumer revenue per customer
34
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
( (“consumer ARPC)ARPC”) decreased by $1.43$2.30, or 2%3%, to $80.91 during$83.35 and $3.83, or 4%, to $82.51 for the third quarter of 2017three and six months ended June 30, 2022, compared to the prior year period. three and six months ended June 30, 2021, respectively.
The overall decrease in consumer ARPC isfor the quarter ended June 30, 2022, was primarily a result of lowerdecreased video services and consumer voice services, revenue and lower video revenue from our CTF Operations, partiallyslightly offset by higherincreased fiber data as well as price adjustments and promotional roll-offs on our voice, data and video services. The moderate decline in ARPC is expected to continue as our customer mix becomes more weighted towards broadband service. We have de-emphasized the sale of low margin video products, which have been a material part of the overall ARPC. In our expansion markets, we expect 15% and 20% penetration within 12 months and 25% after 24 months.
Fiber Broadband Customers
The Company has initiated an investment strategy focused on expanding and improving its fiber network. In conjunction with this strategy, the Company is also working to improve its product positioning in both existing and new fiber markets.
Although still in the early stages of this fiber investment strategy, results are promising. The quarter ended June 30, 2022 represents the twelfth consecutive quarter of positive consumer fiber net adds. For the quarter ended June 30, 2022, Frontier Secure revenue.
Ouradded 50,000 consumer customer churn was 2.23% for the nine months ended September 30, 2017 (1.94% for Frontier legacy and 2.68% for CTF Operations)fiber broadband customers compared to 1.94% (1.81% for Frontier legacy and 2.27% for CTF Operations) for the nine months ended September 30, 2016. The consolidated average monthly consumer revenue per customer (consumer ARPC) increased by $4.62 or 6% to $80.73 during the first nine months of 2017 compared to the prior year period. The overall increase in consumer ARPC is a result of higher revenue due to having nine months of CTF Operations in 2017 and only six months in 2016, partially offset by lower voice services revenue.
We had approximately 463,000 and 516,000 total commercial customers as of September 30, 2017 and 2016, respectively. We lost approximately 10,000 commercial customers during the three months ended September 30, 2017 compared to a loss of 12,000 customers for the three months ended September 30, 2016 and a loss of 11,000 for the three months ended June 30, 2017.2021. Customers who migrated from our copper base constituted a minor portion of these consumer fiber broadband customer net additions in the six months ended June 30, 2022.
For the three and six months ended June 30, 2022, Frontier expectsadded 4,000 and 6,000 business fiber broadband customers compared to zero net additions for both the declines in voice services revenuethree and wireless backhaul revenues from commercial customerssix months ended June 30, 2021.
Our focus on expanding and improving our fiber network is contributing to continueimproved customer retention. Our average monthly consumer fiber broadband churn was 1.43% and 1.31% for the remainder of 2017. Our Ethernet product revenues from our SME (small business, medium businessthree and larger enterprise customers)six months ended June 30, 2022, compared to 1.53% and carrier customers have grown by 9%1.47% for the Frontier legacy operations during the thirdthree and six months ended June 30, 2021, respectively. The improvements in customer churn were driven partly by increased focus at key customer touchpoints such as installation, first bill, and end of promotion periods, and partly by improved retention associated with inflation-related pricing actions, which were implemented in first quarter of 2017,2021 and second quarter of 2022.
In addition to our improvement in fiber net adds, we continue to see improvements in the average monthly consumer fiber broadband revenue per customer which increased $0.25 to $63.35 and $0.88 to $62.76 for the three and six months ended June 30, 2022, compared to the prior year period,three and declined by 3% (including CTF Operations) comparedsix months ended June 30, 2021, respectively. These increases are due to price increases and shifting mix towards higher speed tiers, a shift which has accelerated since the second quarterlaunch of 2017.our 2 gigabit offering on February 22, 2022.
We had approximately 4,000,000 and 4,362,000 broadband subscribers as of September 30, 2017 and 2016, respectively. DuringCopper Broadband Customers
For the three and six months ended SeptemberJune 30, 2017, we2022, Frontier lost approximately 63,000 net41,000 and 71,000 consumer copper broadband subscriberscustomers compared to a loss of 99,00030,000 and 52,000 for the three and six months ended June 30, 2021, respectively. Our fiber investment strategy has impacted these results as new fiber markets will not only cease selling the copper broadband product, but we will focus on converting existing copper broadband customers to a fiber product.
For the three and six months ended June 30, 2022, Frontier lost 5,000 and 9,000 business copper broadband customers compared to a loss of 99,0004,000 and 9,000 in the three and six months ended June 30, 2021, respectively.
Our average monthly consumer copper broadband churn was 1.73% and 1.63% for the three and six months ended September 30, 2016 and June 30, 2017, respectively.
REVENUE
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|
|
|
| For the three months ended September 30, |
| $ Increase |
|
| % Increase | ||||||
($ in millions) |
| 2017 |
| 2016 |
| (Decrease) |
|
| (Decrease) | ||||
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|
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|
Data and Internet services (1) |
| $ | 956 |
| $ | 1,045 |
| $ | (89) |
|
| (9) | % |
Voice services |
|
| 702 |
|
| 809 |
|
| (107) |
|
| (13) | % |
Video services |
|
| 318 |
|
| 392 |
|
| (74) |
|
| (19) | % |
Other |
|
| 84 |
|
| 73 |
|
| 11 |
|
| 15 | % |
Customer revenue (1) |
|
| 2,060 |
|
| 2,319 |
|
| (259) |
|
| (11) | % |
Switched access and |
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|
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|
|
|
subsidy |
|
| 191 |
|
| 205 |
|
| (14) |
|
| (7) | % |
Total revenue (1) |
| $ | 2,251 |
| $ | 2,524 |
| $ | (273) |
|
| (11) | % |
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|
| For the three months ended September 30, |
| $ Increase |
|
| % Increase | ||||||
|
| 2017 |
| 2016 |
| (Decrease) |
|
| (Decrease) | ||||
|
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|
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|
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|
|
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|
|
Consumer |
| $ | 1,102 |
| $ | 1,272 |
| $ | (170) |
|
| (13) | % |
Commercial |
|
| 958 |
|
| 1,047 |
|
| (89) | �� |
| (9) | % |
Customer revenue (1) |
|
| 2,060 |
|
| 2,319 |
|
| (259) |
|
| (11) | % |
Switched access and |
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|
|
|
|
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|
|
subsidy |
|
| 191 |
|
| 205 |
|
| (14) |
|
| (7) | % |
Total revenue (1) |
| $ | 2,251 |
| $ | 2,524 |
| $ | (273) |
|
| (11) | % |
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|
| For the nine months ended September 30, |
| $ Increase |
|
| % Increase | ||||||
($ in millions) |
| 2017 |
| 2016 |
| (Decrease) |
|
| (Decrease) | ||||
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Data and Internet services (1) |
| $ | 2,923 |
| $ | 2,680 |
| $ | 243 |
|
| 9 | % |
Voice services |
|
| 2,177 |
|
| 2,112 |
|
| 65 |
|
| 3 | % |
Video services |
|
| 994 |
|
| 879 |
|
| 115 |
|
| 13 | % |
Other |
|
| 231 |
|
| 218 |
|
| 13 |
|
| 6 | % |
Customer revenue (1) |
|
| 6,325 |
|
| 5,889 |
|
| 436 |
|
| 7 | % |
Switched access and |
|
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|
|
|
|
|
|
|
|
subsidy |
|
| 586 |
|
| 598 |
|
| (12) |
|
| (2) | % |
Total revenue (1) |
| $ | 6,911 |
| $ | 6,487 |
| $ | 424 |
|
| 7 | % |
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|
| For the nine months ended September 30, |
| $ Increase |
|
| % Increase | ||||||
|
| 2017 |
| 2016 |
| (Decrease) |
|
| (Decrease) | ||||
|
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|
Consumer |
| $ | 3,390 |
| $ | 3,187 |
| $ | 203 |
|
| 6 | % |
Commercial |
|
| 2,935 |
|
| 2,702 |
|
| 233 |
|
| 9 | % |
Customer revenue (1) |
|
| 6,325 |
|
| 5,889 |
|
| 436 |
|
| 7 | % |
Switched access and |
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|
|
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subsidy |
|
| 586 |
|
| 598 |
|
| (12) |
|
| (2) | % |
Total revenue (1) |
| $ | 6,911 |
| $ | 6,487 |
| $ | 424 |
|
| 7 | % |
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(1) Includes revenue from Frontier Secure Strategic Partnerships business, which was soldJune 30, 2022, compared to 1.67% and 1.65% in May of 2017, of $22 million for the three and six months ended SeptemberJune 30, 2016 and $40 million and $62 million for the nine months ended September 30, 2017 and 2016, respectively. 2021. The reductions in customer churn were primarily driven by customer retention initiatives.
Financial Results
Successor | Successor | Predecessor | Non-GAAP Combined | |||||||||||||||
For the three months ended June 30, | For the two months ended June 30, | For the one month ended April 30, | For the three months ended June 30, | |||||||||||||||
2022 | 2021 | 2021 | 2021 | % Change | ||||||||||||||
Data and Internet services | $ | 847 | $ | 556 | $ | 283 | $ | 839 | 1 | % | ||||||||
Voice services | 381 | 283 | 160 | 443 | (14) | % | ||||||||||||
Video services | 134 | 105 | 54 | 159 | (16) | % | ||||||||||||
Other | 80 | 62 | 30 | 92 | (13) | % | ||||||||||||
Revenue from contracts | 1,442 | 1,006 | 527 | 1,533 | (6) | % | ||||||||||||
Subsidy and other revenue | 17 | 55 | 28 | 83 | (80) | % | ||||||||||||
Revenue | 1,459 | 1,061 | 555 | 1,616 | (10) | % | ||||||||||||
Operating expenses: | ||||||||||||||||||
Cost of Service | 546 | 396 | 210 | 606 | (10) | % | ||||||||||||
Selling, general and administrative expenses | 427 | 269 | 129 | 398 | 7 | % | ||||||||||||
Depreciation and amortization | 290 | 179 | 119 | 298 | (3) | % | ||||||||||||
Restructuring costs and other charges | 30 | 11 | 5 | 16 | 88 | % | ||||||||||||
Total operating expenses | $ | 1,293 | $ | 855 | $ | 463 | $ | 1,318 | (2) | % | ||||||||
Operating income | 166 | 206 | 92 | 298 | (44) | % | ||||||||||||
Consumer | 791 | 543 | 283 | 826 | (4) | % | ||||||||||||
Business and wholesale | 651 | 463 | 244 | 707 | (8) | % | ||||||||||||
Revenue from contracts | $ | 1,442 | $ | 1,006 | $ | 527 | $ | 1,533 | (6) | % | ||||||||
Fiber revenue | 685 | 455 | 225 | 680 | 1 | % | ||||||||||||
Copper revenue | 757 | 551 | 283 | 834 | (9) | % | ||||||||||||
Non-network specific revenue | - | - | 19 | 19 | (100) | % | ||||||||||||
Revenue from contracts | $ | 1,442 | $ | 1,006 | $ | 527 | $ | 1,533 | (6) | % | ||||||||
36
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Revenue
Successor | Successor | Predecessor | Non-GAAP Combined | ||||||||||||||
For the six months ended June 30, | For the two months ended June 30, | For the four months ended April 30, | For the six months ended June 30, | ||||||||||||||
2022 | 2021 | 2021 | 2021 | % Change | |||||||||||||
Data and Internet services | $ | 1,683 | $ | 556 | $ | 1,125 | $ | 1,681 | 0 | % | |||||||
Voice services | 767 | 283 | 647 | 930 | (18) | % | |||||||||||
Video services | 271 | 105 | 223 | 328 | (17) | % | |||||||||||
Other | 163 | 62 | 125 | 187 | (13) | % | |||||||||||
Revenue from contracts | 2,884 | 1,006 | 2,120 | 3,126 | (8) | % | |||||||||||
Subsidy and other revenue | 22 | 55 | 111 | 166 | (87) | % | |||||||||||
Revenue | 2,906 | 1,061 | 2,231 | 3,292 | (12) | % | |||||||||||
Operating expenses: | |||||||||||||||||
Cost of Service | 1,099 | 396 | 830 | 1,226 | (10) | % | |||||||||||
Selling, general and administrative expenses | 862 | 269 | 537 | 806 | 7 | % | |||||||||||
Depreciation and amortization | 574 | 179 | 506 | 685 | (16) | % | |||||||||||
Restructuring costs and other charges | 84 | 11 | 7 | 18 | 367 | % | |||||||||||
Total operating expenses | $ | 2,619 | $ | 855 | $ | 1,880 | $ | 2,735 | (4) | % | |||||||
Operating income | 287 | 206 | 351 | 557 | (48) | % | |||||||||||
Consumer | 1,567 | 543 | 1,133 | 1,676 | (7) | % | |||||||||||
Business and wholesale | 1,317 | 463 | 987 | 1,450 | (9) | % | |||||||||||
Revenue from contracts | $ | 2,884 | $ | 1,006 | $ | 2,120 | $ | 3,126 | (8) | % | |||||||
Fiber revenue | 1,357 | 455 | 903 | 1,358 | (0) | % | |||||||||||
Copper revenue | 1,527 | 551 | 1,140 | 1,691 | (10) | % | |||||||||||
Non-network specific revenue | - | - | 77 | 77 | (100) | % | |||||||||||
Revenue from contracts | $ | 2,884 | $ | 1,006 | $ | 2,120 | $ | 3,126 | (8) | % | |||||||
We generate revenues
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
REVENUE
The table below presents our revenue by technology for the periods indicated:
Successor | Non-GAAP Combined | |||||||||||||
For the three months | For the three months | |||||||||||||
ended June 30, | ended June 30, | $ Increase | % Increase | |||||||||||
($ in millions) | 2022 | 2021 | (Decrease) | (Decrease) | ||||||||||
Fiber | $ | 685 | $ | 680 | $ | 5 | 1 | % | ||||||
Copper | 757 | 834 | (77) | (9) | % | |||||||||
Other (2) | - | 19 | (19) | (100) | % | |||||||||
Revenue from contracts with customers (1) | 1,442 | 1,533 | (91) | (6) | % | |||||||||
Subsidy revenue | 17 | 83 | (66) | (80) | % | |||||||||
Total revenue | $ | 1,459 | $ | 1,616 | $ | (157) | (10) | % | ||||||
Successor | Non-GAAP Combined | |||||||||||||
For the six months | For the six months | |||||||||||||
ended June 30, | ended June 30, | $ Increase | % Increase | |||||||||||
($ in millions) | 2022 | 2021 | (Decrease) | (Decrease) | ||||||||||
Fiber | $ | 1,357 | $ | 1,358 | $ | (1) | (0) | % | ||||||
Copper | 1,527 | 1,691 | (164) | (10) | % | |||||||||
Other (2) | - | 77 | (77) | (100) | % | |||||||||
Revenue from contracts with customers (1) | 2,884 | 3,126 | (242) | (8) | % | |||||||||
Subsidy revenue | 22 | 166 | (144) | (87) | % | |||||||||
Total revenue | $ | 2,906 | $ | 3,292 | $ | (386) | (12) | % | ||||||
(1)Includes $16 million and $16 million, and $32 million and $37 million of lease revenue for the three and six months ended June 30, 2022 and 2021, respectively.
(2)Includes USF fees that, in conjunction with the application of fresh start accounting, are now recorded net.
Our revenue streams are primarily througha result of recurring data, voice, and video services delivered over either a monthly recurring feeour copper or a feefiber network. Revenues are considered copper or fiber based on usage,the “last-mile” technology used to connect the customer location. With our investment strategy to expand and improve our fiber network and the corresponding fiber focus of our sales and marketing efforts, the company is experiencing growth in fiber broadband revenue and a decline in copper revenue. We expect this trend to continue due to strong fiber demand and the migration of customers from copper to fiber once the fiber network is available.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Revenue for our consumer and business and wholesale customers was as follows:
Successor | Non-GAAP Combined | |||||||||||||
For the three months ended June 30, | For the three months ended June 30, | $ Increase | % Increase | |||||||||||
($ in millions) | 2022 | 2021 | (Decrease) | (Decrease) | ||||||||||
Consumer | $ | 791 | $ | 826 | $ | (35) | (4) | % | ||||||
Business and wholesale | 651 | 707 | (56) | (8) | % | |||||||||
Revenue from contracts with customers (1) | 1,442 | 1,533 | (91) | (6) | % | |||||||||
Subsidy and other revenue | 17 | 83 | (66) | (80) | % | |||||||||
Total revenue | $ | 1,459 | $ | 1,616 | $ | (157) | (10) | % | ||||||
Successor | Non-GAAP Combined | |||||||||||||
For the six months ended June 30, | For the six months ended June 30, | $ Increase | % Increase | |||||||||||
($ in millions) | 2022 | 2021 | (Decrease) | (Decrease) | ||||||||||
Consumer | $ | 1,567 | $ | 1,676 | $ | (109) | (7) | % | ||||||
Business and wholesale | 1,317 | 1,450 | (133) | (9) | % | |||||||||
Revenue from contracts with customers (1) | 2,884 | 3,126 | (242) | (8) | % | |||||||||
Subsidy and other revenue | 22 | 166 | (144) | (87) | % | |||||||||
Total revenue | $ | 2,906 | $ | 3,292 | $ | (386) | (12) | % | ||||||
(1)Includes $16 million and $16 million, and $32 million and $37 million of lease revenue for the three and six months ended June 30, 2022 and 2021, respectively.
We conduct business with a range of consumer, business and wholesale customers and we generate both recurring and non-recurring revenues. Recurring revenues are primarily billed at fixed recurring rates, with some services billed based on usage. Revenue recognition is not dependent upon significant judgments by management, with the exception of a determination of the provision for uncollectible amounts.expected credit losses.
Consolidated total revenue
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Consumer
Consumer customer losses were driven by reductions in our copper broadband and stand-alone voice customers, partially offset by net additions of fiber broadband customers. Customer preferences as well as our fiber investment initiative is resulting in a migration of the customer base to fiber.
For the three and six months ended June 30, 2022, Frontier lost 10,000 and 6,000 consumer customers compared to a loss of 38,000 and 68,000 for the ninethree and six months ended SeptemberJune 30, 2017 increased $424 million2021. This includes net gains of consumer broadband customers of 9,000 and 31,000 for the three and six months ended June 30, 2022, as compared to $6,911 millionnet losses of our consumer broadband customers of approximately 18,000 and 27,000 during the same periods in 2021. This improvement is a direct result of our fiber initiatives.
For the three and six months ended June 30, 2022, compared to the three and six months ended June 30, 2021:
we experienced 4% and 7% decline in consumer revenues for the three and six months ended June 30, 2022, respectively, driven by a 3% and 4% decrease in ARPC and 1% decline in the number of customers as compared to the prior year period. Excluding additional revenue from the CTF Operations for the first quarter of 2017, our revenue for the first nine months of 2017 decreased $663 million, or 10%, as compared to the prior year period.same periods in 2021. This decline in 2017 is primarily the result of decreases in voice services revenues, lower switched and nonswitched access revenue, video, and data services revenue, each as described in more detail below.
Customer revenue for the nine months ended September 30, 2017 increased $436 million to $6,325 million as compared to the prior year period. Excluding additional revenue from the CTF Operations for the first quarter of 2017, our customer revenue for the first nine months of 2017 decreased $599 million, or 10%, as compared to the prior year period.
Consolidated consumer customer revenue for the nine months ended September 30, 2017 increased $203 million, or 6%, as compared to the prior year period. Excluding additional consumer customer revenue from the CTF Operations for the first quarter of 2017, revenues for the first nine months of 2017 decreased $411 million, or 13%, compared to the prior year period, primarily aswas driven predominantly a result of decreases in voice, video and data services revenue. Similarcopper broadband, offset by increases in fiber broadband. The Company’s fiber initiative will result in our revenue mix continuing to other wireline providers, move to fiber broadband.
we have experienced declines13% and 12% improvement in consumer fiber broadband revenues for the number of traditional voice customersthree and switched access minutes of use assix months ended June 30, 2022, respectively. This improvement is a result of competitionour fiber initiative which resulted in net adds of 175,000 customers during the 12 month period, and our continued focus on product positioning in both new and existing markets which resulted in ARPU improvements of $0.25 and $0.88 for the availability of substitutes, a trendthree and six months ended June 30, 2022.
we experienced approximately 2% and 3% decline in consumer copper broadband revenues for the three and six months ended June 30, 2022. As our copper footprint is transitioned to fiber, we expect fewer copper sales opportunities, and will proactively migrate existing broadband customers from copper to continue.fiber, both of which will reduce our copper net adds.
Consolidated commercial customerBusiness
For the three and six months ended June 30, 2022, we experienced an 8% and 9% decline in our business and wholesale revenues, respectively. Business revenues declined primarily due to the secular pressures in copper voice revenue as well as the loss of equipment revenue associated with the sale of our equipment subsidiary. Wholesale revenues declined primarily due to secular pressures in copper voice revenue, legacy circuit revenue, and lower rates for our network access services charged to our wholesale customers for the six months ended June 30, 2022.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Revenue by product and service type was as follows:
Successor | Non-GAAP Combined | |||||||||||||
For the three months ended June 30, | For the three months ended June 30, | $ Increase | % Increase | |||||||||||
($ in millions) | 2022 | 2021 | (Decrease) | (Decrease) | ||||||||||
Data and Internet services | $ | 847 | $ | 839 | $ | 8 | 1 | % | ||||||
Voice services | 381 | 443 | (62) | (14) | % | |||||||||
Video services | 134 | 159 | (25) | (16) | % | |||||||||
Other | 80 | 92 | (12) | (13) | % | |||||||||
Revenue from contracts with customers (1) | 1,442 | 1,533 | (91) | (6) | % | |||||||||
Subsidy and other revenue | 17 | 83 | (66) | (80) | % | |||||||||
Total revenue | $ | 1,459 | $ | 1,616 | $ | (157) | (10) | % | ||||||
Successor | Non-GAAP Combined | |||||||||||||
For the six months ended June 30, | For the six months ended June 30, | $ Increase | % Increase | |||||||||||
($ in millions) | 2022 | 2021 | (Decrease) | (Decrease) | ||||||||||
Data and Internet services | $ | 1,683 | $ | 1,681 | $ | 2 | 0 | % | ||||||
Voice services | 767 | 930 | (163) | (18) | % | |||||||||
Video services | 271 | 328 | (57) | (17) | % | |||||||||
Other | 163 | 187 | (24) | (13) | % | |||||||||
Revenue from contracts with customers (1) | 2,884 | 3,126 | (242) | (8) | % | |||||||||
Subsidy and other revenue | 22 | 166 | (144) | (87) | % | |||||||||
Total revenue | $ | 2,906 | $ | 3,292 | $ | (386) | (12) | % | ||||||
(1)Includes $16 million and $16 million, and $32 million and $37 million of lease revenue for the ninethree and six months ended SeptemberJune 30, 2017 increased $233 million, or 9%, as compared to the prior year period. Excluding additional commercial customer revenue from the CTF Operations for the first quarter of 2017, revenues for 2017 declined $188 million, or 7%, as compared to the prior year period, principally as a result of decreases in our voice services revenue2022 and nonswitched revenue including wireless backhaul revenue.2021, respectively.
Consolidated switched access and subsidy revenue of $586 million represented 8% of our revenues for the nine months ended September 30, 2017. Switched access revenue was $129 million for both the first nine months of 2017 and 2016, or 2% of our revenues for each period. The Report and Order released by the FCC on November 18, 2011 (the 2011 Order) provided for the gradual elimination of terminating traffic charges by 2017 with a related decline in operating expenses. Switched access revenue declined sequentially in the third quarter of 2017, reflecting the rate reductions mandated by the 2011 Order, and we anticipate that we have experienced nearly all of the rate decline related to the 2011 Order. We have been able to recover a significant portion of these lost revenues through end user rates and other replacement support mechanisms, a trend we expect will continue throughout 2017. We expect declining revenue trends due to reduced volume in switched access revenue to continue in the fourth quarter of 2017 in our legacy operations. Subsidy revenue, including CAF Phase II subsidies, was $457 million for the nine months ended September 30, 2017, or 7% of our revenues, which decreased from $468 million, or 7% of our revenues, in the prior year period.
We categorize our products, services, and other revenues into the following five categories:
Data and Internet Services
Data and internet services include broadband services for consumer and commercial customers. We provide data transmissionand Internet services to high volume commercial customersour consumer, business and other carriers with dedicated high capacity circuits (“nonswitched access”) including services to wireless providers (“wireless backhaul”).
wholesale customers. Data and Internet services consist of fiber broadband services, copper broadband services and network access revenues.
Our fiber expansion strategy is expected to positively impact data and Internet services. This network expansion will provide faster, symmetrical broadband speeds and provide customer and revenue growth opportunities for the three months ended September 30, 2017 decreased $89 million as compared with 2016. Datafiber broadband and certain network access products like ethernet. This initiative will also create an opportunity for us to provide more fiber-based services revenue for the three months ended September 30, 2017 decreased $65 million, or 11%, to $548 million, primarily due to an 8% decrease in the total number of broadband subscribers since September 30, 2016, and a decline in revenue of approximately $22 million due to the sale of our Frontier Secure Strategic Partnerships business. Nonswitched access revenues for the three months ended September 30, 2017customers.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
decreased $25 million, or 6%,
($ in millions) | For the three months ended | For the six months ended | |||||
Data and Internet services revenue, June 30, 2021 | $ | 839 | $ | 1,681 | |||
Change in fiber broadband revenue | 34 | 63 | |||||
Change in copper broadband revenue | (9) | (21) | |||||
Change in other data and Internet services | (16) | (38) | |||||
Impact of fresh start accounting | (1) | (2) | |||||
Data and Internet services revenue, June 30, 2022 | $ | 847 | $ | 1,683 | |||
Upon emergence from bankruptcy, the accumulated balances in deferred installation fee revenue were eliminated as part of fresh start accounting, which has resulted in a decline in revenue recognition.
The revenue growth was primarily driven by 4% improvement in our broadband revenue offset by declines in other data revenue for both the three and six months ended June 30, 2022, as compared to $408 million, primarily duethe corresponding periods in 2021. The increases in broadband revenue were driven by growth in fiber, offset somewhat by continued declines in copper. The other data revenues declines were the result of an ongoing migration of our carrier customers from legacy technology circuits to lower monthly recurring revenues for wireless backhaul and other carrier services.
Consolidatedpriced ethernet circuits. The period over period decrease in data and Internet services revenue continued to improve for the ninethree and six months ended SeptemberJune 30, 2017 increased $243 million as compared with 2016. Consolidated data services revenue for the nine months ended September 30, 2017 increased $128 million, or 8%, to $1,696 million as compared with 2016. Excluding additional data service revenue from the CTF Operations for the first quarter of 2017, revenue for the first nine months decreased $111 million, or 7%, driven by a reduction in revenue of $22 million2022, as a result of the sale of the Frontier Secure Strategic Partnerships business in May of 2017 and a decrease in the total number of broadband subscribers. Company’s initiatives.
Consolidated nonswitched access revenues for the nine months ended September 30, 2017 increased $115 million or 10% to $1,277 million as compared with 2016. Excluding additional nonswitched access revenue from the CTF Operations for the first quarter of 2017, revenue decreased $67 million, or 6%, due to lower monthly recurring revenue for wireless backhaul and other carrier services. We expect wireless data usage to continue to increase, which may drive the need for additional wireless backhaul capacity. Despite the need for additional capacity, in the near term, we anticipate that our overall wireless backhaul revenues (which comprise approximately 2.9% of consolidated total revenues) will continue to decline in 2017, as our carrier customers migrate to Ethernet solutions at lower price points or migrate to our competitors.
Voice Services
VoiceThe Company provides voice services includeconsisting of traditional local and long distance wireline services, data-based Voicelong-distance service and voice over Internet Protocolprotocol (VoIP) services,service provided over our fiber and copper broadband products. It also includes enhanced features such as well ascall waiting, caller identification and voice messaging services offeredservices.
($ in millions) | For the three months ended | For the six months ended | |||||
Voice services revenue, June 30, 2021 | $ | 443 | $ | 930 | |||
Change in other voice services revenue | (43) | (87) | |||||
Impact of fresh start accounting | (19) | (76) | |||||
Voice services revenue, June 30, 2022 | $ | 381 | $ | 767 | |||
Upon implementation of fresh start accounting policies, Frontier is recording both revenue and expense related to our consumer and commercial customers. Voice services also include the long distance voice origination and termination services that we provideUniversal Service Fund (“USF”) surcharges on a net basis, as opposed to our commercial customers and other carriers.
Voice services revenue for the three months ended September 30, 2017 decreased $107 million, or 13%,recording each on a gross basis prior to $702 million as compared with 2016,emergence. These declines were primarily due to the continued loss of voicenet losses in business and consumer customers and decreases in long distance revenue among thoseaddition to fewer customers that do not have a bundled long distance plan.
Voice services revenue for the nine months ended September 30, 2017 increased $65 million, or 3%, to $2,177 million as compared with 2016. Excluding additionalbundling voice services revenue from the CTF Operations for the first quarter of 2017, revenues decreased $262 million, or 12%, due to the continued loss of voice customers and decreases in long distance revenue. with broadband.
Video Services
Video servicesinclude revenues generated from traditional television (TV) services provided directly to consumer customers through the FiOS video and Vantage video brands, and through DISHas well as satellite TV services.
services provide through Dish. Video services revenue foralso includes pay-per-view revenues, video on demand, equipment rentals, and video advertising. The Company has made the three months ended September 30, 2017 decreased $74 million, or 19%,strategic decision to $318 million as compared with 2016 due to a decrease in the total number of video subscribers.
Video services revenue for the nine months ended September 30, 2017 increased $115 million, or 13%, to $994 million compared with 2016. Excluding additional video services revenue from the CTF Operations for the first quarter of 2017, revenues decreased $166 million, or 19%, due to a decrease in the total number of video subscribers.
Other
Other customer revenue includeslimit sales of customer premise equipmentnew traditional TV services, focusing on our broadband products and OTT video options. We are partnering with OTT video providers and expect this to grow as OTT options are offered with our commercial customers and directory services, less our provision for bad debts.broadband products.
Switched Access
($ in millions) | For the three months ended | For the six months ended | |||||
Video services revenue, June 30, 2021 | $ | 159 | $ | 328 | |||
Change in video services revenue | (23) | (49) | |||||
Impact of fresh start accounting | (2) | (8) | |||||
Video services revenue, June 30, 2022 | $ | 134 | $ | 271 | |||
Under our fresh start accounting policies, Frontier is recording both revenue and Subsidyexpense related to certain surcharges and taxes on a net basis, as opposed to recording each on a gross basis prior to emergence. These declines were primarily driven by linear video customer losses, partially offset by price increases.
Other
Other customer revenue includes directory listing services and switched access revenue. Switched access and subsidy revenues include revenuesrevenue includes revenue derived from allowing other carriers to use our network to originate and/or terminate their local and long distancelong-distance voice traffic (“switched access”).traffic. 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
($ in millions) | For the three months ended | For the six months ended | |||||
Other revenue, June 30, 2021 | $ | 92 | $ | 187 | |||
Change in other services revenue | (14) | (32) | |||||
Impact of fresh start accounting | 2 | 8 | |||||
Other revenue, June 30, 2022 | $ | 80 | $ | 163 | |||
Under our fresh start accounting policies, Frontier has classified the provision for bad debt as expense, rather than a reduction of revenue as it was recorded prior to emergence, resulting in increases to other customer revenues of $4 million and federal authorities, including the Connect America Fund.
Switched access and subsidy revenue for the three months ended September 30, 2017 decreased $14 million, or 7%, as compared with 2016. Switched access revenue decreased $4 million for the three and six months ended SeptemberJune 30, 2017,2022, respectively. Additionally, the accumulated balances in deferred installation fee revenue were eliminated as part of fresh start accounting, which has resulted in a $2 million and $6 million decline in revenue recognized for the three and six months ended June 30, 2022, as compared to the prior year periods. After adjusting for the impacts of these policy changes, other customer services revenue declined $14 million and $32 million for the three and six months ended June 30, 2022, respectively. These decreases were primarily driven by reductions in CPE sales, late payment fees, early termination fees and reconnect fees.
Subsidy and other revenue
Subsidy and other revenue decreased $66 million and $144 million for the three and six months ended June 30, 2022, compared to the prior year period, primarily due to the impactCAF II program which was completed in 2021.
($ in millions) | For the three months ended | For the six months ended | |||||
Subsidy and other revenue, June 30, 2021 | $ | 83 | $ | 166 | |||
Change in CAF II subsidies | (78) | (157) | |||||
Change in RDOF, subsidy, and other services revenue | 11 | 8 | |||||
Impact of fresh start accounting | 1 | 5 | |||||
Subsidy and other revenue, June 30, 2022 | $ | 17 | $ | 22 | |||
Upon implementation of the declinenew fresh start accounting policies, certain governmental grants that were historically presented on a net basis as part of capital expenditures, are presented on a gross basis and included in minutes of use relatedsubsidy, resulting in increases to access line losses and the displacement of minutes of use by wirelessSubsidy and other communications services, combined with the lower rates required by the FCC’s 2011 Order on intercarrier compensation reform. Subsidy revenues decreased $10revenue of $1 million and $5 million for the three and six months ended SeptemberJune 30, 2017, primarily due to one-time true-up payments and phasedown support recognized in the second quarter2022.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
OPERATING EXPENSES
Successor | Non-GAAP Combined | |||||||||||||||||||
For the three months | For the three months | |||||||||||||||||||
($ in millions) | ended June 30, | ended June 30, | ($) | % | ||||||||||||||||
2022 | 2021 | Variance | Variance | |||||||||||||||||
Operating expenses: | ||||||||||||||||||||
Cost of Service | $ | 546 | $ | 606 | $ | (60) | (10) | % | ||||||||||||
Selling, general and administrative expenses | 427 | 398 | 29 | 7 | % | |||||||||||||||
Depreciation and amortization | 290 | 298 | (8) | (3) | % | |||||||||||||||
Restructuring costs and other charges | 30 | 16 | 14 | 88 | % | |||||||||||||||
Total operating expenses | $ | 1,293 | $ | 1,318 | $ | (25) | (2) | % | ||||||||||||
Successor | Non-GAAP Combined | ||||||||||||||||||||||
For the six months | For the six months | ||||||||||||||||||||||
($ in millions) | ended June 30, | ended June 30, | ($) | % | |||||||||||||||||||
2022 | 2021 | Variance | Variance | ||||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||
Cost of Service | $ | 1,099 | $ | 1,226 | $ | (127) | (10) | % | |||||||||||||||
Selling, general and administrative expenses | 862 | 806 | 56 | 7 | % | ||||||||||||||||||
Depreciation and amortization | 574 | 685 | (111) | (16) | % | ||||||||||||||||||
Restructuring costs and other charges | 84 | 18 | 66 | 367 | % | ||||||||||||||||||
Total operating expenses | $ | 2,619 | $ | 2,735 | $ | (116) | (4) | % | |||||||||||||||
Cost of 2016 in connection with the CAF Phase II program.service
Switched access and subsidy revenue for the nine months ended September 30, 2017 decreased $12 million, or 2%, as compared with 2016. Switched access revenue decreased $1 million for the nine months ended September 30, 2017, primarily due to the impactCost of the decline in minutes of use related to access line losses and the displacement of minutes of use by wireless and other communications service combined with the lower rates required by the FCC’s 2011 Order on intercarrier compensation refund. Excluding additional switched access revenue from the CTF Operations for the first quarter of 2017, revenue decreased $15 million, or 11%. Subsidy revenues for the nine months ended September 30, 2017 decreased $11 million. Excluding additional subsidy revenue from the CTF Operations for the first quarter of 2017, revenue decreased $46 million, or 10%. We expect that switched access revenue will continue to decline in the fourth quarter of 2017.
OPERATING EXPENSES
NETWORK ACCESS EXPENSES
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| For the three months ended September 30, |
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Network access expenses |
| $ | 390 |
| $ | 440 |
| $ | (50) |
| (11) | % |
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| For the nine months ended September 30, |
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| 2016 |
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Network access expenses |
| $ | 1,209 |
| $ | 1,053 |
| $ | 156 |
| 15 | % |
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Network access expenses include access charges and other third-party costs directly attributable to connecting customer locations to our network, and video content costs and certain promotional costs. Such access charges and other third-party costs exclude network related expenses, depreciation and amortization, and employee related expenses.
Network access expensesAs a result of the fresh start accounting policy change to account for USF fees and certain other surcharges and taxes on a net basis instead of on a gross basis in both revenue and expense, cost of service decreased by $21 million and $84 million for the three and six months ended SeptemberJune 30, 2017 decreased $502022, respectively. After adjusting for this fresh start change, cost of service declined $39 million or 11%, primarily due toand $43 million for the three and six months ended June 30, 2022, respectively. For the three and six months ended June 30, 2022, the decrease in cost of service expense was driven by lower video content costs as a result of a declinedeclines in video customers, partiallynon-renewal of certain content agreements and decreased CPE costs. These decreases more than offset by higher promotional costs.fuel and energy prices, and outside service rate increases resulting from increased inflation.
Network accessSelling, general, and administrative expenses for the nine months ended September 30, 2017 increased $156 million, or 15%. Excluding additional expenses from the CTF Operations for the first quarter of 2017, network access expenses for the nine months ended September 30, 2017 decreased $105 million, or 10%, primarily due to lower video content and long distance costs as a result of a decline in customers.
39
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NETWORK RELATED EXPENSES
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($ in millions) |
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Network related expenses |
| $ | 497 |
| $ | 527 |
| $ | (30) |
| (6) | % |
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Network related expenses |
| $ | 1,468 |
| $ | 1,399 |
| $ | 69 |
| 5 | % |
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Network related expenses include expenses associated with the delivery of services to customers and the operation and maintenance of our network, such as facility rent, utilities, maintenance and other costs, as well as salaries, wages and related benefits associated with personnel who are responsible for the delivery of services, and the operation and maintenance of our network.
Network related expenses for the three months ended September 30, 2017 decreased $30 million, or 6%, as compared with 2016, primarily due to a decrease in compensation costs related to lower employee headcount and certain benefits, including incentive compensation, pension and OPEB expense (as discussed below). There was also a reduction in rental costs for vehicles previously under operating leases that were modified during late 2016, resulting in the classification as capital leases, which were partially offset by an increase in outside services, primarily related to storm-related costs.
Network related expenses for the nine months ended September 30, 2017 increased $69 million, or 5%, as compared with 2016. Excluding additional expenses from the CTF Operations for the first quarter of 2017, network related expenses for the nine months ended September 30, 2017 decreased $128 million, or 9%, primarily due to a decrease in compensation costs related to lower employee headcount and a reduction in rental costs for vehicles.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
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administrative expenses |
| $ | 486 |
| $ | 582 |
| $ | (96) |
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administrative expenses |
| $ | 1,561 |
| $ | 1,535 |
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Selling, general, and administrative expenses (SG&A expenses) include the salaries, wages and related benefits and the related costs of corporate and sales personnel, travel, insurance, non-network related rent, advertising, and other administrative expenses.
SG&A expenses for the three months ended September 30, 2017 decreased $96 million, or 16%, due to lower costs for compensation, primarily related to decreased employee headcount, lower incentive compensation costs, certain benefits, including pension and OPEB expense (as discussed below), reduced marketing costs, and lower information technology and other outside services costs. There were approximately $23 million of additional SG&A
40
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
expense during the third quarter of 2016 related to the Frontier Secure Strategic Partnerships business, which was sold in May of 2017.
SG&A expenses for the nine months ended September 30, 2017 increased $26 million, or 2%, as compared with 2016. Excluding additional expenses from the CTF Operations for the first quarter of 2017, SG&A expenses for the nine months ended September 30, 2017 decreased $200 million, or 13%, primarily due to lower compensation and other employee related costs and reduced costs for outside services and marketing. There were approximately $28 million of additional SG&A expense during the nine months ended September 30, 2016 related to the Frontier Secure Strategic Partnerships business, which was sold in May of 2017.
Pension and OPEB costs
Frontier allocates pension/OPEB expense to network related expenses and SG&A expenses. Total consolidated pension and OPEB costs, excluding pension settlement costs, for the three and nine months ended September 30, 2017 and 2016 were as follows:
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($ in millions) |
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expense |
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| $ | 33 |
| $ | 93 |
| $ | 95 |
Less: costs capitalized into |
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capital expenditures |
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| (20) |
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| $ | 23 |
| $ | 28 |
| $ | 73 |
| $ | 77 |
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DEPRECIATION AND AMORTIZATION EXPENSE
The fair value estimates related to the allocation of the purchase price of the CTF Operations to Other intangibles were revised and finalized during the first quarter of 2017 from the previous estimates as of December 31, 2016. The allocation that was reported as of December 31, 2016 for Other intangibles increased $100 million, from $2,162 million to $2,262 million. These adjustments resulted in higher amortization expense during the nine months ended September 30, 2017 ($20 million of which is attributable to 2016).
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Depreciation expense |
| $ | 376 |
| $ | 323 |
| $ | 53 |
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| 16 | % |
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Amortization expense |
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| 163 |
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| 255 |
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| (92) |
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| (36) | % |
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| $ | 539 |
| $ | 578 |
| $ | (39) |
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Depreciation expense |
| $ | 1,131 |
| $ | 1,009 |
| $ | 122 |
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| 12 | % |
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Amortization expense |
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| 539 |
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| 460 |
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| 79 |
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| $ | 1,670 |
| $ | 1,469 |
| $ | 201 |
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Depreciation and amortization expense for the three and nine months ended September 30, 2017 decreased $39 million, or 7%, and increased $201 million, or 14%, respectively. Depreciation expense for the three months ended September 30, 2017 increased $53 million, or 16%. The increase was primarily driven by the changes in the remaining lives of certain plant assets. Excluding additional expense from the CTF Operations for the first quarter of 2017, depreciation expense decreased $17 million, or 2%, for the nine months ended September 30, 2017 as compared to the prior year period due to lower net asset bases as compared to 2016.
41
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Amortization expense for the three months ended September 30, 2017 decreased $92 million, or 36% as compared with 2016. The decrease was primarily driven by the accelerated method of amortization related to customer bases acquired in 2010 and 2014, offset by an increase in the value of the acquired CTF customer base as a result of final purchase accounting adjustments in 2017. Excluding additional expense from the CTF Operations for the first quarter of 2017, amortization expense decreased $62 million, or 13%, for the nine months ended September 30, 2017 as compared to the prior year period due to an increase in the value of the acquired CTF customer base subsequent to the second quarter of 2016, offset by the accelerated method of amortization related to customer bases acquired in 2010 and 2014.
GOODWILL IMPAIRMENT
As a result of the continued decline infresh start accounting policy change to classify the share price of our common stock in each of the three quarters in 2017, we tested goodwillprovision for impairment. The results of our quantitative goodwill impairment test resulted inbad debt as an expense rather than a $670 million goodwill impairment in the second quarter of 2017, principally duereduction to the decline in our profitability during the period (See Note 6). Results from our first and third quarter quantitative assessments did not result in additional goodwill impairment charges. Further declines in our profitability or share price could result in additional impairment in the future.
ACQUISITION AND INTEGRATION COSTS
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| For the three months ended September 30, |
| $ Increase |
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($ in millions) |
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Acquisition and integration costs |
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| $ | 122 |
| $ | (121) |
| (99) | % |
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| For the nine months ended September 30, |
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Acquisition and integration costs |
| $ | 15 |
| $ | 387 |
| $ | (372) |
| (96) | % |
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Acquisition costs include financial advisory, accounting, regulatory, legal and other related costs. Integration costs includerevenue, SG&A expenses that are incremental and directly related to the acquisition, which were incurred to integrate the network and information technology platforms. Integration costs also include costs to achieve synergies and operational efficiencies directly associated with the acquisition.
We invested $19$4 million and $99$14 million in capital expenditures related to the CTF Acquisition during the nine months ended September 30, 2017 and 2016, respectively.
PENSION SETTLEMENT COSTS
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| For the three months ended September 30, |
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Pension Settlement Costs |
| $ | 15 |
| $ | - |
| $ | 15 |
| 100 | % |
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| For the nine months ended September 30, |
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Pension Settlement Costs |
| $ | 77 |
| $ | - |
| $ | 77 |
| 100 | % |
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The Pension Plan contains provisions that provide certain employees with the option of receiving a lump sum payment upon retirement. Frontier’s accounting policy is to record these payments as a settlement only if, in the aggregate, they exceed the sum of the annual service and interest costshigher for the Pension Plan’s net periodic pension benefit cost. During the three and ninesix months ended SeptemberJune 30, 2017, lump sum pension settlement payments2022, respectively. Additionally, as a result of fresh start accounting policy changes, we have expensed $4 million and $17 million of certain administrative items that were previously capitalized by the predecessor for the three and six months ended June 30, 2022. After adjusting for the fresh start impacts, SG&A expenses increased by $21 million and $25 million for the three and six months ended June 30, 2022.This increase was primarily a result of transformational investments that are non-recurring such as rebranding costs, higher professional services and recruiting fees, partially offset by a non-recurring $8 million sales tax refund in the current quarter.
Pension and Other Postretirement Employee Benefit (OPEB) costs
Frontier allocates certain pension/OPEB expense to terminated or retired individuals amountedCost of service and SG&A expenses. Total pension and OPEB service costs were as follows:
Successor | Non-GAAP Combined | |||||||
($ in millions) | For the three months ended June 30, 2022 | For the three months ended June 30, 2021 | ||||||
Total pension/OPEB expenses | $ | 23 | $ | 26 | ||||
Less: costs capitalized into capital expenditures | (5) | (5) | ||||||
Net pension/OPEB costs | $ | 18 | $ | 21 | ||||
Successor | Non-GAAP Combined | |||||||
($ in millions) | For the six months ended June 30, 2022 | For the six months ended June 30, 2021 | ||||||
Total pension/OPEB expenses | $ | 48 | $ | 55 | ||||
Less: costs capitalized into capital expenditures | (11) | (11) | ||||||
Net pension/OPEB costs | $ | 37 | $ | 44 | ||||
Depreciation and amortization
As a result of fresh start accounting, both Frontier’s fixed assets and intangible assets were adjusted to $87 millionfair value as of the Effective Date. These changes, which decreased the carrying value of its fixed assets and $449 million, which exceededincreased the settlement thresholdcarrying value of $224 million,its intangible assets. For the three and six months ended June 30, 2022, the decreased depreciation and amortization expense was driven by lower depreciation expense as a result Frontier recognized non-cash settlementof reduced fixed asset bases following the fresh start adjustment noted above.
Restructuring costs and other charges totaling $77 million during 2017. The non-cash charge accelerated the recognition of a portion of the previously unrecognized actuarial losses in the Pension Plan. Additional pension settlement charges will be required in the fourth quarter of 2017, the amount of which will be dependent on the lump sum benefit payments made during the fourth quarter.
RESTRUCTURING COSTS AND OTHER CHARGES
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Restructuring costs and |
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other charges |
| $ | 14 |
| $ | 11 |
| $ | 3 |
| 27 | % |
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| For the nine months ended September 30, |
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Restructuring costs and |
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other charges |
| $ | 55 |
| $ | 11 |
| $ | 44 |
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NM – Not meaningful
Restructuring costs and other charges consist of expensesconsulting and advisory fees related to changes inour balance sheet restructuring prior to filing our Chapter 11 Cases and subsequent to the composition of our business, includingEmergence Date, workforce reductions, transformation initiatives, lease impairment costs, and other restructuring expenses.
For the sale of business lines or divisions, and corresponding changes to our retirement plans.
Restructuringthree months ended June 30, 2022, restructuring costs and other charges increased indue to, $26 million of severance and employee costs resulting from workforce reductions, and $4 million of costs related to other restructuring activities.
For the third quarter of 2017 compared to the third quarter of 2016 primarily due to a reduction in the workforce of approximately 300 employees in the third quarter of 2017.
Restructuringsix months ended June 30, 2022, restructuring costs and other charges increased fordue to $44 million of lease impairment costs from the nine months ended September 30, 2017 comparedstrategic exit of certain facilities, $32 million of severance and employee costs resulting from workforce reductions, and $8 million of costs related to other restructuring activities. Of the $32 million in severance and employee costs, approximately $26 million related to the nine months ended September 30, 2016 primarily due tosecond quarter of 2022, as a reduction in theresult of larger workforce of approximately 850 employees and the loss on the sale of the Frontier Secure Strategic Partnerships business.reductions.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
OTHER NON-OPERATING INCOME AND EXPENSE
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| For the three months ended September 30, |
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($ in millions) |
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Investment and other income (loss), net |
| $ | 2 |
| $ | 3 |
| $ | (1) |
| (33) | % |
Loss (gain) on extinguishment of debt |
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and debt exchanges |
| $ | (1) |
| $ | 7 |
| $ | (8) |
| (114) | % |
Interest expense |
| $ | 381 |
| $ | 386 |
| $ | (5) |
| (1) | % |
Income tax benefit |
| $ | (31) |
| $ | (46) |
| $ | 15 |
| 33 | % |
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| For the nine months ended September 30, |
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Investment and other income, net |
| $ | 5 |
| $ | 14 |
| $ | (9) |
| (64) | % |
Loss (gain) on extinguishment of debt |
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and debt exchanges |
| $ | 89 |
| $ | 7 |
| $ | 82 |
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Interest expense |
| $ | 1,157 |
| $ | 1,145 |
| $ | 12 |
| 1 | % |
Income tax benefit |
| $ | (280) |
| $ | (212) |
| $ | (68) |
| (32) | % |
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NM - Not meaningful |
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Successor | Successor | Predecessor | Non-GAAP Combined | |||||||||||||||||||
For the three months ended June 30, | For the two months ended June 30, | For the one month ended April 30, | For the three months ended June 30, | $ | % | |||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | 2021 | Variance | Variance | ||||||||||||||||
Investment and other income (loss), net | $ | 122 | $ | (2) | $ | (1) | $ | (3) | $ | 125 | NM | |||||||||||
Reorganization items, net | $ | - | $ | - | $ | 4,196 | $ | 4,196 | $ | (4,196) | (100) | % | ||||||||||
Interest expense | $ | (118) | $ | (62) | $ | (29) | $ | (91) | $ | (27) | 30 | % | ||||||||||
Income tax expense (benefit) | $ | 69 | $ | 43 | $ | (223) | $ | (180) | $ | 249 | (138) | % | ||||||||||
NM - Not meaningful | ||||||||||||||||||||||
Successor | Successor | Predecessor | Non-GAAP Combined | |||||||||||||||||||
For the six months ended June 30, | For the two months ended June 30, | For the four months ended April 30, | For the six months ended June 30, | $ | % | |||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | 2021 | Variance | Variance | ||||||||||||||||
Investment and other income (loss), net | $ | 199 | $ | (2) | $ | 1 | $ | (1) | $ | 200 | NM | |||||||||||
Reorganization items, net | $ | - | $ | - | $ | 4,171 | $ | 4,171 | $ | (4,171) | (100) | % | ||||||||||
Interest expense | $ | (221) | $ | (62) | $ | (118) | $ | (180) | $ | (41) | 23 | % | ||||||||||
Income tax expense (benefit) | $ | 99 | $ | 43 | $ | (136) | $ | (93) | $ | 192 | (206) | % | ||||||||||
NM - Not meaningful | ||||||||||||||||||||||
Investment and other income, net
Investment and other income, net for the nine months ended September 30, 2016 included interest income of $12increased by $125 million primarily due to interest earned on restricted cash. The decrease of $9and $200 million was driven by less restricted cash on hand in 2017.
Loss on Extinguishment of Debt and Debt Exchanges
During the nine months ended September 30, 2017, Frontier recorded a loss on early extinguishment of debt of $89 million, primarily driven by a loss of $90 million resulting from debt buy backs during the second quarter, and slightly offset by a gain of $1 million resulting from buy backs in the third quarter.
During the nine months ended September 30, 2016, Frontier recorded a loss of $7 million resulting from the exchange of senior notes during the third quarter of 2016.
Interest expense
Interest expense for the three and ninesix months ended SeptemberJune 30, 2017 increased $52022, driven by a remeasurement gain related to our other postretirement benefit obligation of $96 million or 1%, and $12$150 million. This was partially offset by an increase of $10 million or 1%,and $31 million non-operating pension income, as compareda result of actuarial losses that are no longer being amortized from accumulated other comprehensive income (loss).
Reorganization items, net
The Company has incurred costs associated with the reorganization, primarily the write-off of certain debt issuance costs and net discounts, financing costs, and legal and professional fees and fresh start accounting adjustments. These include expenses incurred subsequent to the Petition Date. During the three and ninesix months ended SeptemberJune 30, 2016. We incurred additional interest of $192021, Frontier recognized $4,196 million and $4,171 million in 2017 onreorganization items associated with the $1,625 million term loan facility related to the CTF Acquisition. Our composite average borrowing rate asrestructuring of September 30, 2017 and 2016 was 8.36% and 8.55%, respectively.our balance sheet.
Income tax benefitInterest expense
Income tax benefit forFor the three and ninesix months ended SeptemberJune 30, 2017 decreased $152022, interest expense increased $27 million and increased $68$41 million, as compared to the three and nine months ended September 30, 2016. The effective tax rate on our pretax loss for the nine months ended September 30, 2017 was 26.5% as compared with 42.0% for the nine months ended September 30, 2016.same period in 2021. The increase in interest expense was primarily driven by a higher debt balance, partially offset by lower interest rates.
Income tax expense
During the three and six months ended June 30, 2022, the successor recorded income tax expense of $69 million and $99 million on pre-tax income of $170 million and $265 million, respectively. During the four months ended April 30, 2021, the Predecessor recorded an income tax benefit was primarily due toof $136 million on pre-tax income of $4,405 million. During the impacttwo months ended June 30, 2021, the successor recorded income tax expense of the goodwill impairment incurred during the second quarter of 2017. $43 million on pre-tax income
Net loss attributable to Frontier common shareholders
Net loss attributable to Frontier common shareholdersof $142 million. Our effective tax rates for the third quarterthree and six months ended June 30, 2022 were 40.6% and 37.4%, respectively. The effective rate increased as a result of 2017 was $92 million, or ($1.19) per share, as comparedincreases to a net loss of $134 million, or ($1.73) per share,the state rate due to valuation allowances in the third quarter of 2016, and net losscertain states, arising from non-deductible interest expense primarily related to our $1.2 billion first lien note issuance. Our effective tax rates for the first ninefour months of 2017 of $936 million, or ($12.06) per share, as compared to a net loss of $454 million, or ($5.87) per share for ended April 30, 2021 and the first ninetwo months of 2016. For the first nine months of 2017, the increase in net loss was primarily driven by the $532 million (after-tax) goodwill impairment charge incurred during the second quarter of 2017.ended June 30, 2021 were (3.1%) and 30.3%, respectively.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
(b) Liquidity and Capital Resources
As of June 30, 2022, we had liquidity of approximately $3,745 million, comprised of cash and cash equivalents of $678 million, short-term investments consisting of $2,300 million of term deposits earning interest in excess of traditional bank deposit rates, and placed with banks with A-1/P-1 or equivalent credit quality, and undrawn revolving credit facility of $767 million.
Analysis of Cash Flows
As of SeptemberJune 30, 2017,2022, we had unrestricted cash and cash equivalents aggregating $286$678 million. Our primary source of funds duringFor the ninesix months ended SeptemberJune 30, 2017 was cash on hand, cash generated from operations, and cash received from issuance of our Term Loan B. For the nine months ended September 30, 2017,2022, we used cash flow from operations, cash on hand, and cash from prior year borrowings principally to principally fund all of our cash investing and financing activities, which were primarily short-term investments and capital expenditures, dividendsexpenditures.
On May 12, 2022, our consolidated subsidiary Frontier Communications Holdings, LLC (“Frontier Holdings”), issued $1.2 billion aggregate principal amount of 8.750% first lien secured notes due 2030 in an offering pursuant to exemptions from the registration requirements of the Securities Act. We intend to use the net proceeds of this offering to fund capital investments and debt repayments.operating costs arising from our fiber build and expansion of its fiber customer base, and for other general corporate purposes.
At SeptemberAs of June 30, 2017,2022, we had a working capital deficitsurplus of $531$1,723 million including $166 million of long-term debt due within one year, as compared to a working capital deficit of $788$1,237 million surplus at December 31, 2016. 2021. The decreaseprimary driver for the change in the working capital deficit is primarily due to a decreasesurplus at June 30, 2022 was an increase in current liabilities of $651 million, partially offset by a reduction inshort-term investments, accounts receivable of $158 million. payable and accrued interest.
Cash Flows provided byfrom Operating Activities
Cash flows provided byfrom operating activities increased $223$1,031 million to $1,185$757 million for the ninesix months ended SeptemberJune 30, 20172022 as compared withto the prior year period.six months ended June 30, 2021. The overall increase in operating cash flows was primarily the result of the addition of our CTF Operations, partially offset by unfavorable changes in working capital, along with higher interest expense.capital.
We received $4 million and $35paid $9 million in net cash tax refundstaxes during the ninesix months ended SeptemberJune 30, 20172022 and 2016, respectively.
In connection with the CTF Acquisition, Frontier recognized acquisition and integration costs of $15$33 million in Non-GAAP combined net cash taxes during the first nineNon-GAAP combined six months of 2017ended June 30, 2021.
Cash Flows from Investing Activities
Cash flows used in investing activities were $3,385 million for the six months ended June 30, 2022, compared to $387Non-GAAP combined cash flows used in investing activities of $759 million duringfor the first nine monthscorresponding period in 2021. Given the long-term nature of 2016. Interest expense of $581 million was incurred during the first nine months of 2017 related to the September 2015 debt offering and the term loan credit agreement, datedour fiber build, as of August 12, 2015, with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, comparedJune 30, 2022, we have invested $2,300 million cash in short-term investments to $559 million inimprove interest expense during the first nine months of 2016. Additionally, Frontier incurred $10 million of interest expense related to the Verizon Bridge Facility (as defined below) during the first nine months of 2016.income, while preserving funding flexibility.
Cash Flows used by Investing Activities
Capital Expenditures
For the ninesix months ended SeptemberJune 30, 20172022 and 2016,2021, our capital expenditures were $865$1,088 million and $1,059$769 million, respectively, including $19 million and $99 million, respectively,respectively. Approximately 58% of integration relatedour capital expenditures associated within the CTF Acquisition. Capital expendituressecond quarter of 2022 related to CAF Phase II are includedfiber network projects. The driver for the increase in capital expenditure was increased spending for fiber upgrades to our existing copper network, a trend that we expect to continue as we execute our strategy of investing in our reported amounts for capital expenditures. We anticipatefiber network. In addition to the capital expenditures noted above, we had a balance of $250 million in “Accounts payable” on our consolidated balance sheet related to capital expenditures that had not been paid as of June 30, 2022.
Cash Flows from Financing Activities
Cash flows used by financing activities increased $968 million to $1,158 million for business operations to be approximately $1.15 billion to $1.2 billion in 2017,the six months ended June 30, 2022 as compared to $1.26 billionthe Non-GAAP combined corresponding period in 2016.2021. The increase in financing activities were primarily driven by $1,200 million proceeds from long-term debt borrowings partially offset by financing costs,
Cash Flows used bylease obligations payments, long-term debt principal payments and providedother costs.
Capital Resources
Our primary anticipated uses of liquidity are to fund the costs of operations, working capital and capital expenditures and to fund interest payments on our long-term debt. Our primary sources of liquidity are cash flows from Financing Activities
Debt Reduction
During the first nine months of 2017, Frontier usedoperations, cash on hand for the scheduled retirement of $328and borrowing capacity under our $900 million Revolving Facility (as reduced by $133 million of debt, including $210Letters of Credit.)
On May 12, 2022, Frontier Holdings entered into an amendment to its Revolving Facility which, among other things, increased the Revolving Facility by an additional $275 million, to a total of unsecured 8.25% senior notes at maturity, and contractual payments of principal for debt of $118 million. Additionally, Frontier used cash proceeds from the Term Loan B to retire $1,335$900 million of unsecured senior notes prior to maturity, consisting of $763 million of 8.875% Notes due 2020, $551 million of 8.500% Notes due 2020, $10 million of 9.250% Notes due 2021, $6 million of 7.125% Notes due 2019, and $5 million of 8.125% Notes due 2018. During the first nine months of 2017, Frontier recorded a loss on early extinguishment of debt of $89 million driven primarily by premiums paid to retire certain notes and unamortized original issuance costs, slightly offset by discounts received on the retirement of certain notes.
During the first nine months of 2016, Frontier used cash on hand to retire anin aggregate principal amount of $280revolving credit commitments. Our Amended and Restated Credit Agreement, including our $1,456 million Term Loan Facility and $900 million Revolving Facility, and the indentures governing our outstanding secured First Lien Notes and Second Lien Notes are described in detail in Note 8 to the financial statements contained in Part I of this report.
During the six months ended June 30, 2022, we paid $198 million of cash interest. Our long-term debt $189 million of which was senior unsecured debt and $91 million of which was secured debt.
Subjectis described in detail in Note 8 to limitationsthe financial statements contained in Part I of this report.
We have assessed our indenturescurrent and credit facilities, we may from time to time make repurchasesexpected funding requirements and our current and expected sources of liquidity, and have determined, based on our debt in the open market, through tender offers, by exercising rights to call or in privately negotiated transactions. We may also refinance existing debt or exchange existing debt for newly issued debt obligations.
Capital Resources
We believeforecasted financial results and financial condition as of June 30, 2022, that our operating cash flows and existing cash balances, existing revolving credit facility and access to the capital markets, as necessary, will be adequate to finance our working capital requirements, fund capital expenditures, make required debt interest and principal payments, pay taxes pay dividends to our stockholders, and support our short-term and long-term operating strategies for the next twelve months.make other payments. A number of factors, including but not limited to, losses of customers, pricing pressure from increased competition, lower subsidy and switched access revenues, and the impact of economic conditions may negatively affect our cash generated from operations. As
Net Operating Losses
In connection with the Company’s emergence from bankruptcy, we consummated a taxable disposition of September 30, 2017, we had $42 million of debt maturing during the last three months of 2017; $743 million and $828 million of debt will mature in 2018 and 2019, respectively.
Term Loan and Revolving Credit Facilities
On February 27, 2017, Frontier entered into a first amended and restated credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, pursuant to which Frontier combined its revolving credit agreement, dated as of June 2, 2014, and its term loan credit agreement, dated as of August 12, 2015. Under the JPM Credit Agreement, as further amended on June 15, 2017 by Increase Joinder No.1 (as so amended, the JPM Credit Agreement), Frontier has a $1,625 million senior secured term loan A facility (the Term Loan A) maturing on March 31, 2021, an $850 million undrawn secured revolving credit facility maturing on February 27, 2022 (the Revolver), and $1,500 million senior secured term loan B facility (the Term Loan B) maturing on June 15, 2024. The maturitiessubstantially all of the Term Loan A, the Revolver, and the Term Loan B, in each case if still outstanding, will be accelerated in the following circumstances: (i) if, 91 days before the maturity date of any series of Senior Notes maturing in 2020, 2023 and 2024, more than $500 million in principal amount remains outstanding on such series; assets and/or (ii) if, 91 days before the maturity datesubsidiary stock of the first series of Senior Notes maturing in 2021 or 2022, more than $500 million in principal amount remains outstanding, in the aggregate, on the two series of Senior Notes maturing in such year. The determination of interest rates for eachCompany. Certain of the facilities underNOLs were utilized in offsetting gains from the JPM Credit Agreement is baseddisposition, certain of the NOLS were extinguished as part of attribute reduction and certain subsidiary NOLS were carried over. Under Section 338(h)(10) of the Code, Predecessor and Successor made elections to step-up tax basis of certain subsidiary assets. Such Section 338(h)(10) elections will generate depreciation and amortization expense going forward, which may result in net operating losses on margins over the Base Rate (as defined in the JPM Credit Agreement) or over LIBOR, at the election of Frontier. Interest rate margins on the Term Loan A and Revolver (ranging from 0.75% to 1.75% for Base Rate borrowings and 1.75% to 2.75% for LIBOR borrowings) area go forward basis. Such net operating losses would be carried forward indefinitely but would be subject to adjustment basedan 80% limitation on Frontier’s Total Leverage Ratio (as defined in the JPM Credit Agreement). Interest rate margins on the Term Loan B (2.75% for Base Rate borrowings and 3.75% for LIBOR borrowings) are not subject to adjustment. The security package under the JPM Credit Agreement includes pledges of the equity interests in certain Frontier subsidiaries and guaranties by certain Frontier subsidiaries. As of September 30, 2017, the revolving credit facility was fully available and no borrowings had been made thereunder. The revolving credit facility is available for general corporate purposes but may not be used to fund dividend payments.U.S. taxable income.
Frontier has two senior secured credit agreements with CoBank, ACB, as administrative agent, lead arranger and a lender, and the other lenders party thereto: the first, for a $350 million senior term loan facility drawn in 2014 (the 2014 CoBank Credit Agreement), matures on October 24, 2019, and the second, for a $315 million senior term loan
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facility drawn in October 2016 (the 2016 CoBank Credit Agreement), matures on October 12, 2021. We refer to the 2014 CoBank Credit Agreement and the 2016 CoBank Credit Agreement collectively as the CoBank Credit Agreements.
Repayment of the outstanding principal balance under each of the CoBank Credit Agreements is being made in quarterly installments ($9 million, with respect to the 2014 CoBank Credit Agreement, and $8 million, with respect to the 2016 CoBank Credit Agreement), in each case with the remaining outstanding principal balance to be repaid on the applicable maturity date. Borrowings under each of the CoBank Credit Agreements bear interest based on the margins over the Base Rate (as defined in the applicable CoBank Credit Agreement) or over LIBOR, at the election of Frontier.
On March 29, 2017, Frontier amended the 2014 and 2016 CoBank Credit Agreements. The amendments provide that interest rate margins under each of these facilities will range from 0.875% to 3.875% for Base Rate borrowings and 1.875% to 4.875% for LIBOR borrowings, subject to adjustment based on our Total Leverage Ratio, as defined in each credit agreement. The interest rate on each of the facilities as of September 30, 2017 was LIBOR plus 3.875%. In addition, the amendments provide for increases in the maximum Leverage Ratio and expansion of the security package identical to those contained in the February 2017 amendment and restatement of the August 2015 JPM credit agreement.
Letters of Credit Facility
Frontier has a Continuing Agreement for Standby Letters of Credit with Deutsche Bank AG New York Branch and Bank of Tokyo – Mitsubishi UFJ, LTD. (the LC Agreements). As of September 30, 2017, $129 million of undrawn Standby Letters of Credit had been issued under the LC Agreements. Borrowings under the LC Agreement are secured by a pledge of the stock of certain Frontier subsidiaries and guaranties by certain Frontier subsidiaries.
Covenants
The terms and conditions contained in one or more of our indentures, the CoBank Credit Agreements and the JPM Credit Agreement include covenants that, among other things, place restrictions on the following: the incurrence of liens on our and our subsidiaries’ assets securing indebtedness; the incurrence of indebtedness by us and our subsidiaries; the payment of dividends and other restricted payments; selling or transferring assets; the maximum levels of our leverage and secured leverage ratios; and the entry into mergers or other changes in corporate control. All of the above restrictions are subject to important, detailed qualifications and exceptions that are included in the JPM Credit Agreement, filed as an exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017 and in the CoBank Credit Agreements and our indentures, filed as exhibits to our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. In addition, under the Certificate of Designations of our 11.125% Mandatory Convertible Preferred Stock, Series A, we would be restricted from paying dividends on our common stock if we failed to declare and pay dividends on our Series A Preferred Stock.
As of September 30, 2017, we were in compliance with all of our indenture and credit facility covenants.
Dividends
We intend to continue to pay regular quarterly dividends on our common and preferred stock. Our ability to fund a regular quarterly dividend will be impacted by our ability to generate cash from operations. Holders of the Series A Preferred Stock are entitled to receive cumulative dividends at an annual rate of 11.125% of the initial liquidation preference of $100 per share, or $11.125 per year per share. Series A Preferred Stock dividends of $161 million were paid during the nine month periods ended September 30, 2017 and 2016.
On July 26, 2017, we announced that our Board of Directors declared a regular quarterly cash dividend of $0.60 per share of common stock, payable on September 29, 2017 to holders of record at the close of business on September 15, 2017. The Board of Directors also declared a regular quarterly cash dividend on Frontier’s 11.125% Series A Preferred Stock of $2.78125 per share, payable on September 29, 2017 to holders of record at the close of business on September 15, 2017.
On October 31, 2017, we announced that our Board of Directors declared a regular quarterly cash dividend of $0.60 per share of common stock, payable on December 29, 2017 to holders of record at the close of business on December 15, 2017. The Board of Directors also declared a regular quarterly cash dividend on Frontier’s 11.125%
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Mandatory Convertible Preferred Stock, Series A, of $2.78125 per share, payable on December 29, 2017 to holders of record at the close of business on December 15, 2017.
The declaration and payment of future dividends on our common stock is at the discretion of our Board of Directors, and will depend upon many factors, including our financial condition, results of operations, growth prospects, funding requirements, payment of cumulative dividends on Series A Preferred Stock, applicable law, restrictions in agreements governing our indebtedness and other factors our Board of Directors deems relevant.
Off-Balance Sheet Arrangements
Contractual Obligations
Other than as disclosed elsewhere in this report with respect to the filing of the Chapter 11 Cases, the acceleration of substantially all of our debt, and the application of fresh start accounting, there have been no material changes outside the ordinary course of business to the information provided with respect to our contractual obligations, including indebtedness and purchase and lease obligations, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Future Commitments
On April 29, 2015,Frontier participated in the FCC released its right of first refusal offer of support to price cap carriers under theFCC’s CAF Phase II program, which iswas intended to provide long-term support for broadband in high costhigh-cost unserved or underserved areas. In June 2015, FrontierWe accepted the FCC’s CAF Phase II offer in 25 states, which provides for $332provided $313 million in annual support through 2020, including $49 million in annual support related to the properties acquired in the CTF Acquisition,2021, to make available 10 Mbps downstream/1 Mbps upstream broadband service to approximately 774,000 households across some of the 2925 states where we operate.
The deployment deadline for CAF Phase II was December 31, 2021, and final review and audit of households is not complete. To the extent it is determined we dodid not enable the required number of households with 10 Mbps downstream/1 Mbps upstream broadband service by the end of theor we were unable to satisfy other FCC CAF Phase II term, we wouldrequirements, Frontier will be required to return a portion of the funds previously received.received and may be subject to certain other requirements and obligations. We have accrued an amount for any potential shortfall in the household build commitment that we deem to be probable and reasonably estimated, and we do not expect that any potential penalties, if ultimately incurred, will be material in comparison to the established accrual.
On January 30, 2020, the FCC adopted an order establishing RDOF, a competitive reverse auction to provide support to serve high cost areas. The FCC announced the results of its RDOF Phase I auction on December 7, 2020. Frontier was awarded approximately $371 million over ten years to build gigabit-capable broadband over a fiber-to-the-premises network to approximately 127,000 locations in eight states (California, Connecticut, Florida, Illinois, New York, Pennsylvania, Texas, and West Virginia). The FCC approved Frontier’s Long Form application in March 2022 and Frontier began receiving funding in the second quarter of 2022. Frontier will be required to complete the buildout to these locations by December 31, 2028, with interim target milestones over this period.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires management to make estimates and assumptions. There are inherent uncertainties with respect to such estimates and assumptions; accordingly, it is possible that actual results could differ from those estimates and changes to estimates could occur in the near term.
These critical accounting estimates have been reviewed with the Audit Committee of our Board of Directors.
Other than the updated indefinite-lived intangibles discussion below, thereThere have been no material changes to our critical accounting policies and estimates from the information provided in Item 7. “Management Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2016.2021.
Indefinite-lived Intangibles
Our indefinite-lived intangibles consist of goodwill and trade name, which were generated as a result of business combinations. We test for impairment of these assets annually as of December 31 or more frequently, whenever events occur or facts and circumstances change that make it more likely than not that the fair value of a reporting unit has been reduced below its carrying amount. Events that might indicate impairment include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, material negative changes in relationships with significant customers, and/or a significant decline in our stock price for a sustained period.
We early adopted ASU 2017-04 “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”) during the second quarter of 2017. In accordance with ASU 2017-04, our annual goodwill impairment test (and interim test if determined to be necessary) will consist of comparing the fair value of our reporting unit to its carrying value. To the extent that the carrying value exceeds fair value, an impairment will be recognized.
For the purpose of our goodwill impairment test, we first assess qualitative factors to determine if it is more likely than not that fair value of the reporting unit is less than the carrying amount. If it is less, an additional quantitative evaluation must be performed. Our quantitative assessment consists of using a market multiples approach to determine fair value. Marketplace company comparisons and analyst reports within the telecommunications industry have historically supported a range of fair values of multiples between 5.0x and 7.9x annualized EBITDA (defined as operating income,
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net of acquisition and integration costs, pension/ OPEB expense, pension settlement costs, stock-based compensation expense, goodwill impairment, storm-related costs, and restructuring costs and other charges, as well as depreciation and amortization).
During 2017, our common stock has declined and traded at historically low prices. As a result, we tested goodwill for impairment in each of the three quarters in 2017. The second quarter quantitative assessment, as described above, resulted in a conclusion that the estimated enterprise fair value was lower than its carrying value, principally due to the decline in our profitability during the period. Accordingly, we recorded a goodwill impairment of $670 million in the second quarter of 2017. The first and third quarter quantitative assessments, did not result in goodwill impairment charges. In estimating the enterprise fair value we used 5.8x as the multiple in each of the three quarters in 2017.
The market multiples approach that we use incorporates significant estimates and assumptions related to the forecasted results for the remainder of the year, including revenues, expenses, and the achievement of other cost synergies. Our assessment includes many qualitative factors that require significant judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding the need for, or size of, an impairment. Continued declines in our profitability or cash flows or in sustained low trading prices of our common stock may result in further impairment.
The enterprise fair value is sensitive to the amount of EBITDA generated by Frontier and the EBITDA multiple used in the calculation. Significant changes in the assumptions or estimates used in our impairment analyses, such as a reduction in profitability and/or cash flows, could result in a non-cash goodwill and indefinite-lived intangible asset impairment charge and materially affect our operating results. The market multiples approach is sensitive to changes in the estimated annual EBITDA, with each $100 million change equating to approximately $580 million of estimated enterprise value. Similarly, a 1% change in the multiple used would affect the estimated enterprise value by approximately $200 million. Sustained low trading prices for our common stock could also affect the reconciliation of our market capitalization and indicate further impairment.
We also considered whether the carrying values of finite-lived intangible assets and property plant and equipment may not be recoverable or whether the carrying value of certain finite-lived intangible assets were impaired, noting no additional impairment was present as of September 30, 2017.
Recent Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements included in Part I of this report for additional information related to recent accounting literature.
Regulatory Developments
On April 29,Connect America Fund (“CAF”)/ Rural Digital Opportunity Fund (“RDOF”): In 2015, Frontier accepted the FCC released offers of support to price cap carriers under theFCC’s CAF Phase II program. The intent of these offersoffer in 29 states, which provided $332 million in annual support and in return the Company is committed to provide long-term support for carriers for establishing and providingmake broadband service with at least 10 Mbps downstream/1 Mbps upstream speeds inavailable to approximately 774,000 high-cost unserved or underserved areas. Frontier accepted the CAF Phase II offer in 29 states, including our CTF properties, which provides for $332locations within its footprint. This amount included approximately 41,000 locations and $19 million in annual support through 2020related to the four states of the Northwest Operations, which were disposed on May 1, 2020. The deployment deadline for the CAF phase II program was December 31, 2021 and funding ended on that date. Thereafter, the FCC has initiated a commitment to make broadband available to approximately 774,000 households.review of carriers’ CAF II program completion data, and if the FCC determines that the Company did not satisfy certain applicable CAF Phase II support isrequirements, Frontier could be required to return a successorportion of the funds previously received and may be subject to the approximately $156 million in annual USF frozen high-cost support that Frontier had been receiving prior to the CTF acquisition,certain other requirements and the $42 million in annual transitional USF frozen high-cost support that Verizon had been receiving in California and Texas. In addition to the annual support levels, these amounts also include frozen support phasedown amounts in states where the annual CAF II funding is less than the prior annual frozen high-cost support funding. The frozen support phasedown support was $35 million in 2015 and $27 million in 2016, and is expected to be $17 million in 2017 and $6 million in 2018.obligations.
In February 2017,On January 30, 2020, the FCC adopted an Order further explainingorder establishing RDOF, a competitive reverse auction to provide support to serve high cost areas. The FCC announced the results of its competitive bidding process to continue to distribute CAFRDOF Phase II funding in those high-cost areas where price cap carriers declined the FCC’s offer of support. ThisI auction could present a new support and deployment opportunity.
On August 4, 2017, the FCC adopted a Public Notice initiating the pre-auction process for the Connect America Fund Phase II auction. The Phase II auction will award up to $198on December 7, 2020. Frontier was awarded approximately $371 million annually for 10over ten years to service providers that commitbuild gigabit-capable broadband over a fiber-to-the-premises network to offer voice and broadband services to fixedapproximately 127,000 locations in unserved high-cost areas; the auction will also account for other service elements such as the minimum data speed provided and data usage allowances. Theeight states (California, Connecticut, Florida,
auction is likelyIllinois, New York, Pennsylvania, Texas, and West Virginia). The FCC approved Frontier’s Long Form application in March 2022 and Frontier began receiving funding in the second quarter of 2022. Frontier will be required to begin in 2018 thoughcomplete the exact timeframe is unknown. Frontier has not yet determined whether it will participate in any competitive bid process atbuildout to these locations by December 31, 2028, with interim target milestones over this time, and because Frontier accepted virtually allperiod.
As part of its available CAF II support up front, we expect the funding available within our footprint to be limited.
On April 20, 2017,RDOF order, the FCC issuedindicated it would hold a follow-on auction for the unawarded funding following the Phase I auction. However, it remains uncertain whether any such follow-on auction will occur given the recent passage of significant federal funding for broadband infrastructure funding.
COVID-19 Initiatives: The Federal government has undertaken several measures to address the ongoing impacts of the COVID-19 pandemic and to facilitate enhanced access to high speed broadband, including through several new funding programs. As these large amounts of federal funding flow through the broadband ecosystem, we will evaluate and pursue funding opportunities that make sense for our business. Because of the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain and rapidly changing, the impact of the crisis and the governmental responses to the crisis on our business in 2022 and beyond remains uncertain and difficult to predict.
Current and Potential Internet Regulatory Obligations: On October 1, 2019, the D.C. Circuit Court largely upheld the FCC decision in its 2018 Restoring Internet Freedom Order to reclassify broadband as an Order that will significantly alter how Commercial Data Services are regulated once“information service.” However, the Court invalidated the FCC’s preemption of a state’s ability to pass their own network neutrality rules goand remanded back to the FCC other parts of the 2018 Order. California’s network neutrality provisions have gone into effect. Specifically,It is unclear whether pending or future appeals will have any impact on the Order adoptedregulatory structure, and it is unclear what impact future federal and/or state legislative or regulatory actions will have on net neutrality issues.
Privacy: Privacy-related legislation has been considered in a test to determine, on a county-by-county basis, whether price cap ILECs, like Frontier’s DS1number of states. Legislative and DS3 services, will continue to be regulated. The test is likely toregulatory action could result in deregulationincreased costs of compliance, claims against broadband Internet access service providers and others, and increased uncertainty in the value and availability of data. On June 28, 2018, the state of California enacted comprehensive privacy legislation that, effective as of January 1, 2020, gives California consumers the right to know what personal information is being collected about them, and whether and to whom it is sold or disclosed, and to access and request deletion of this information. Subject to certain exceptions, it also gives consumers the right to opt-out of the sale of personal information. The law applies the same rules to all companies that collect consumer information. On May 10, 2022, the state of Connecticut enacted privacy legislation that became effective on July 1, 2022. Frontier's privacy protections are consistent with this new legislation.
Video Programming: Federal, state, and local governments extensively regulate the video services industry. Our linear video services are subject to, among other things: subscriber privacy regulations; requirements that we carry a substantial numberlocal broadcast station or obtain consent to carry a local or distant broadcast station; rules for franchise renewals and transfers; the manner in which program packages are marketed to subscribers; and program access requirements.
We provide video programming in some of our markets. Once implemented,markets including California, Connecticut, Florida, Indiana, and Texas pursuant to franchises, permits and similar authorizations issued by state and local franchising authorities. Most franchises are subject to termination proceedings in the deregulation will allow Frontier to offer its DS1 and DS3 servicesevent of a material breach or expire in the ordinary course. In addition, most franchises require payment of a manner that better respondsfranchise fee as a requirement to the competitive marketplacegranting of authority.
Many franchises establish comprehensive facilities and allowsservice requirements, as well as specific customer service standards and monetary penalties for commercial negotiation. non-compliance. In many cases, franchises are terminable if the franchisee fails to comply with material provisions set forth in the franchise agreement governing system operations. We believe that we are in compliance and meeting all material standards and requirements. Franchises are generally granted for fixed terms and must be periodically renewed. Local franchising authorities may resist granting a renewal if either past performance or the prospective operating proposal is considered inadequate.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Our agreement with Verizon for use of the FiOS brand and trademark in markets acquired from them expired on March 31, 2021 and was not renewed or extended. Frontier rebranded our related data and video services as Frontier FiberOptic Internet and Frontier TV, respectively.
Environmental Regulation:The areas that remain regulated may belocal exchange carrier subsidiaries we operate are subject to price fluctuations depending uponfederal, state, and local laws, and regulations governing the price cap formulause, storage, disposal of, and exposure to hazardous materials, the release of pollutants into the environment and the remediation of contamination. As an owner and former owner of property, we are subject to environmental laws that year. Multiple parties have appealedcould impose liability for the entire cost of cleanup at contaminated sites, including sites formerly owned by us, regardless of fault or the lawfulness of the activity that resulted in contamination. We believe that our operations are in substantial compliance with applicable environmental laws and requested a stay of this Order. Frontier cannot predict the extent to which these regulatory changes will affect revenues at this time.regulations.
Item 3. Quantitative and QualitativeQualitative Disclosures about Market Risk
We are exposed to market risk in the normal course of our business operations due to ongoing investing and funding activities, including those associated with our pension plan assets. Market risk refers to the potential change in fair value of a financial instrument as a result of fluctuations in interest rates and equity prices. We do not hold or issue derivative instruments, derivative commodity instruments or other financial instruments for trading purposes. As a result, we do not undertake any specific actions to cover our exposure to market risks, and we are not party to any market risk management agreements other than in the normal course of business. Our primary market risk exposures from interest rate risk and equity price risk are as follows:
Our exposure to market risk for changes in interest rates relates primarily to the interest-bearing portion of our pension investment portfolio and the related actuarial liability for pension obligations, as well as our floating rate indebtedness. As of SeptemberJune 30, 2017, 80%2022, 84% of our total debt had fixed interest rates. We had no interest rate swap agreements in effect at SeptemberJune 30, 2017.2022. We believe that our currently outstanding obligation exposure to interest rate changes is minimal.
Our objectives in managing our interest rate risk are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, only $3,537our $1.456 billion term loan facility has a floating interest rate at June 30, 2022. The annual impact of a 100 basis point change in LIBOR would result in approximately $15 million of our outstanding borrowings at September 30, 2017 have floatingadditional interest rates. Our undrawn $850 million revolving credit facility has interest ratesexpense, provided that float with the LIBO Rate, as defined. Consequently, we have limited material future earnings or cash flow exposures from changes in interest rates on our debt.LIBOR rate exceeds the LIBOR floor. An adverse change in interest rates would increase the amount that we pay on our variable rate obligations and could result in fluctuations in the fair value of our fixed rate obligations. Interest income from cash invested in term deposits offsets the impact of higher interest expense from floating rate debt. Based upon our overall interest rate exposure, a near-term change in interest rates would not materially affect our consolidated financial position, results of operations or cash flows.
Our discount rate assumption for our pension benefit obligation is determined at least annually, or whenever required, with assistance from our actuaries based on the pattern of expected future benefit payments and the prevailing rates available on long-term, high quality corporate bonds with durations approximate to that of our benefit obligation. As of June 30, 2022, our discount rate utilized in calculating our benefit plan obligation continues to reflect the December 31, 2021 discount rate of 2.90%.
Our discount rate assumption for our OPEB obligation is determined in a similar manner to the pension plan. As of December 31, 2021, the discount rate was 3.00%. The discount rate was updated in connection with the remeasurements in February and May of 2022. As of June 30, 2022, our discount rate utilized for purposes of calculating our OPEB plan obligation reflects the May 31, 2022 discount rate of 4.50%.
At SeptemberJune 30, 2017,2022, the fair value of our long-term debt was estimated to be approximately $15.5$8.0 billion, based on quoted market prices, our overall weighted average borrowing rate was 8.36%6.163% and our overall weighted average maturity was
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
approximately sixseven years. AsRefer to Note 8 for discussion of September 30, 2017, there has been no significant change in the weighted average maturity applicable toimpact of the Chapter 11 Cases on our obligations since December 31, 2016.debt obligations.
Our exposure to market risks for changes in equity security prices as of SeptemberJune 30, 20172022 is primarily limited to our pension plan assets. We have no other security investments of any significant amount.
Our Pension PlanThe value of our pension plan assets decreased $545 million from $2,766$2,655 million at December 31, 20162021 to $2,604$2,110 million at SeptemberJune 30, 2017, a decrease of $162 million, or 6%.2022. This decrease was a resultprimarily resulted from changes in the market value of investments of $506 million including plan expenses, benefit payments to participants of $492$113 million, partially offset by positive investment returnscontributions of $270 million, net of investment management and administrative fees, and contributions$74 million. While there is a significant reduction in excessthe assets of the Differential (as defined below) of $60 million, duringpension plan, the first nine months of 2017.related liability is also expected to decrease due to increases in the related discount rate.
As partWhile there is a significant reduction in the assets of the CTF Acquisition, Verizon was requiredpension plan, discount rates have also risen by approximately 190 basis points to makeabout 4.80%, as of June 30, 2022. If these discount rates remain in effect through the end of 2022 our projected benefit obligation would decrease by about $650 million. On the funding side, a cash payment to Frontiersustained pension asset loss could result in a reduced funding percentage and an increased minimum contribution for the difference in assets initially transferred by Verizon into the Pension Plan and the related obligation (the Differential). In the third quarter of 2017, we received the $131 million Differential payment from Verizon, and have remitted an equivalent amount to the2023 plan year.
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Pension Plan as of September 30, 2017. As the Differential was reflected as a receivable of the Pension Plan at December 31, 2016, the cash funding had no impact to plan assets.
Item 4. Controls and Procedures
(a)Evaluation of disclosure controls and Proceduresprocedures
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We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, regarding the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon this evaluation, our principal executive officer and principal financial officer concluded, as of the end of the period covered by this report, September 30, 2017,March 31, 2022, that our disclosure controls and procedures were effective. effective in recording, processing, summarizing and reporting on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and were effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
| (b)Changes in |
We reviewed our internal control over financial reporting at September 30, 2017.
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in an evaluation thereof that occurred during the third fiscal quarterfirst six months of 20172022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting.
Item 1. Legal Proceedings
See Note 15On April 30, 2018, an amended consolidated class action complaint was filed in the United States District Court for the District of Connecticut on behalf of certain purported stockholders against Frontier, certain of its current and former directors and officers and the Notesunderwriters of certain Frontier securities offerings and in connection with certain disclosures relating to Consolidated Financial Statements includedthe acquisition of properties in Part I, ItemCalifornia, Texas and Florida from Verizon on April 1, 2016 (“CTF transaction”). The complaint was brought on behalf of all persons who (1) acquired Frontier common stock between February 6, 2015 and February 28, 2018, inclusive, and/or (2) acquired Frontier common stock or Mandatory Convertible Preferred Stock. On March 8, 2019, the District Court granted in its entirety Frontier’s motion to dismiss the complaint and on March 24, 2020, the court denied plaintiffs’ motion for leave to amend. Plaintiffs appealed and prior to oral argument, the parties reached an agreement in principle to resolve the matter. The settlement, which has preliminary court approval, will be covered by insurance and will have no material financial impact on the Company.
On May 19, 2021, the FTC, joined by the attorneys general of Arizona, Indiana, Michigan, North Carolina, and Wisconsin, and two California District Attorneys, filed a complaint against Frontier in the Federal District Court for the Central District of California alleging that Frontier violated federal and state laws by knowingly misrepresenting in its advertisements the Internet speeds it was capable of delivering to DSL customers. On October 4, 2021, the court granted in part and denied in part Frontier’s motion dismiss by dismissing the non-California state claims, but permitting the FTC’s and California’s claims to proceed in the litigation. Frontier expressly denies any wrongdoing but, in the interest of resolving the matter, entered into a settlement with the FTC and California, which required Frontier to make a financial payment of approximately $9 million in costs and civil penalties, along with certain modifications to its DSL advertising and other practices. An accrual was established as of March 31, 2022 for the financial impact of this report. There have been nosettlement, which is not material changes to our legal proceedingsthese financial statements. The settlement was approved by the court and the financial payment was made in the second quarter of 2022.
On July 27, 2022, the Connecticut Public Utility Regulatory Authority (“PURA”) issued a Notice of Violation and Assessment of Civil Penalty Order to Cease and Desist (“NOV”) related to the underground excavation and placement of fiber facilities by Frontier and its contractors in Connecticut. The NOV alleges that Frontier and its contractors failed to comply with certain state excavation regulations which created public safety and compliance issues. The NOV prescribes a $5 million fine, which the Company will challenge in a contested proceeding. The NOV also orders Frontier to discontinue certain underground fiber deployment work until the Company submits a compliance plan to ensure compliance with the applicable regulations. Frontier is complying with the NOV and will seek relief from the information providedunderground fiber deployment restrictions. On August 1, 2022, the PURA responded to a Frontier motion, clarifying the restrictions and allowing certain underground construction activity to continue. While the Company does not believe that this matter will have a material impact on its fiber build or financial position, results of operations or cash flows, a prolonged ban on underground installations in Item 3. “Legal Proceedings” includedConnecticut could adversely impact the Company’s ability to meet its build targets in our Annual Report on Form 10-K for the year ended December 31, 2016. a timely manner.
WeIn addition, we are party to various other legal proceedings (including individual, class and putative class actions)actions as well as federal and state governmental investigations) arising in the normal course of our business covering a wide range of matters and types of claims including, but not limited to, general contracts, billing disputes, rights of access, taxes and surcharges, consumer protection, trademark, copyright and patent infringement, employment, regulatory, tort, claims of competitors and disputes with other carriers. Litigation isSuch matters are subject to uncertainty and the outcome of individual matters is not predictable. However, we believe that the ultimate resolution of all suchthese matters, after considering insurance coverage or other indemnities to which we are entitled, will not have a material adverse effect on our financial position, results of operations, or cash flows.
There have been no material changes to the Risk Factors described in Part 1, Item 1A.1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. 2021.
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PART II. OTHER INFORMATION (Continued)
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
PART II. OTHER INFORMATION
There were no unregistered sales of equity securities during the quarter ended SeptemberJune 30, 2017.2022.
(a) | Exhibits: | ||||||||||
Exhibit Number | Description | ||||||||||
| Indenture, dated as of May 12, 2022, by and among Frontier Communications Holdings, LLC, the guarantors party thereto, the collateral grantor party thereto. Wilmington Trust, National Association, as trustee, and JPMorgan Chase Bank, N.A., as collateral agent (filed as Exhibit 4.1 to Frontier’s Current Report on Form 8-K filed on May 16, 2022). | ||||||||||
Form of 8.750% First Lien Secured Notes due 2030 (included in Exhibit 4.1 to Frontier’s Current Report on Form 8-K filed on May 16, 2022). | |||||||||||
Amendment No. 2 to Amended and Restated Credit Agreement, dated as of May 12, 2022, by and among Frontier Communications Holdings, LLC, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, Goldman Sachs Bank USA, as revolver agent, and the lenders party thereto (filed as Exhibit 10.1 to Frontier’s Current Report on Form 8-K filed on May 12, 2022). | |||||||||||
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | |||||||||||
| Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | ||||||||||
| Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||||||
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| The following materials from Frontier’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in iXBRL (inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Loss; (iv) the Consolidated Statements of Equity (Deficit); (v) the Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements. | |||||||||
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FRONTIER COMMUNICATIONS | |
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By: /s/ | |
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(Principal Accounting Officer) | |
Date: | |