UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20222023
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 PARENT, INC.
(Exact name of registrant as specified in its charter)
Delaware |
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(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
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(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (203) 614-5600(972) 445-0042
401 Merritt 7, Norwalk, Connecticut 06851
(Former name, former address and former fiscal year, if changed from last report)
Securities registered pursuant to Section 12(b) of the Act:
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes __ No _X_
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes __ No _X_
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 _xX_ No __¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 _xX_ 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”, “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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
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 Stockcommon stock as of October 27, 202230, 2023 was 245,004,000.
245,789,000.
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
Table of Contents
Page | |
Part I. Financial Information (Unaudited) | |
Item 1. Financial Statements | |
Consolidated Balance Sheets as of September 30 | 1 |
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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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PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
($ in millions and shares in thousands, except for per-share amounts)
(Unaudited) | ||||||||
September 30, 2022 | December 31, 2021 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 230 | $ | 2,127 | ||||
Short-term investments | 2,325 | - | ||||||
Accounts receivable, less allowances of $47 and $57, respectively | 422 | 458 | ||||||
Prepaid expenses | 80 | 73 | ||||||
Income taxes and other current assets | 21 | 30 | ||||||
Total current assets | 3,078 | 2,688 | ||||||
Property, plant and equipment, net | 10,847 | 9,199 | ||||||
Other intangibles, net | 3,986 | 4,227 | ||||||
Other assets | 362 | 367 | ||||||
Total assets | $ | 18,273 | $ | 16,481 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Long-term debt due within one year | $ | 15 | $ | 15 | ||||
Accounts payable | 995 | 535 | ||||||
Advanced billings | 195 | 197 | ||||||
Accrued other taxes | 179 | 183 | ||||||
Accrued interest | 178 | 76 | ||||||
Pension and other postretirement benefits | 46 | 46 | ||||||
Other current liabilities | 369 | 399 | ||||||
Total current liabilities | 1,977 | 1,451 | ||||||
Deferred income taxes | 554 | 387 | ||||||
Pension and other postretirement benefits | 1,193 | 1,672 | ||||||
Other liabilities | 496 | 403 | ||||||
Long-term debt | 9,120 | 7,968 | ||||||
Total liabilities | 13,340 | 11,881 | ||||||
Equity: | ||||||||
Common stock, $0.01 par value (1,750,000 authorized shares, 244,999 | ||||||||
and 244,416 shares issued and outstanding at September 30, 2022 and | ||||||||
December 31, 2021, respectively) | 2 | 2 | ||||||
Additional paid-in capital | 4,171 | 4,124 | ||||||
Retained earnings | 700 | 414 | ||||||
Accumulated other comprehensive income, net of tax | 60 | 60 | ||||||
Total equity | 4,933 | 4,600 | ||||||
Total liabilities and equity | $ | 18,273 | $ | 16,481 | ||||
(Unaudited) | ||||||||
September 30, 2023 | December 31, 2022 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 948 | $ | 322 | ||||
Short-term investments | 1,275 | 1,750 | ||||||
Accounts receivable, less allowances of $33 and $47, respectively | 449 | 438 | ||||||
Prepaid expenses | 79 | 57 | ||||||
Income taxes and other current assets | 47 | 30 | ||||||
Total current assets | 2,798 | 2,597 | ||||||
Property, plant and equipment, net | 13,621 | 11,850 | ||||||
Other intangibles, net | 3,665 | 3,906 | ||||||
Other assets | 425 | 271 | ||||||
Total assets | $ | 20,509 | $ | 18,624 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Long-term debt due within one year | $ | 15 | $ | 15 | ||||
Accounts payable | 885 | 1,410 | ||||||
Advanced billings | 202 | 194 | ||||||
Accrued other taxes | 131 | 137 | ||||||
Accrued interest | 183 | 104 | ||||||
Pension and other postretirement benefits | 39 | 39 | ||||||
Other current liabilities | 596 | 396 | ||||||
Total current liabilities | 2,051 | 2,295 | ||||||
Deferred income taxes | 565 | 558 | ||||||
Pension and other postretirement benefits | 866 | 1,044 | ||||||
Other liabilities | 529 | 483 | ||||||
Long-term debt | 11,258 | 9,110 | ||||||
Total liabilities | 15,269 | 13,490 | ||||||
Equity: | ||||||||
Common stock, $0.01 par value (1,750,000 authorized shares, 245,782 | ||||||||
and 245,021 shares issued and outstanding at September 30, 2023 and | ||||||||
December 31, 2022, respectively) | 2 | 2 | ||||||
Additional paid-in capital | 4,271 | 4,198 | ||||||
Retained earnings | 867 | 855 | ||||||
Accumulated other comprehensive income, net of tax | 100 | 79 | ||||||
Total equity | 5,240 | 5,134 | ||||||
Total liabilities and equity | $ | 20,509 | $ | 18,624 | ||||
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)
For the three months | For the three months | |||||||
ended September 30, | ended September 30, | |||||||
2022 | 2021 | |||||||
Revenue | $ | 1,444 | $ | 1,576 | ||||
Operating expenses: | ||||||||
Cost of service | 544 | 590 | ||||||
Selling, general, and administrative expenses | 431 | 421 | ||||||
Depreciation and amortization | 296 | 273 | ||||||
Restructuring costs and other charges | 4 | 8 | ||||||
Total operating expenses | 1,275 | 1,292 | ||||||
Operating income | 169 | 284 | ||||||
Investment and other income (loss), net (See Note 10) | 211 | (37) | ||||||
Pension settlement costs | (50) | - | ||||||
Interest expense | (135) | (90) | ||||||
Income before income taxes | 195 | 157 | ||||||
Income tax expense | 75 | 31 | ||||||
Net income | $ | 120 | $ | 126 | ||||
Basic net earnings per share | ||||||||
attributable to Frontier common shareholders | $ | 0.49 | $ | 0.52 | ||||
Diluted net earnings per share | ||||||||
attributable to Frontier common shareholders | $ | 0.49 | $ | 0.51 | ||||
Total weighted average shares outstanding - basic | 244,984 | 244,403 | ||||||
Total weighted average shares outstanding - diluted | 245,212 | 245,667 | ||||||
For the three months ended | For the nine months ended | |||||||||||||
September 30, | September 30, | |||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||
Revenue | $ | 1,436 | $ | 1,444 | $ | 4,325 | $ | 4,350 | ||||||
Operating expenses: | ||||||||||||||
Cost of service | 545 | 544 | 1,615 | 1,643 | ||||||||||
Selling, general, and administrative expenses | 405 | 431 | 1,250 | 1,293 | ||||||||||
Depreciation and amortization | 356 | 296 | 1,040 | 870 | ||||||||||
Restructuring costs and other charges | 16 | 4 | 48 | 88 | ||||||||||
Total operating expenses | 1,322 | 1,275 | 3,953 | 3,894 | ||||||||||
Operating income | 114 | 169 | 372 | 456 | ||||||||||
Investment and other income, net (See Note 10) | 67 | 211 | 101 | 410 | ||||||||||
Pension settlement costs | - | (50) | - | (50) | ||||||||||
Interest expense | (170) | (135) | (460) | (356) | ||||||||||
Income before income taxes | 11 | 195 | 13 | 460 | ||||||||||
Income tax expense | - | 75 | 1 | 174 | ||||||||||
Net income | $ | 11 | $ | 120 | $ | 12 | $ | 286 | ||||||
Basic net earnings per share | ||||||||||||||
attributable to Frontier common shareholders | $ | 0.05 | $ | 0.49 | $ | 0.05 | $ | 1.17 | ||||||
Diluted net earnings per share | ||||||||||||||
attributable to Frontier common shareholders | $ | 0.05 | $ | 0.49 | $ | 0.05 | $ | 1.17 | ||||||
Total weighted average shares outstanding - basic | 245,761 | 244,984 | 245,431 | 244,711 | ||||||||||
Total weighted average shares outstanding - diluted | 247,447 | 245,212 | 247,336 | 245,080 | ||||||||||
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)
Successor | Predecessor | ||||||||||
For the nine months | For the five months | For the four months | |||||||||
ended September 30, | ended September 30, | ended April 30, | |||||||||
2022 | 2021 | 2021 | |||||||||
Revenue | $ | 4,350 | $ | 2,637 | $ | 2,231 | |||||
Operating expenses: | |||||||||||
Cost of service | 1,643 | 986 | 830 | ||||||||
Selling, general, and administrative expenses | 1,293 | 690 | 537 | ||||||||
Depreciation and amortization | 870 | 452 | 506 | ||||||||
Restructuring costs and other charges | 88 | 19 | 7 | ||||||||
Total operating expenses | 3,894 | 2,147 | 1,880 | ||||||||
Operating income | 456 | 490 | 351 | ||||||||
Investment and other income (loss), net (See Note 10) | 410 | (39) | 1 | ||||||||
Pension settlement costs | (50) | - | - | ||||||||
Reorganization items, net | - | - | 4,171 | ||||||||
Interest expense (See Note 8) | (356) | (152) | (118) | ||||||||
Income before income taxes | 460 | 299 | 4,405 | ||||||||
Income tax expense (benefit) | 174 | 74 | (136) | ||||||||
Net income | $ | 286 | $ | 225 | $ | 4,541 | |||||
Basic net earnings per share | |||||||||||
attributable to Frontier common shareholders | $ | 1.17 | $ | 0.92 | $ | 43.42 | |||||
Diluted net earnings per share | |||||||||||
attributable to Frontier common shareholders | $ | 1.17 | $ | 0.92 | $ | 43.28 | |||||
Total weighted average shares outstanding - basic | 244,711 | 244,402 | 104,584 | ||||||||
Total weighted average shares outstanding - diluted | 245,080 | 245,600 | 104,924 |
The accompanying Notes are an integral part of these unaudited Consolidated Financial Statements.
PART I. FINANCIAL INFORMATION (Continued)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
(Unaudited)
For the three months | For the three months | |||||||||||
ended September 30, | ended September 30, | |||||||||||
2022 | 2021 | |||||||||||
Net income | $ | 120 | $ | 126 | ||||||||
Other comprehensive (loss) income, net of tax | (2) | 3 | ||||||||||
Comprehensive income | $ | 118 | $ | 129 | ||||||||
For the three months ended | For the nine months ended | |||||||||||||
September 30, | September 30, | |||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||
Net income | $ | 11 | $ | 120 | $ | 12 | $ | 286 | ||||||
Other comprehensive income (loss), net of tax | 8 | (2) | 21 | - | ||||||||||
Comprehensive income | $ | 19 | $ | 118 | $ | 33 | $ | 286 | ||||||
Successor | Predecessor | |||||||||||
For the nine months | For the five months | For the four months | ||||||||||
ended September 30, | ended September 30, | ended April 30, | ||||||||||
2022 | 2021 | 2021 | ||||||||||
Net income | $ | 286 | $ | 225 | $ | 4,541 | ||||||
Other comprehensive income, net of tax | - | 44 | 359 | |||||||||
Comprehensive income | $ | 286 | $ | 269 | $ | 4,900 | ||||||
The accompanying Notes are an integral part of these unaudited Consolidated Financial Statements.
PART I. FINANCIAL INFORMATION (Continued)
($ in millions and shares in thousands)
(Unaudited)
For the nine months ended September 30, 2022 (Successor) | For the nine months ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||
Additional | Other | Additional | Other | |||||||||||||||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | Total | Common Stock | Paid-In | Retained | Comprehensive | Total | |||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income | Equity | 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 | ||||||||||||||||||||||||||||||
Balance at January 1, 2023 | 245,021 | $ | 2 | $ | 4,198 | $ | 855 | $ | 79 | $ | 5,134 | |||||||||||||||||||||||||
Stock plans, net | 211 | - | 22 | - | - | 22 | ||||||||||||||||||||||||||||||
Net income | - | - | - | 65 | - | 65 | - | - | - | 3 | - | 3 | ||||||||||||||||||||||||
Other comprehensive | ||||||||||||||||||||||||||||||||||||
loss, net of tax | - | - | - | - | (2) | (2) | ||||||||||||||||||||||||||||||
Balance at March 31, 2022 | 244,476 | $ | 2 | $ | 4,139 | $ | 479 | $ | 58 | $ | 4,678 | |||||||||||||||||||||||||
income, net of tax | - | - | - | - | 4 | 4 | ||||||||||||||||||||||||||||||
Balance at March 31, 2023 | 245,232 | $ | 2 | $ | 4,220 | $ | 858 | $ | 83 | $ | 5,163 | |||||||||||||||||||||||||
Stock plans, net | 512 | - | 22 | - | - | 22 | ||||||||||||||||||||||||||||||
Net loss | - | - | - | (2) | - | (2) | ||||||||||||||||||||||||||||||
Other comprehensive | ||||||||||||||||||||||||||||||||||||
income, net of tax | - | - | - | - | 9 | 9 | ||||||||||||||||||||||||||||||
Balance at June 30, 2023 | 245,744 | $ | 2 | $ | 4,242 | $ | 856 | $ | 92 | $ | 5,192 | |||||||||||||||||||||||||
Stock plans | 493 | - | 13 | - | - | 13 | 38 | - | 29 | - | - | 29 | ||||||||||||||||||||||||
Net income | - | - | - | 101 | - | 101 | - | - | - | 11 | - | 11 | ||||||||||||||||||||||||
Other comprehensive | ||||||||||||||||||||||||||||||||||||
income, net of tax | - | - | - | - | 4 | 4 | - | - | - | - | 8 | 8 | ||||||||||||||||||||||||
Balance at June 30, 2022 | 244,969 | $ | 2 | $ | 4,152 | $ | 580 | $ | 62 | $ | 4,796 | |||||||||||||||||||||||||
Stock plans | 30 | - | 19 | - | - | 19 | ||||||||||||||||||||||||||||||
Net income | - | - | - | 120 | - | 120 | ||||||||||||||||||||||||||||||
Other comprehensive | ||||||||||||||||||||||||||||||||||||
income, net of tax | - | - | - | - | (2) | (2) | ||||||||||||||||||||||||||||||
Balance at September 30, 2022 | 244,999 | $ | 2 | $ | 4,171 | $ | 700 | $ | 60 | $ | 4,933 | |||||||||||||||||||||||||
Balance at September 30, 2023 | 245,782 | $ | 2 | $ | 4,271 | $ | 867 | $ | 100 | $ | 5,240 | |||||||||||||||||||||||||
For the nine months ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||
Accumulated | For the nine months ended September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
Additional | Other | Treasury | Total | Accumulated | |||||||||||||||||||||||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive | Common Stock | Equity | Additional | Other | ||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Income (Loss) | Shares | Amount | (Deficit) | Common Stock | Paid-In | Retained | Comprehensive | Total | |||||||||||||||||||||||||||||
Balance at January 1, 2021 | 106,025 | $ | 27 | $ | 4,817 | $ | (8,975) | $ | (755) | (1,232) | $ | (14) | $ | (4,900) | |||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income | Equity | ||||||||||||||||||||||||||||||||||||
Balance at January 1, 2022 | 244,416 | $ | 2 | $ | 4,124 | $ | 414 | $ | 60 | $ | 4,600 | ||||||||||||||||||||||||||||||
Stock plans, net | 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, net | 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 | ||||||||||||||||||||||||||||||
Stock plans | - | - | - | - | - | (122) | (1) | (1) | 30 | - | 19 | - | - | 19 | |||||||||||||||||||||||||||
Net income | - | - | - | 60 | - | - | - | 60 | - | - | - | 120 | - | 120 | |||||||||||||||||||||||||||
Other comprehensive | |||||||||||||||||||||||||||||||||||||||||
income, net of tax | - | - | - | - | 11 | - | - | 11 | - | - | - | - | (2) | (2) | |||||||||||||||||||||||||||
Balance at March 31, 2021 (Predecessor) | 106,025 | $ | 27 | $ | 4,817 | $ | (8,915) | $ | (744) | (1,354) | $ | (15) | $ | (4,830) | |||||||||||||||||||||||||||
Balance at September 30, 2022 | 244,999 | $ | 2 | $ | 4,171 | $ | 700 | $ | 60 | $ | 4,933 | ||||||||||||||||||||||||||||||
Stock plans | - | - | 1 | - | - | - | - | 1 | |||||||||||||||||||||||||||||||||
Net income | - | - | - | 4,481 | - | - | - | 4,481 | |||||||||||||||||||||||||||||||||
Other comprehensive | |||||||||||||||||||||||||||||||||||||||||
income, net of tax | - | - | - | - | 348 | - | - | 348 | |||||||||||||||||||||||||||||||||
Cancellation of Predecessor equity | (106,025) | (27) | (4,818) | 4,434 | 396 | 1,354 | 15 | - | |||||||||||||||||||||||||||||||||
Issuance of Successor common stock | 244,401 | 2 | 4,106 | - | - | - | - | 4,108 | |||||||||||||||||||||||||||||||||
Balance at April 30, 2021 (Predecessor) | 244,401 | $ | 2 | $ | 4,106 | $ | - | $ | - | - | $ | - | $ | 4,108 | |||||||||||||||||||||||||||
Balance at April 30, 2021 (Successor) | 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 (Successor) | 244,401 | $ | 2 | $ | 4,106 | $ | 99 | $ | 41 | - | $ | - | $ | 4,248 | |||||||||||||||||||||||||||
Stock plans | 6 | - | 8 | - | - | - | - | 8 | |||||||||||||||||||||||||||||||||
Net income | - | - | - | 126 | - | - | - | 126 | |||||||||||||||||||||||||||||||||
Other comprehensive | |||||||||||||||||||||||||||||||||||||||||
income, net of tax | - | - | - | - | 3 | - | - | 3 | |||||||||||||||||||||||||||||||||
Balance at September 30, 2021 | 244,407 | $ | 2 | $ | 4,114 | $ | 225 | $ | 44 | - | $ | - | $ | 4,385 | |||||||||||||||||||||||||||
The accompanying Notes are an integral part of these unaudited Consolidated Financial Statements.
PART I. FINANCIAL INFORMATION (Continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
(Unaudited)
Successor | Predecessor | |||||||||||
For the nine months ended September 30, | For the five months ended September 30, | For the four months ended April 30, | ||||||||||
2022 | 2021 | 2021 | ||||||||||
Cash flows provided from (used by) operating activities: | ||||||||||||
Net Income | $ | 286 | $ | 225 | $ | 4,541 | ||||||
Adjustments to reconcile net income to net cash provided from (used by) operating activities: | ||||||||||||
Depreciation and amortization | 870 | 452 | 506 | |||||||||
Pension settlement costs | 50 | - | - | |||||||||
Stock-based compensation expense | 54 | 8 | (1) | |||||||||
Non-cash reorganization items, net | - | - | (5,467) | |||||||||
Lease Impairment | 44 | - | - | |||||||||
Bad debt expense | 19 | 16 | - | |||||||||
Other adjustments | (20) | (11) | 1 | |||||||||
Deferred income taxes | 167 | 68 | (148) | |||||||||
Change in accounts receivable | 16 | 49 | 36 | |||||||||
Change in pension and other post retirement liabilities | (527) | 60 | (12) | |||||||||
Change in accounts payable and other liabilities | 94 | 89 | (156) | |||||||||
Change in prepaid expenses, income taxes, and other assets | (12) | 27 | 46 | |||||||||
Net cash provided from (used by) operating activities | 1,041 | 983 | (654) | |||||||||
Cash flows provided from (used by) investing activities: | ||||||||||||
Capital expenditures | (1,860) | (646) | (500) | |||||||||
Proceeds on sale of assets | 4 | - | 9 | |||||||||
Purchase of short-term investments | (3,225) | - | - | |||||||||
Sale of short-term investments | 900 | - | - | |||||||||
Other | 3 | 1 | 1 | |||||||||
Net cash used by investing activities | (4,178) | (645) | (490) | |||||||||
Cash flows provided from (used by) financing activities: | ||||||||||||
Long-term debt principal payments | (11) | (8) | (1) | |||||||||
Proceeds from long-term debt borrowings | 1,200 | - | 225 | |||||||||
Financing costs paid | (17) | - | (4) | |||||||||
Finance lease obligation payments | (15) | (9) | (7) | |||||||||
Proceeds from financing lease transactions | 70 | - | - | |||||||||
Taxes paid on behalf of employees for shares withheld | (7) | - | - | |||||||||
Other | (1) | - | (16) | |||||||||
Net cash provided from (used by) financing activities | 1,219 | (17) | 197 | |||||||||
Increase (decrease) in cash, cash equivalents, and restricted cash | (1,918) | 321 | (947) | |||||||||
Cash, cash equivalents, and restricted cash at January 1, | 2,178 | 940 | 1,887 | |||||||||
Cash, cash equivalents, and restricted cash at September 30, | $ | 260 | $ | 1,261 | $ | 940 | ||||||
Supplemental cash flow information: | ||||||||||||
Cash paid during the period for: | ||||||||||||
Interest | $ | 286 | $ | 121 | $ | 84 | ||||||
Income tax payments, net | $ | 7 | $ | 27 | $ | 9 | ||||||
Reorganization items, net | $ | - | $ | - | $ | 1,397 |
For the nine months ended | ||||||||
2023 | 2022 | |||||||
Cash flows provided from (used by) operating activities: | ||||||||
Net Income | $ | 12 | $ | 286 | ||||
Adjustments to reconcile net income to net cash provided from (used by) operating activities: | ||||||||
Depreciation and amortization | 1,040 | 870 | ||||||
Pension settlement costs | - | 50 | ||||||
Stock-based compensation expense | 81 | 54 | ||||||
Lease Impairment | - | 44 | ||||||
Amortization of premium | (21) | (21) | ||||||
Bad debt expense | 24 | 19 | ||||||
Other adjustments | 9 | 1 | ||||||
Deferred income taxes | (1) | 167 | ||||||
Change in accounts receivable | (35) | 16 | ||||||
Change in long-term pension and other postretirement liabilities | (149) | (527) | ||||||
Change in accounts payable and other liabilities | 101 | 94 | ||||||
Change in prepaid expenses, income taxes, and other assets | (13) | (12) | ||||||
Net cash provided from operating activities | 1,048 | 1,041 | ||||||
Cash flows provided from (used by) investing activities: | ||||||||
Capital expenditures | (2,882) | (1,860) | ||||||
Purchase of short-term investments | (1,850) | (3,225) | ||||||
Sale of short-term investments | 2,325 | 900 | ||||||
Purchase of long-term investments | (63) | - | ||||||
Proceeds on sale of assets | 18 | 4 | ||||||
Other | 1 | 3 | ||||||
Net cash (used by) investing activities | (2,451) | (4,178) | ||||||
Cash flows provided from (used by) financing activities: | ||||||||
Long-term debt principal payments | (64) | (11) | ||||||
Net proceeds from long-term debt borrowings | 2,278 | 1,200 | ||||||
Premium paid to retire debt | (10) | - | ||||||
Financing costs paid | (56) | (17) | ||||||
Finance lease obligation payments | (18) | (15) | ||||||
Proceeds from sale and lease-back transactions | 21 | 70 | ||||||
Taxes paid on behalf of employees for shares withheld | (9) | (7) | ||||||
Other | (7) | (1) | ||||||
Net cash provided from financing activities | 2,135 | 1,219 | ||||||
Increase (Decrease) in cash, cash equivalents, and | 732 | (1,918) | ||||||
Cash, cash equivalents, and restricted cash at January 1, | 322 | 2,178 | ||||||
Cash, cash equivalents, and restricted cash at September 30, | $ | 1,054 | $ | 260 | ||||
Supplemental cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 449 | $ | 286 | ||||
Income tax payments, net | $ | 1 | $ | 7 |
The accompanying Notes are an integral part of these unaudited Consolidated Financial Statements.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
(1) Summary of Significant Accounting Policies:
a) Basis of Presentation and Use of Estimates:
Frontier Communications Parent, 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, 2021.2022. 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 income, and cash flows for any interim periods are not necessarily indicative of results that may be expected for the full year.
We operate in one 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 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 September 30, 2022,2023, 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”).
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 credit losses, asset impairments, indefinite-lived intangibles, depreciation and amortization, income taxes, and pension and other postretirement benefits, among others.
Chapter 11 Bankruptcy Emergence
As described in Note 3 Emergence from the Chapter 11 Cases, and Note 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, the Company emerged from bankruptcy on April 30, 2021 (the “Effective Date”). 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 a capital structure having carrying amounts not comparable with prior periods.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Reorganization items incurred in the first four months of 2021 as a result of the 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 $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 expensed as incurred and significantly affected our consolidated results of operations. From the Petition Date to the Effective Date, these costs were included in “Reorganization items, net” on 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 for periods 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 footnote tables, which emphasizes the lack of comparability between amounts presented. References to “Successor” relate to our financial position and results of operations after the Effective Date. References to “Predecessor” refer to the 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 surcharges, 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 retail 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 estimated average remaining service period of participants. As part of fresh start accounting, Frontier has made an accounting policy election to recognize these gains and losses immediately in the period they occur as “Investment and other income (loss)” on the consolidated statement of income.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Government Grants Revenue - Certain governmental grants that were historically presented on a net basis as part of capital expenditures, are now presented on a gross basis and included in ”Revenue” on the consolidated statement of income.
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:
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Satisfaction of Performance Obligations
Frontier satisfies itsWe satisfy our obligations to customers by transferring goods and services in exchange for consideration received from the customer. The timing of Frontier’sour 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 service is determined by allocating the total transaction price based upon the relative stand-alone selling price of sucheach 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 relative stand-alone selling price. These types of incentives are accounted 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”service revenue” for fees charged to our wholesale customers and “Other revenue” for fees charged to all other customers using a portfolio approach over the average customer life.life using a portfolio approach.
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 are deferred and recorded as a contract asset if the period of 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 Company applieswe applied the practical expedient that allows such costs to be expensed as incurred.
Taxes, Surcharges and Subsidies
Frontier collectsWe collect various taxes, Universal Service FundFunds (“USF”) surcharges (primarily federal USF), and certain other surcharges from itsour customers and subsequently remits these taxes to governmental authorities. During the predecessor period, USF and other surcharges amounted to $83 million for the four months ended April 30, 2021.
In June 2015, Frontierwe accepted the FCC offer of support to price cap carriers under the Connect America Fund (“CAF”) Phase II program, which was intended to provide long-term support for broadband build commitments in high cost unserved or underserved areas. We recognized FCC’s CAF Phase II subsidies into revenue on a straight-line basis over the seven-year funding term which ended on December 31, 2021. The FCC is reviewing carriers’ CAF II program completion data, and if the FCC determines that we did not satisfy certain applicable CAF Phase II requirements, we could be required to return a portion of the funds previously 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
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
probable and reasonably estimated, and we do not expect that any potential penalties, if ultimately incurred,amounts of funds that may need to be returned will be material.
In May 2022, Frontierwe accepted the FCC offer under the Rural Digital Opportunity Fund (“RDOF”) Phase I program, which provides funding over a ten-year period to support the construction of broadband networks in rural communities across the country. FrontierWe accepted $37 million in annual support through 2032 in return for our 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 straight-line basis over the ten-year funding term which will end March 31, 2032. We are required to complete the RDOF deployment by December 31, 2028. Thereafter, the FCC will review carriers’ RDOF program completion data, and if the FCC determines that the Companywe did not satisfy applicable FCC RDOF requirements, Frontierwe could be required to return 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)c)Cash Equivalents and Restricted Cash:
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. WeRestricted cash amounts represent cash collateral required for certain Letter of Credit obligations and utility vendors and collateral for debt arrangements.
At September 30, 2023, the Company had $106 million in restricted cash. Pursuant to the terms of the Company’s securitized financing facility and secured fiber network revenue term notes, as described in Note 8, restricted cash is held in securitization escrow accounts. As of $30September 30, 2023, approximately $36 million included in “Other assets” on our consolidated balance sheetis current restricted cash held for the purpose of paying interest and certain fees. In addition, as of September 30, 2022, and2023, approximately $70 million is noncurrent restricted cash held for the purpose of $17 million included in “Other current assets” and $34 million included in “Other assets” as of December 31, 2021.satisfying the required liquidity reserve amount.
e)d) Short-Term InvestmentsInvestments:
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 flexibility.liquidity to fund the investment as required.
As of September 30, 2022,2023, short-term investments of $2,325$1,275 million are comprised of term deposits earning interest in excess of traditional bank deposit rates, maturing between October 26, 2022,November 14, 2023, and March 14, 2023,19, 2024, 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)
f)e)Definite and Indefinite Lived Intangible Assets:
Intangible assets are initially recorded at estimated fair value. Old Frontier historically amortized its acquired customer lists and certain other finite-lived intangible assets over their estimated useful lives on an accelerated basis. Upon emergence from bankruptcy, customerCustomer relationship intangibles werehave been established for business and wholesale customers. These intangibles are amortized on a straight-line basis over their assigned useful lives of 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 annually, or more often if indicators of impairment arise, to determine whether there is
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
evidence that indicates an impairment condition may exist that would necessitate a change in useful life and a different amortization period.
g)f)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)g) RecentGoing Concern:
In accordance with the requirements of Accounting Literature:Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements Going Concern (ASU 2014-15)”, and ASC 205, “Presentation of Financial Statements”, we have the responsibility to evaluate at each reporting period, including interim periods, whether conditions and/or events raise substantial doubt about our ability to meet our future financial obligations. In its evaluation for this report, management considered our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due within one year following the date of issuance of this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements Not Yet AdoptedWe believe we have the ability to meet our obligations for at least one year from the date of issuance of this Form 10-Q. Accordingly, the accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course business.
h)Reference Rate ReformProperty, Plant and Equipment:
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): FacilitationProperty, plant, and equipment are stated at original cost, including capitalized interest, or fair market value as of the Effectsdate of Reference Rate Reform on Financial Reporting". This standard provides optional expedients,acquisition for acquired properties. Maintenance and allows for certain exceptionsrepairs are charged to existing GAAP, for contract modifications triggered by the expected market transitionoperating expenses as incurred. The gross book value of certain benchmark interest rates to alternative reference rates. The standard applies to contractsroutine property, plant and other arrangements that reference the London Interbank Offering Rate (LIBOR) or any other rates ending after December 31, 2022. The adoption of this standard does not result in a material impact to our financial position or results of operations.equipment retirements is charged against accumulated depreciation.
Government Assistancei)Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of:
In November 2021,We review long-lived assets to be held and used, including customer lists and property, plant and equipment, and long-lived assets to be disposed of for impairment whenever events or changes in circumstances indicate that the FASB issued ASU 2021-10, which requires business entitiescarrying amount of such assets may not be recoverable. Recoverability of assets to disclose information about certain government assistance they receive. Such disclosure requirements includebe held and used is measured by comparing the naturecarrying amount of the transactions andasset to the related accounting policy used, the line items on the balance sheet and income statement that are affected and the amounts applicable to each financial statement line item and significant terms andfuture
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
conditionsundiscounted net cash flows expected to be generated by the asset. Recoverability of assets held for sale is measured by comparing the carrying amount of the transactions. ASU 2021-10 willassets to their estimated fair market value. If any assets are considered to be effectiveimpaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value. Also, we periodically reassess the useful lives of our long-lived assets to determine whether any changes are required.
j) Income Taxes and Deferred Income Taxes:
We file a consolidated federal income tax return. We utilize the asset and liability method of accounting for annual periods beginning after December 15, 2021 (year ending December 31, 2022income taxes. Under the asset and liability method, deferred income taxes are recorded for the Company)tax effect of temporary differences between the financial statement basis and the tax basis of assets and liabilities using tax rates expected to be in effect when the temporary differences are expected to reverse.
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, tax-planning strategies, and results of recent operations. If we determine that we are not able to realize a portion of our net deferred tax assets in the future, we would make an adjustment to the deferred tax asset valuation allowance, which would increase the provision for income taxes.
The tax effect of a change in tax law or rates included in income tax expense from continuing operations includes effect of changes in deferred tax assets and liabilities initially recognized through a charge or credit to other comprehensive income (loss). The residual tax effects typically are released when the item giving rise to the tax effect is disposed of, liquidated, or terminated.
k) Stock Plans:
We have one stock-based compensation plan under which grants are made and awards remain outstanding. Awards under this plan may be made to employees, directors or consultants of the Company or its affiliates, as determined by the Compensation and Human Capital Committee of the Board. Awards may be made in the form of restricted stock, restricted stock units, incentive stock options, non-qualified stock options, stock appreciation rights or other stock-based awards, including awards with performance, market, and time-vesting conditions.
The compensation cost recognized is currently evaluatingbased on awards ultimately expected to vest. GAAP requires forfeitures to be estimated and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
(2) Recent Accounting Pronouncements:
Financial Accounting Standards Adopted During 2023
During the impactquarter ended September 30, 2023, we adopted, the Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) No. 2022-04, “Liabilities – Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations” (ASU 2022-04), which establishes interim and annual reporting disclosure requirements about a company’s supplier finance programs for its purchase of goods and services. In the year of adoption, the disclosure of payment and other key terms under the programs and outstanding balances under the obligations also applies to interim reporting dates. The adoption of this ASU 2021-10 willdoes not have a material effect on its disclosuresour financial statements upon adoption.
.
We have negotiated favorable payment terms with some of our vendors that allow for a longer payment period than our normal customary terms (referred to as vendor financing), which are excluded from capital expenditures and reported as financing activities. As of September 30, 2023 we have $169 million of vendor
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
financing liabilities included in “Other current liabilities” on our consolidated balance sheets. No vendor financing payments were made as of September 30, 2023.
(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 (“nonswitchednon-switched access”) including services to wireless providers (wireless backhaul);
Voice services include traditional local and long-distance wireline services, Voice over Internet Protocol (VoIP) services, as well as a number of unified messaging services offered to our consumer and business customers. Voice services also include the long-distance voice origination and termination services that we provide to our business customers and other carriers;
Video services include revenues generated from services provided directly to consumer customers as linear terrestrial television services, through DISH®various satellite TV service,providers, and through partnerships with over-the-top (OTT) video providers. Video services also includes pay per viewpay-per-view revenues, video on demand, equipment rentals, and video advertising. The Company hasWe have 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.traffic (switched access). These services are primarily billed on a minutes-of-use basis applying tariffed rates filed with the FCC or state agencies; and
Subsidy and other regulatory revenue includeincludes revenues generated from cost subsidies from state and federal authorities, including the CAF II and RDOF.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
The following tables provide a summary of revenues, by category:
Successor | ||||||||
For the three months ended September 30, | For the three months ended September 30, | |||||||
($ in millions) | 2022 | 2021 | ||||||
Data and Internet services | $ | 848 | $ | 834 | ||||
Voice services | 369 | 411 | ||||||
Video services | 127 | 149 | ||||||
Other | 82 | 99 | ||||||
Revenue from contracts with customers (1) | 1,426 | 1,493 | ||||||
Subsidy and other revenue (2) | 18 | 83 | ||||||
Total revenue | $ | 1,444 | $ | 1,576 | ||||
Successor | ||||||||
For the three months ended September 30, | For the three months ended September 30, | |||||||
($ in millions) | 2022 | 2021 | ||||||
Consumer | $ | 785 | $ | 800 | ||||
Business and wholesale | 641 | 693 | ||||||
Revenue from contracts with customers (1) | 1,426 | 1,493 | ||||||
Subsidy and other revenue (2) | 18 | 83 | ||||||
Total revenue | $ | 1,444 | $ | 1,576 | ||||
Successor | Predecessor | |||||||||||
For the nine months ended September 30, | For the five months ended September 30, | For the four months ended April 30, | ||||||||||
($ in millions) | 2022 | 2021 | 2021 | |||||||||
Data and Internet services | $ | 2,531 | $ | 1,390 | $ | 1,125 | ||||||
Voice services | 1,136 | 694 | 647 | |||||||||
Video services | 398 | 254 | 223 | |||||||||
Other | 245 | 161 | 125 | |||||||||
Revenue from contracts with customers (1) | 4,310 | 2,499 | 2,120 | |||||||||
Subsidy and other revenue (2) | 40 | 138 | 111 | |||||||||
Total revenue | $ | 4,350 | $ | 2,637 | $ | 2,231 | ||||||
Successor | Predecessor | |||||||||||
For the nine months ended September 30, | For the five months ended September 30, | For the four months ended April 30, | ||||||||||
($ in millions) | 2022 | 2021 | 2021 | |||||||||
Consumer | $ | 2,352 | $ | 1,343 | $ | 1,133 | ||||||
Business and wholesale | 1,958 | 1,156 | 987 | |||||||||
Revenue from contracts with customers (1) | 4,310 | 2,499 | 2,120 | |||||||||
Subsidy and other revenue (2) | 40 | 138 | 111 | |||||||||
Total revenue | $ | 4,350 | $ | 2,637 | $ | 2,231 |
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||
($ in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||
Data and Internet services | $ | 895 | $ | 848 | $ | 2,637 | $ | 2,531 | ||||||
Voice services | 341 | 369 | 1,044 | 1,136 | ||||||||||
Video services | 104 | 127 | 333 | 398 | ||||||||||
Other | 81 | 82 | 253 | 245 | ||||||||||
Revenue from contracts with customers (1) | 1,421 | 1,426 | 4,267 | 4,310 | ||||||||||
Subsidy and other revenue | 15 | 18 | 58 | 40 | ||||||||||
Total revenue | $ | 1,436 | $ | 1,444 | $ | 4,325 | $ | 4,350 | ||||||
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||
($ in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||
Consumer | $ | 787 | $ | 785 | $ | 2,323 | $ | 2,352 | ||||||
Business and wholesale | 634 | 641 | 1,944 | 1,958 | ||||||||||
Revenue from contracts with customers (1) | 1,421 | 1,426 | 4,267 | 4,310 | ||||||||||
Subsidy and other revenue | 15 | 18 | 58 | 40 | ||||||||||
Total revenue | $ | 1,436 | $ | 1,444 | $ | 4,325 | $ | 4,350 | ||||||
(1)Includes lease revenue of $15$14 million and $16$44 million for the three months ended September 30, 2022 and 2021, respectively; and $48 million for the nine months ended September 30, 2022. Lease revenue was $262023, and $15 million for the five months ended September 30, 2021, and $26$48 million for the four months ended April 30, 2021.
(2)Subsidy and other revenue for the three and nine months ended September 30, 2022, does not include revenue from CAF II asrespectively.
The following is a summary of the program ended in 2021. We began to receive funding for RDOFchanges in the second quarter of 2022.contract liabilities:
Contract Liabilities | ||||||||
($ in millions) | Current | Noncurrent | ||||||
Balance at December 31, 2022 | $ | 27 | $ | 17 | ||||
Revenue recognized included in opening contract balance | (29) | (9) | ||||||
Credits granted, excluding amounts recognized as revenue | 31 | 15 | ||||||
Reclassified between current and noncurrent | 5 | (5) | ||||||
Balance at September 30, 2023 | $ | 34 | $ | 18 | ||||
Contract Liabilities | ||||||||
($ in millions) | Current | Noncurrent | ||||||
Balance at December 31, 2021 | $ | 27 | $ | 11 | ||||
Revenue recognized included in opening contract balance | (21) | (8) | ||||||
Credits granted, excluding amounts recognized as revenue | 17 | 17 | ||||||
Reclassified between current and concurrent | 4 | (4) | ||||||
Balance at September 30, 2022 | $ | 27 | $ | 16 | ||||
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
The following is a summary of the changes in the contract 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 | - | - | (21) | (8) | ||||||||||
Credits granted, excluding amounts | ||||||||||||||
recognized as revenue | - | - | 17 | 17 | ||||||||||
Reclassified between current | ||||||||||||||
and noncurrent | - | - | 4 | (4) | ||||||||||
Balance at September 30, 2022 (Successor) | $ | - | $ | - | $ | 27 | $ | 16 | ||||||
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 | - | - | (13) | (1) | ||||||||||
Cash received, excluding amounts | ||||||||||||||
recognized as revenue | - | - | 17 | 9 | ||||||||||
Reclassified between current | ||||||||||||||
and noncurrent | - | - | 1 | (1) | ||||||||||
Balance at September 30, 2021 (Successor) | $ | - | $ | - | $ | 20 | $ | 8 |
The unsatisfied obligations for retail customers consist of amounts in advance billings, which are expected to be earned within the following monthly billing cycle. Unsatisfied obligations for wholesale customers are based on a point-in-time calculation and determined by the number of circuits provided and the contractual price. These wholesale customer obligations change from period to period based on new circuits added as well as circuits that are terminated.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period:
($ in millions) | Revenue from contracts with customers | ||||
2022 (remaining three months) | $ | 320 | |||
2023 | 410 | ||||
2024 | 273 | ||||
2025 | 137 | ||||
2026 | 80 | ||||
Thereafter | 87 | ||||
Total | $ | 1,307 | |||
($ in millions) | Revenue from contracts with customers | ||||
2023 (remaining three months) | $ | 294 | |||
2024 | 297 | ||||
2025 | 169 | ||||
2026 | 71 | ||||
2027 | 14 | ||||
Thereafter | 9 | ||||
Total | $ | 854 | |||
(4) Accounts Receivable:
The components of accounts receivable, net are as follows:
($ in millions) | September 30, 2022 | December 31, 2021 | ||||||
Retail and wholesale | $ | 403 | $ | 441 | ||||
Other | 66 | 74 | ||||||
Less: Allowance for doubtful accounts | (47) | (57) | ||||||
Accounts receivable, net | $ | 422 | $ | 458 | ||||
($ in millions) | September 30, 2023 | December 31, 2022 | ||||||
Retail and wholesale | $ | 406 | $ | 416 | ||||
Other | 76 | 69 | ||||||
Less: Allowance for doubtful accounts | (33) | (47) | ||||||
Accounts receivable, net | $ | 449 | $ | 438 | ||||
We maintain an allowance for credit losses based on the estimated ability to collect accounts receivable. The allowance for credit losses is increased by recording an expense for 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 $5$24 million and $10 million for the three months ended September 30, 2022 and 2021, respectively; and $19 million for the nine months ended September 30, 2022. The provision for bad debts was $16 million for the five months ended September 30, 2021,2023 and $14 million for the four months ended April 30, 2021.2022, respectively.
In accordance with ASC 326, Frontier performs its calculationwe performed calculations to estimate expected credit losses, utilizing rates that are consistent with the Company’sour 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 nine months ended September 30, 20222023 was as follows:
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Balance at December 31, 2022 | $ | 47 | ||
Provision for bad debt | 24 | |||
Amounts charged to revenue | 11 | |||
Write offs charged against the allowance | (49) | |||
Balance at September 30, 2023 | $ | 33 | ||
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
(5) Property, Plant and Equipment:
Property, plant and equipment, net is as follows:
($ in millions) | September 30, 2023 | December 31, 2022 | ||||||
Property, plant and equipment | $ | 15,714 | $ | 13,186 | ||||
Less: Accumulated depreciation | (2,093) | (1,336) | ||||||
Property, plant and equipment, net | $ | 13,621 | $ | 11,850 | ||||
Depreciation expense is principally based on the composite group method. Depreciation expense was as follows:
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||
($ in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||
Depreciation expense | $ | 276 | $ | 215 | $ | 799 | $ | 629 | ||||||
As of September 30, 2023, our materials and supplies were $589 million, as compared to $546 million as of December 31, 2022. Components of this include fiber, network electronics, and customer premises equipment.
During the nine months ended September 30, 2023, our capital expenditures were $2,882 million which included a decrease of $514 million due to changes in accounts payable and vendor financing payables from December 31, 2022. As of September 30, 2023 there was $635 million in accounts payable and vendor financing payables associated with capital expenditures. For the nine months ended September 30, 2023, we had capitalized interest of $65 million.
Through September 2023, we had asset sales and transactions of $39 million, including approximately $34 million in net proceeds related to certain wireless towers. Approximately $13 million of the proceeds related to wireless towers that qualified as sales, included in investing cash flows, and the remaining $21 million in proceeds related to wireless towers that were subject to sale-leaseback agreements and included in financing cash flows. After taking these sales and transactions into account, along with our capital expenditures, our net capital activity was $2,843 million as of September 30, 2023.
(6) Intangibles:
We consider whether the carrying values of finite-lived intangible assets and property plant and equipment may not be recoverable or whether the carrying value of certain indefinite-lived intangible assets were impaired. There was no impairment of either intangibles or property plant and equipment as of September 30, 2023 and 2022.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
(5) Property, Plant and Equipment:
Property, plant and equipment, net is as follows:
($ in millions) | September 30, 2022 | December 31, 2021 | ||||||
Property, plant and equipment | $ | 11,948 | $ | 9,707 | ||||
Less: Accumulated depreciation | (1,101) | (508) | ||||||
Property, plant and equipment, net | $ | 10,847 | $ | 9,199 | ||||
Depreciation expense is principally based on the composite group method. Depreciation expense was as follows:
For the three months ended September 30, | For the three months ended September 30, | |||||||||||
($ in millions) | 2022 | 2021 | ||||||||||
Depreciation expense | $ | 215 | $ | 191 | ||||||||
Successor | Predecessor | |||||||||||
For the nine months ended September 30, | For the five months ended September 30, | For the four months ended April 30, | ||||||||||
($ in millions) | 2022 | 2021 | 2021 | |||||||||
Depreciation expense | $ | 629 | $ | 318 | $ | 407 | ||||||
As a resultThe balances of applying fresh start accounting on the Effective Date, Frontier’s fixedthese assets were reduced from $13.0 billion to $8.5 billion. For the nine months ended September 30, 2022, the decrease in depreciation expense was principally a result of the reduced asset base following this fresh start fair value adjustment. In July 2022, we sold a property that was subject to leaseback, generating approximately $70 million in proceeds.
During the nine months ended September 30, 2022, our capital expenditures were $1,860 million. In addition, we had $431 million of capital expenditures that were received but not paid as of September 30, 2022.
(6) Other Intangibles:
The components of other intangibles as of September 30, 20222023 and December 31, 20212022 was as follows:follows:
September 30, 2022 | December 31, 2021 | |||||||||||||||||||
Gross Carrying | Accumulated | Net Carrying | Gross Carrying | Accumulated | Net Carrying | |||||||||||||||
($ in millions) | Amount | Amortization | Amount | Amount | Amortization | Amount | ||||||||||||||
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Intangibles: | ||||||||||||||||||||
Customer Relationships - Business | $ | 800 | $ | (103) | $ | 697 | $ | 800 | $ | (48) | $ | 752 | ||||||||
Customer Relationships - Wholesale | 3,491 | (309) | 3,182 | 3,491 | (146) | 3,345 | ||||||||||||||
Trademarks & Tradenames | 150 | (43) | 107 | 150 | (20) | 130 | ||||||||||||||
Total other intangibles | $ | 4,441 | $ | (455) | $ | 3,986 | $ | 4,441 | $ | (214) | $ | 4,227 | ||||||||
September 30, 2023 | December 31, 2022 | |||||||||||||||||||
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 | $ | (176) | $ | 624 | $ | 800 | $ | (121) | $ | 679 | ||||||||
Customer Relationships - Wholesale | 3,491 | (527) | 2,964 | 3,491 | (364) | 3,127 | ||||||||||||||
Trademarks & Tradenames | 150 | (73) | 77 | 150 | (50) | 100 | ||||||||||||||
Total other intangibles | $ | 4,441 | $ | (776) | $ | 3,665 | $ | 4,441 | $ | (535) | $ | 3,906 | ||||||||
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Amortization expense was as follows:follows:
For the three months ended September 30, | For the three months ended September 30, | |||||||||||
($ in millions) | 2022 | 2021 | ||||||||||
Amortization expense | $ | 81 | $ | 82 | ||||||||
Successor | Predecessor | |||||||||||
For the nine months ended September 30, | For the five months ended September 30, | For the four months ended April 30, | ||||||||||
($ in millions) | 2022 | 2021 | 2021 | |||||||||
Amortization expense | $ | 241 | $ | 134 | $ | 99 | ||||||
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||
($ in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||
Amortization expense | $ | 80 | $ | 81 | $ | 241 | $ | 241 | ||||||
Following the Effective Date, weWe 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 5five years for our trademarks and tradenames.
For the Predecessor, amortization expense was primarily for our customer base acquired as a result of our acquisitions in 2010, 2014, and 2016 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 September 30, 20222023 and December 31, 2021.2022. For the other financial instruments including cash, short-term investments, accounts receivable, 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.
September 30, 2022 | December 31, 2021 | September 30, 2023 | December 31, 2022 | |||||||||||||||||||||
($ in millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||
Total debt | $ | 8,966 | $ | 8,015 | $ | 7,777 | $ | 7,996 | $ | 11,235 | $ | 9,977 | $ | 8,963 | $ | 8,079 | ||||||||
(
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
(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), and
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 $450 million, respectively, because we ceased accruing interest on the Petition Date in accordance with the terms of the Plan and ASC Topic 852.
The activity in our long-term debt is summarized as follows:
| For the nine months ended September 30, 2022 |
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Principal | ||||||||||||||
January 1, | Payments | New | September 30, | |||||||||||
($ in millions) | 2022 | and Retirements | Borrowings | 2022 | ||||||||||
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Secured debt issued by Frontier | $ | 6,927 | $ | (11) | $ | 1,200 | $ | 8,116 | ||||||
Secured debt issued by subsidiaries | 100 | - | - | 100 | ||||||||||
Unsecured debt issued by subsidiaries | 750 | - | - | 750 | ||||||||||
Principal outstanding | $ | 7,777 | $ | (11) | $ | 1,200 | $ | 8,966 | ||||||
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Less: Debt Issuance Costs | (13) |
| (29) | |||||||||||
Less: Current Portion | (15) |
| (15) | |||||||||||
Plus: Unamortized fair value adjustments (1) | 219 | 198 | ||||||||||||
Total Long-term debt | $ | 7,968 |
| $ | 9,120 | |||||||||
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Principal | ||||||||||||||
January 1, | Payments | New | September 30, | |||||||||||
($ in millions) | 2023 | and Retirements | Borrowings | 2023 | ||||||||||
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Secured debt issued by Frontier | $ | 8,113 | $ | (11) | $ | 750 | $ | 8,852 | ||||||
Secured debt issued by subsidiaries | 100 | (53) | 1,586 | 1,633 | ||||||||||
Unsecured debt issued by subsidiaries | 750 | - | - | 750 | ||||||||||
Principal outstanding | $ | 8,963 | $ | (64) | $ | 2,336 | $ | 11,235 | ||||||
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Less: Debt issuance costs | (28) |
| (68) | |||||||||||
Less: Current portion | (15) |
| (15) | |||||||||||
Less: Debt premium / (discount) | - | (64) | ||||||||||||
Plus: Unamortized fair value adjustments (1) | 190 | 170 | ||||||||||||
Total Long-term debt | $ | 9,110 |
| $ | 11,258 | |||||||||
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(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 unamortized discounts and recording a balance of $236 million as a fair value adjustment. The fair value accounting adjustment is being amortized into interest expense using the effective interest method.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Additional information regarding our senior secured debt, and unsecured total long-termsubsidiary debt as ofat September 30, 20222023 and December 31, 20212022 is as follows:follows:
September 30, 2022 | December 31, 2021 | ||||||||||||
Principal | Interest | Principal | Interest | ||||||||||
($ in millions) | Outstanding | Rate | Outstanding | Rate | |||||||||
Secured debt issued by Frontier | |||||||||||||
Term loan due 10/8/2027 | $ | 1,453 | 6.063% (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 5/15/2030 | 1,200 | 8.750% | - | n/a | |||||||||
Second lien notes due 5/1/2029 | 1,000 | 6.750% | 1,000 | 6.750% | |||||||||
Second lien notes due 11/1/2029 | 750 | 5.875% | 750 | 5.875% | |||||||||
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% | |||||||||
Total secured debt issued by Frontier | 8,116 | 6,927 | |||||||||||
Secured debt issued by subsidiaries | |||||||||||||
Debentures due 11/15/2031 | 100 | 8.500% | 100 | 8.500% | |||||||||
Total 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% | |||||||||
Total unsecured debt issued by subsidiaries | 750 | 750 | |||||||||||
Principal outstanding | $ | 8,966 | 6.366% (1) | $ | 7,777 | 5.702% (1) | |||||||
September 30, 2023 | December 31, 2022 | ||||||||||||
Principal | Interest | Principal | Interest | ||||||||||
($ in millions) | Outstanding | Rate | Outstanding | Rate | |||||||||
Secured debt issued by Frontier | |||||||||||||
Term loan due 10/8/2027 | $ | 1,438 | 9.180% (Variable) | $ | 1,450 | 8.500% (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 5/15/2030 | 1,200 | 8.750% | 1,200 | 8.750% | |||||||||
First lien notes due 3/15/2031 | 750 | 8.625% | - | - | |||||||||
Second lien notes due 5/1/2029 | 1,000 | 6.750% | 1,000 | 6.750% | |||||||||
Second lien notes due 11/1/2029 | 750 | 5.875% | 750 | 5.875% | |||||||||
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% | |||||||||
Total secured debt issued by Frontier | 8,851 | 8,113 | |||||||||||
Secured debt issued by subsidiaries | |||||||||||||
Debentures due 11/15/2031 | 47 | 8.500% | 100 | 8.500% | |||||||||
Series 2023-1 Revenue Term Notes Class A-2 due 7/20/2028 | 1,120 | 6.600% | - | ||||||||||
Series 2023-1 Revenue Term Notes Class B due 7/20/2028 | 155 | 8.300% | - | ||||||||||
Series 2023-1 Revenue Term Notes Class C due 7/20/2028 | 312 | 11.500% | - | ||||||||||
Total secured debt issued by subsidiaries | 1,634 | 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% | |||||||||
Total unsecured debt issued by subsidiaries | 750 | 750 | |||||||||||
Principal outstanding | $ | 11,235 | 7.098% (1) | $ | 8,963 | 6.760% (1) | |||||||
(1)Interest rate represents a weighted average of the stated interest rates of multiple issuances.
Credit Facilitiesissuances. The anticipated repayment date of July 2028 is used for the Series 2023-1 Revenue Term Notes, classes A-2 B, and Term LoansC when calculating the weighted average.
Summaries of our various credit and debt agreements, including our credit agreements and the indentures for our senior secured first lien notes and 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 the respectiveincluding agreements filed as an Exhibit to our Annual Report on Form 10-K.exhibits thereto.
First Lien Notes due 2030
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 (the “First Lien 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 operating costs arising from our fiber build and expansion of our fiber customer base, and for general corporate purposes.
The First Lien Notes due 2030 are secured by a first-priority lien, subject to permitted liens, by all the assets that secure the issuer’s obligations under its senior secured credit facilities and existing senior secured notes. The First Lien Notes due 2030 were issued pursuant to an indenture, dated as of May 12, 2022, by and among
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Frontier Holdings, the guarantors party thereto, the grantor party thereto, Wilmington Trust, National Association, as trustee
Credit Facilities and JPMorgan Chase Bank, N.A., as collateral agent.Term Loans
Revolving Facility
On May 12, 2022,March 8, 2023, Frontier Holdings entered into an amendment (“Amendment No. 2”) to its Revolving Facility. Amendment No. 2,Facility, which, among other things, increased(i) extends the maturity with respect to the commitments of certain revolving lenders (in addition to certain amendments to springing maturity provisions); (2) amends the financial maintenance covenant for the benefit of the Revolving Facility by an additional $275 million,increasing the maximum first lien leverage ratio thereunder to a total of $900 million3.50:1.00, with step-downs to: (a) 3.25:1.00 in aggregate principal amount of revolving credit commitments,2026; and provided that the Revolving Facility be amended(b) 3.00:1.00 in 2027 and continuing thereafter; and (3) provides for certain amendments to reflect Secured Overnight Financing Rate “SOFR” based interest rates (including a customary spread adjustment).debt incurrence and other restrictive covenants.
The $900 million Revolving Facility will be available on a revolving basis until April 30, 2025.2025 and with respect to certain lenders currently representing $850 million thereunder, the maturity date of the Revolving Facility will be the earliest of (a) April 30, 2028, (b) 91 days prior to the maturity date of the term loan facility, (c) unless such notes have been repaid and/or redeemed in full, the date that is 91 days prior to the stated maturity date of our 5.875% First Lien Notes due 2027, and (d) unless such notes have been repaid and/or redeemed in full, the date that is 91 days prior to the stated maturity date of our 5.000% First Lien Notes due 2028.
At Frontier’s election, the determination of interest rates for the Revolving Facility is based on margins over the alternate base rate or over SOFR.Secured Overnight Financing Rate (“SOFR”). The interest rate margin with respect to any SOFR loan under the Exit Revolving Facility is 3.50% or 2.50% with respect to any alternate base rate loans, with a 0% SOFR floor.
Subject to customary exceptions and thresholds, the security package under the Revolving Facility includes pledges of the equity interests in certain of our subsidiaries, which as of the issue date is currently limited to certain specified pledged entities and substantially all personal property of Frontier Video, which same assets also secure theour First Lien Notes. The Revolving Facility is guaranteed by the same subsidiaries that guarantee the First Lien Notes. After giving effect to $133approximately $249 million of revolver letters of credit previously outstanding, as of September 30, 2022, the Company has $767we have $651 million of available borrowing capacity under the Revolving Facility.
Senior Secured Notes
First Lien Notes due 2031
On March 8, 2023, our consolidated subsidiary Frontier Communications Holdings, LLC (“Frontier Holdings”) issued $750 million aggregate principal amount of 8.625% first lien secured notes due 2031 (the “First Lien Notes due 2031”) in an offering pursuant to exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). We intend to use the net proceeds of the offering to fund capital investments and operating costs arising from our fiber build and expansion of our fiber customer base, and for general corporate purposes.
The First Lien Notes due 2031 are secured by a first-priority lien, subject to permitted liens, by all the assets that secure the issuer’s obligations under its senior secured credit facilities and existing senior secured notes. The First Lien Notes due 2031 were issued pursuant to an indenture, dated as of March 8, 2023, by and among Frontier Holdings, the guarantors party thereto, the grantor party thereto, Wilmington Trust, National Association, as trustee and JPMorgan Chase Bank, N.A., as collateral agent.
Fiber Securitization Transaction
Secured Fiber Network Revenue Term Notes
On August 8, 2023, our limited-purpose, bankruptcy remote, subsidiary, Frontier Issuer, issued $1.586 billion aggregate principal amount of secured Fiber Term Notes, less $58 million in original issue discounts, consisting of $1.120 billion 6.60% Series 2023-1, Class A-2 term notes, $155 million 8.30% Series 2023-1, Class B term
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notes and $312 million 11.50% Series 2023-1, Class C term notes, each with an anticipated term ending in July 2028 (such anticipated repayment date, the “ARD”), in an offering exempt from registration under the Securities Act. We intend to use the proceeds from the offering of the Fiber Term Notes for, among other things, general corporate purposes, including potential investments or expenditures, such as capital expenditures and research and development, in line with our fiber expansion and copper migration strategies. In addition, we used a portion of the proceeds to retire and defease certain outstanding indebtedness of our subsidiary Frontier Southwest Incorporated.
The Fiber Term Notes were issued as part of a securitization transaction, pursuant to which the Company’s fiber network assets and associated customer contracts in certain neighborhoods in the Dallas, Texas metropolitan area were contributed to AssetCo, a direct, wholly-owned subsidiary of Frontier Issuer. The Fiber Term Notes are secured by these fiber assets and associated customer contracts. The Fiber Term Notes were issued pursuant to an indenture, dated as of August 8, 2023 (the “Base Indenture”), as supplemented by the Series 2023-1 Supplement thereto, dated as of August 8, 2023 (the “Series 2023-1 Supplement”), in each case entered into by and among the Issuer, Frontier Dallas TX Fiber 1 LLC (“AssetCo”) and Citibank, N.A. as the indenture trustee (the “Trustee”).
The Base Indenture, together with the Series 2023-1 Supplement and Series 2023-2 Supplement, and any other series supplements to the Base Indenture, are referred to herein as the “Fiber Term Notes Indenture.”
The table below sets forth the material terms of Fiber Term Notes as of September 30, 2023:
Security | Issue Date | Amount Outstanding | Interest Rate (1) | Anticipated Repayment Date | Final Maturity Date | ||||||
Series 2023-1, Class A-2 term notes | August 8, 2023 | $ | 1,120,000,000 | 6.60% | July 20, 2028 | August 20, 2053 | |||||
Series 2023-1, Class B term notes | August 8, 2023 | $ | 155,000,000 | 8.30% | July 20, 2028 | August 20, 2053 | |||||
Series 2023-1, Class C term notes | August 8, 2023 | $ | 312,000,000 | 11.50% | July 20, 2028 | August 20, 2053 | |||||
(1)If Frontier Issuer has not repaid or refinanced any Fiber Term Note prior to the monthly payment date in July of 2028, additional interest will accrue thereon in an amount equal to the greater of (i) 5.00% per annum and (ii) the excess amount, if any, by which the sum of the following exceeds the interest rate for such note: (A) the yield to maturity (adjusted to a “mortgage-equivalent basis” pursuant to the standards and practices of the Securities Industry and Financial Markets Association) on the ARD for such note of the United States Treasury Security having a remaining term closest to 10 years plus (B) 5.00% plus (C) the post-ARD note spread applicable to such Note.
While the Fiber Term Notes are outstanding, scheduled payments of interest are required to be made on the Notes on a monthly basis. From and after the ARD, principal payments will also be required to be made on the Notes on a monthly basis. No principal payments will be due on the Fiber Term Notes prior to the ARD, unless certain rapid amortization or acceleration triggers are activated.
The Fiber Term Notes are subject to a series of covenants and restrictions customary for transactions of this type. These covenants and restrictions include (i) that Frontier Issuer maintains a liquidity reserve account to be used to make required payments in respect of the Notes, (ii) provisions relating to optional and mandatory prepayments, including specified make-whole payments in the case of certain optional prepayments of the Fiber Term Notes prior to the monthly payment date in July 2026, (iii) certain indemnification payments in the event, among other things, that the transfers of the assets pledged as collateral for the Fiber Term Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters. As provided in the Base Indenture, the Fiber Term Notes are also subject to rapid amortization in the event of a failure to maintain a stated debt service coverage ratio. A rapid amortization may be cured if the debt service coverage ratio exceeds a certain threshold for a certain period of time, upon which cure, regular amortization, if any, will resume. The Fiber Term Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal or other amounts due on or
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with respect to the Fiber Term Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective and certain judgments.
Securitized Financing Facility
In connection with the Fiber Term Notes, Frontier Issuer entered into a financing facility for the issuance of up to $500 million in Series 2023-2 Secured Fiber Network Revenue Variable Funding Senior Notes, Class A-1 (the “Variable Funding Notes”). Frontier Issuer had not drawn on the Variable Funding Notes as of September 30, 2023.
The Variable Funding Notes were issued pursuant to the Base Indenture, as supplemented by the Series 2023-1 Supplement and the Series 2023-2 Supplement, dated as of August 24, 2023 (the “Series 2023-2 Supplement”), in each case entered into by and among Frontier Issuer, AssetCo and the Trustee.
Drawings and certain additional terms related to the Variable Funding Notes are governed by the Class A-1 Note Purchase Agreement, dated as of August 24, 2023 (the “Variable Funding Note Purchase Agreement”), among Frontier Issuer, AssetCo, Frontier Communications Holdings, LLC (as the “Manager”), certain conduit investors, financial institutions and funding agents, and Barclays Bank plc, as administrative agent. The Variable Funding Notes will be governed, in part, by the Variable Funding Note Purchase Agreement and by certain generally applicable terms contained in the Indenture. The initial anticipated repayment date for the Variable Funding Notes is July 2026, and Frontier Issuer and Manager have the option to elect two one-year extensions of the anticipated repayment date. Following the initial anticipated repayment date (and any extensions thereof), additional interest will accrue on the Variable Funding Notes equal to 5.0% per annum.
Defeasance of Notes
As of September 30, 2023, the Company extinguished $53 million of notes issued by its subsidiary Frontier Southwest Incorporated and transferred assets to an escrow account to pay the future interest and principal on the remaining $47 million of notes, which remain on the Company’s balance sheet as outstanding debt and restricted assets.
(9) Restructuring Costs and Other Charges:
Restructuring and other charges consists of severance and employee costs related to workforce reductions. It also includes professional fees
During the nine month period ended September 30, 2023, we incurred $48 million in restructuring charges and other costs consisting of $48 million of severance and employee costs resulting from workforce reductions, of which, approximately $23 million and $15 million related to our Chapter 11 Cases that were incurred afterlarger workforce reductions during the Effective Date as well as professional fees related to our restructuringsecond and transformation that were incurred prior to the Petition Date.
third quarters of 2023, respectively.
During the nine month period ended September 30, 2022, we incurred $88 million in restructuring charges and other costs consisting of $44 million of lease impairment costs from the strategic exit of certain facilities, $35 million of severance and employee costs resulting from workforce reductions, and $9 million of costs related to other restructuring activities. Of the $35 million in severance and employee costs, approximately $26 million related to the second quarter of 2022, as a result of larger workforce reductions in that period.reductions.
As part of Frontier’s cost reduction strategy, certain real estate leases will not be retained, or will be marketed for sublease. We evaluated the related right-of-use assets and other lease related assets for impairment under ASC 360. In connection with this analysis, we reassessed our leased 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 five months ended September 30, 2021, we incurred $19 million in expenses consisting of $6 million of severance and employee costs resulting from workforce reductions and $13 million of professional fees related to our balance sheet restructuring.
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The following is a summary of the changes in the liabilities established for restructuring and other related programs:
($ in millions) | |||||
Balance at January 1, 2022 | $ | 7 | |||
Severance expense | 35 | ||||
Other costs | 9 | ||||
Cash payments during the period | (45) | ||||
Balance at September 30, 2022 | $ | 6 |
($ in millions) | |||||
Balance at January 1, 2023 | $ | 9 | |||
Severance expense | 48 | ||||
Cash payments during the period | (39) | ||||
Balance at September 30, 2023 | $ | 18 |
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(10) Investment and Other Income:
The following is a summary of the components of Investment and Other Income:
For the three months ended September 30, | For the three months ended September 30, | |||||||||||||
($ in millions) | 2022 | 2021 | ||||||||||||
Interest and dividend income | $ | 16 | $ | 1 | ||||||||||
Pension benefit | 24 | 23 | ||||||||||||
OPEB costs | (5) | (59) | ||||||||||||
OPEB remeasurement gain | 84 | - | ||||||||||||
Pension remeasurement gain | 91 | - | ||||||||||||
All other, net | 1 | (2) | ||||||||||||
Total investment and other income (loss), net | $ | 211 | $ | (37) | ||||||||||
For the three months ended | For the nine months ended | |||||||||||||
($ in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||
Interest and dividend income | $ | 22 | $ | 16 | $ | 60 | $ | 24 | ||||||
Pension benefit | 5 | 24 | 14 | 74 | ||||||||||
OPEB costs | (2) | (5) | (7) | (13) | ||||||||||
OPEB remeasurement gain | 46 | 84 | 38 | 234 | ||||||||||
Pension remeasurement gain | - | 91 | - | 91 | ||||||||||
All other, net | (4) | 1 | (4) | - | ||||||||||
Total investment and other income, net | $ | 67 | $ | 211 | $ | 101 | $ | 410 | ||||||
Successor | Predecessor | |||||||||||||
For the nine months ended September 30, | For the five months ended September 30, | For the four months ended April 30, | ||||||||||||
($ in millions) | 2022 | 2021 | 2021 | |||||||||||
Interest and dividend income | $ | 24 | $ | 1 | $ | - | ||||||||
Pension benefit | 74 | 36 | 6 | |||||||||||
OPEB costs | (13) | (76) | (4) | |||||||||||
OPEB remeasurement gain | 234 | - | - | |||||||||||
Pension remeasurement gain | 91 | - | - | |||||||||||
All other, net | - | - | (1) | |||||||||||
Total investment and other income (loss), net | $ | 410 | $ | (39) | $ | 1 | ||||||||
In the first nine months of 2022,2023, Frontier amended the medical coverage for certain postretirement benefit plans, which resulted in an $38 million net remeasurement gainsgain. The net gain was comprised of $234a loss of $20 million in the first quarter, offset by a remeasurement gain of $12 million in the second quarter, and a gain of $46 million in the third quarter, primarily due to discount rate changes. As a result of pension settlement charges incurred during the period, Frontier remeasured its pension plan obligations, resulting in a remeasurement gain of $91 million for the nine months ended September 30, 2022. Refer to Note 15 for further details.
Pension and OPEB benefit (costs)(cost) consist of interest income (loss)(costs), expected return on plan assets, amortization of prior service costs (credit)(costs) and recognition of actuarial gain (loss).(gain) loss. Service cost components of pension and OPEB benefit costs are included in “Selling, general, and administrative expenses” on our consolidated statements of income.
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(11) Stock Plans:
Upon emergence, the Frontier Communications Parent, Inc. has one stock-based compensation plan under which grants are made and awards remain outstanding: the 2021 Management Incentive Plan (the “2021 Incentive Plan”) was approved and adopted by the Board.. The 2021 Incentive Plan permits stock-based awards to be made to employees, directors, or consultants of the Company or its affiliates, as determined by the Compensation and Human Capital Committee of the Board. Under the 2021 Incentive Plan, 15,600,000 shares of common stock have been reserved for issuance. Equity awards have been issued in the form of time-based restricted stock units (RSUs) and performance-based stock units (PSUs). As of September 30, 2022, unvested awards relating to2023, approximately 2,090,0004,155,000 shares were outstandingavailable to grant under our long-term incentive plan. Further, upon emergence, all outstanding stock-based compensation plans of Old Frontier were terminated.the 2021 Incentive Plan.
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Restricted Stock Units
The following summary presents information regarding unvested RSUs outstanding 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 | 2,483 | $ | 28.67 | $ | 72 | |||||
Restricted stock granted | 1,078 | $ | 25.86 | $ | 25 | |||||
Restricted stock vested | (862) | $ | 25.73 | $ | (20) | |||||
Restricted stock forfeited | (140) | $ | 25.86 |
| ||||||
Balance at September 30, 2022 | 2,559 | $ | 25.83 | $ | 60 | |||||
Weighted | |||||||||
Average | |||||||||
Number of | Grant Date | Aggregate | |||||||
Shares | Fair Value | Fair Value | |||||||
(in thousands) | (per share) | (in millions) | |||||||
Balance at January 1, 2023 | 2,514 | $ | 25.78 | $ | 64 | ||||
Restricted stock units granted | 1,364 | $ | 23.19 | $ | 21 | ||||
Restricted stock units vested | (1,179) | $ | 25.73 | $ | (18) | ||||
Restricted stock units forfeited | (166) | $ | 25.06 |
| |||||
Balance at September 30, 2023 | 2,533 | $ | 24.46 | $ | 40 | ||||
For purposes of determining compensation expense, the fair value of each RSU grant is based on the closing price of our common stock on the date of grant. The non-vested RSUs granted in 2021, 2022, and 20222023 generally vest, and are expensed, on a ratable basis over three years from the grant date of the award. Total remaining unrecognized compensation cost associated with unvested RSU awards that is deferred at September 30, 20222023 was $56$46 million and the weighted average vesting period over which this cost is expected to be recognized is approximately 2 years.1 year.
None of the RSU awards may be sold, assigned, pledged, or otherwise transferred, voluntarily or involuntarily, by the employees until the applicable time-based restrictions lapse, subject to limited exceptions. RSUs, when vested, will be paid out in the form of common stock. Compensation expense, including compensation related to non-employee directors, recognized in “Selling, general, and administrative expenses”, of $29 million and $27 million for the nine month-periodmonth-periods ended September 30, 2023, and 2022, hasrespectively, have been recorded in connection with RSUs.
Performance Stock Units
Under the 2021 Incentive Plan, a target number of PSUs areperformance units (“PSU”) have been awarded to certainapplicable participants with respect to a three-year performance period (aperiods (each a “Measurement Period”). The performance metrics under the 2021, 2022, and 20222023 PSU grantsawards 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’sour 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 on a cumulative basis for each performance metric, and the number of awards earned will be determined at the end of the three-year Measurement Period 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 PSUs. The payout of the 2022 and 2023 PSUs can range from 0% to a maximum award payout of 200% of the target PSUs.
The number of PSU awards earned at the end of a Measurement Period may be more or less than the number of target PSUs granted as a result of performance. An executive must maintain a satisfactory performance rating during the Measurement Period and, except for limited circumstances, 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 PSUs earned for the Measurement Period in the first quarter of the year following the end of the Measurement Period. PSU awards, to the extent earned, will be paid out in the form of common stock on a one-for-one basis.
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from 0% to a maximum award payout of 300% of the target units. The payout of the 2022 PSUs can range from 0% to a maximum award payout of 200% of the target units.
The number of PSU awards earned at the end of the Measurement Period may be more or less than the number of target PSUs granted as a result of performance. An executive must maintain a satisfactory performance rating during the Measurement Period and generally 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. PSUs, to the extent earned, will be paid out in the form of common stock shortly following this determination.
Under ASC 718, Stock Based Compensation Expense, a grant date, and the fair value of a performance award are determined once the targets are finalized. AllFor the 2021, 2022 and 2023 PSU awards, targets for all of the 2021 awardsmetrics have been fully set for each performance period and the fair value of the grantsrelated expense will be amortized over the appropriate period. For the 2022 PSU awards, the targets related to two of the three performance metrics have not been established. As a result, we are recognizing expense with respect to 1/3 of the aggregate outstanding 2022 PSU awards over the appropriate period.
The following summary presents information regarding performance sharesPSU awards as of September 30, 20222023, and changes during the nine months then ended with regard to performance sharesPSUs 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 | 388 | $ | 25.66 | $ | 9 | ||||
Target performance shares forfeited | (47) | $ | 25.62 | ||||||
Balance at September 30, 2022 | 3,485 | $ | 25.62 | $ | 82 | ||||
Weighted | |||||||
Average | |||||||
Number of | Award Date | ||||||
Shares | Fair Value | ||||||
(in thousands) | (per share) (1) | ||||||
Balance at January 1, 2023 | 3,485 | $ | 25.62 | ||||
Target performance shares awarded, net | 1,040 | $ | 24.36 | ||||
Target performance shares forfeited | (33) | $ | 25.59 | ||||
Balance at September 30, 2023 | 4,492 | $ | 25.33 | ||||
(1) Represents the weighted average of the closing price of our stock on the date of the awards. |
For purposes of determining compensation expense, the fair value of each performance share grantPSU award 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 nine months ended September 30, 2023, and 2022, we recognized net compensation expense, reflected in “Selling, general, and administrative expenses,” of $52 million and $27 million, respectively, related to PSU awards.
Non-Employee Directors
Compensation expense related to the board of directors, recognized in “Selling, general, and administrative expenses”, was $1 million for the nine months ended September 30, 2023.
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(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:rates:
Successor | Predecessor | ||||||||||||||
For the three months ended September 30, | For the nine months ended September 30, | For the five months ended September 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 | 14.7 | 13.1 | 2.8 | 0.5 | |||||||||||
Changes in certain deferred tax balances | 2.1 | 1.5 | - | - | |||||||||||
Restructuring cost | - | - | - | 0.3 | |||||||||||
Fresh start and reorganization adjustments | - | - | - | (24.9) | |||||||||||
Sec.162(m) - nondeductible Executive Compensation | 1.5 | 2.5 | - | - | |||||||||||
All other, net | (0.8) | (0.3) | 0.9 | - | |||||||||||
Effective tax rate | 38.5 | % | 37.8 | % | 24.7 | % | (3.1) | % | |||||||
For the three months ended | For the nine months ended | |||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||
Consolidated tax provision at federal statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | 21.0 | % | ||||||
State income tax provisions, net of federal | ||||||||||||||
income tax benefit | (4.3) | 14.7 | 5.1 | 13.1 | ||||||||||
Changes in certain deferred tax balances | - | 2.1 | - | 1.5 | ||||||||||
Tax reserve adjustment | (3.0) | - | (3.1) | - | ||||||||||
Tax Credit | 6.0 | - | 6.3 | - | ||||||||||
Sec.162(m) - nondeductible Executive Compensation | (18.5) | 1.5 | (19.1) | 2.5 | ||||||||||
All other, net | (0.5) | (0.8) | (0.5) | (0.3) | ||||||||||
Effective tax rate | 0.7 | % | 38.5 | % | 9.7 | % | 37.8 | % | ||||||
Frontier considered positive and negative evidence in regard to evaluating certain state deferred tax assets during the third quarter of 2022,2023, including the development of recent years of pre-tax book losses. On the basis of this evaluation, a valuation allowance of $77$28 million ($6122 million net of federal benefit) was recorded as of September 30, 2022.2023.
The effective rate for the three and nine months ended September 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 $1.2 billion first lien note issuance.
The effective rate changes between the three and nine months ended September 30, 2022, as compared to 2021 are primarily due to, as described more fully in Note 1, the Company emergence from bankruptcy on April 30, 2021, and consummation of a taxable disposition of substantially all of the assets and/or subsidiary stock of the Company and utilized substantially all of the Company’s Net Operating Losses (“NOLs”).
The Inflation Reduction Act was signed into law on August 16, 2022. The law contains numerous changes to tax laws effective January 1, 2023. The Company is currently evaluatingevaluated the effects if any, of these changes.and does not believe the Company will be materially impacted by the Inflation Reduction Act.
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(13) Net Earnings Per Share:
The reconciliation of the net earningsincome per common share calculation is as follows:
($ in millions and shares in thousands, except per share amounts) | For the three months ended September 30, | For the three months ended September 30, | |||||
2022 | 2021 | ||||||
Net income used for basic and diluted earnings | |||||||
per share: | |||||||
Total basic net income | |||||||
attributable to Frontier common shareholders | $ | 120 | $ | 126 | |||
Effect of loss related to dilutive stock units | - | - | |||||
Total diluted net income | |||||||
attributable to Frontier common shareholders | $ | 120 | $ | 126 | |||
Basic earnings per share: | |||||||
Total weighted average shares and unvested restricted stock | |||||||
awards outstanding - basic | 244,984 | 244,403 | |||||
Less: Weighted average unvested restricted stock awards | - | - | |||||
Total weighted average shares outstanding - basic | 244,984 | 244,403 | |||||
Basic net earnings per share | |||||||
attributable to Frontier common shareholders | $ | 0.49 | $ | 0.52 | |||
Diluted earnings per share: | |||||||
Total weighted average shares outstanding - basic | 244,984 | 244,403 | |||||
Effect of dilutive restricted stock awards | 228 | 1,264 | |||||
Total weighted average shares outstanding - diluted | 245,212 | 245,667 | |||||
Diluted net earnings per share | |||||||
attributable to Frontier common shareholders | $ | 0.49 | $ | 0.51 | |||
For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||
($ in millions and shares in thousands, except per share amounts) | 2023 | 2022 | 2023 | 2022 | |||||||||
Net income used for basic and diluted earnings | |||||||||||||
per share: | |||||||||||||
Total basic net income | |||||||||||||
attributable to Frontier common shareholders | $ | 11 | $ | 120 | $ | 12 | $ | 286 | |||||
Effect of loss related to dilutive stock units | - | - | - | - | |||||||||
Total diluted net income | |||||||||||||
attributable to Frontier common shareholders | $ | 11 | $ | 120 | $ | 12 | $ | 286 | |||||
Basic earnings per share: | |||||||||||||
Total weighted average shares and unvested restricted | |||||||||||||
stock awards outstanding - basic | 245,761 | 244,984 | 245,431 | 244,711 | |||||||||
Less: Weighted average unvested restricted stock awards | - | - | - | - | |||||||||
Total weighted average shares outstanding - basic | 245,761 | 244,984 | 245,431 | 244,711 | |||||||||
Basic net earnings per share | |||||||||||||
attributable to Frontier common shareholders | $ | 0.05 | $ | 0.49 | $ | 0.05 | $ | 1.17 | |||||
Diluted earnings per share: | |||||||||||||
Total weighted average shares outstanding - basic | 245,761 | 244,984 | 245,431 | 244,711 | |||||||||
Effect of dilutive performance stock awards | 1,686 | - | 1,493 | - | |||||||||
Effect of dilutive restricted stock awards | - | 228 | 412 | 369 | |||||||||
Total weighted average shares outstanding - diluted | 247,447 | 245,212 | 247,336 | 245,080 | |||||||||
Diluted net earnings per share | |||||||||||||
attributable to Frontier common shareholders | $ | 0.05 | $ | 0.49 | $ | 0.05 | $ | 1.17 | |||||
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Successor | Predecessor | ||||||||||
($ in millions and shares in thousands, except per share amounts) | For the nine months ended September 30, | For the five months ended September 30, | For the four months ended April 30, | ||||||||
2022 | 2021 | 2021 | |||||||||
Net income used for basic and diluted earnings | |||||||||||
per share: | |||||||||||
Total basic net income | |||||||||||
attributable to Frontier common shareholders | $ | 286 | $ | 225 | $ | 4,541 | |||||
Effect of loss related to dilutive stock units | - | - | - | ||||||||
Total diluted net income | |||||||||||
attributable to Frontier common shareholders | $ | 286 | $ | 225 | $ | 4,541 | |||||
Basic earnings per share: | |||||||||||
Total weighted average shares and unvested restricted stock | |||||||||||
awards outstanding - basic | 244,711 | 244,402 | 104,799 | ||||||||
Less: Weighted average unvested restricted stock awards | - | - | (215) | ||||||||
Total weighted average shares outstanding - basic | 244,711 | 244,402 | 104,584 | ||||||||
Basic net earnings per share | |||||||||||
attributable to Frontier common shareholders | $ | 1.17 | $ | 0.92 | $ | 43.42 | |||||
Diluted earnings per share: | |||||||||||
Total weighted average shares outstanding - basic | 244,711 | 244,402 | 104,584 | ||||||||
Effect of dilutive stock units | - | - | 340 | ||||||||
Effect of dilutive restricted stock awards | 369 | 1,198 | - | ||||||||
Total weighted average shares outstanding - diluted | 245,080 | 245,600 | 104,924 | ||||||||
Diluted net earnings per share | |||||||||||
attributable to Frontier common shareholders | $ | 1.17 | $ | 0.92 | $ | 43.28 | |||||
In calculating diluted net income per common share for the nine months ended September 30, 2022,2023, the effect of allcertain outstanding PSUs is excluded fromincluded in the computation as their respective performance metrics have not been satisfied as of September 30, 2022.2023.
Stock Units
At September 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)
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(14) Comprehensive Income (Loss):
Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting shareholders’ equity (deficit) and pension/postretirement benefit (OPEB) liabilities that, under GAAP, are excluded from net loss.income.
The components of accumulated other comprehensive income, (loss), net of tax, and changes are as follows:
Pension | OPEB | |||||||||
($ in millions) | Costs | Costs | Total | |||||||
Balance at January 1, 2022 (Successor) (1) | $ | - | $ | 60 | $ | 60 | ||||
Other comprehensive income | ||||||||||
before reclassifications | - | 8 | 8 | |||||||
Amounts reclassified from accumulated other | ||||||||||
comprehensive income to net income | - | (8) | (8) | |||||||
Net current-period other comprehensive | ||||||||||
income | - | - | - | |||||||
Balance at September 30, 2022 (Successor) (1) | $ | - | $ | 60 | $ | 60 | ||||
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 | - | 46 | 46 | |||||||
Amounts reclassified from accumulated other | ||||||||||
comprehensive income to net income | - | (2) | (2) | |||||||
Net current-period other comprehensive | ||||||||||
income | - | 44 | 44 | |||||||
Balance at September 30, 2021 (Successor) (1) | $ | - | $ | 44 | $ | 44 |
OPEB | |||||
($ in millions) | Costs | ||||
Balance at January 1, 2023 (1) | $ | 79 | |||
Other comprehensive income before reclassifications | 33 | ||||
Amounts reclassified from accumulated other | |||||
comprehensive income to net loss | (12) | ||||
Net current-period other comprehensive income | 21 | ||||
Balance at September 30, 2023 (1) | $ | 100 | |||
OPEB | |||||
($ in millions) | Costs | ||||
Balance at January 1, 2022 (1) | $ | 60 | |||
Other comprehensive income before reclassifications | 8 | ||||
Amounts reclassified from accumulated other | |||||
comprehensive loss to net loss | (8) | ||||
Net current-period other comprehensive loss | - | ||||
Balance at September 30, 2022 (1) | $ | 60 | |||
(1)Pension and OPEB amounts are net of deferred tax balances of $23 million and $15 million as of January 1, 20222023 and $234 million as of January 1, 2021. The tax impact was $162022,
respectively and $31 million and $12$16 million as of September 30, 20222023 and 2021,2022, respectively.
PART I. FINANCIAL INFORMATION (Continued)
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The significant items reclassified from components of accumulated other comprehensive loss are as follows:
Amount Reclassified from | Amount Reclassified from | ||||||||||||||||||||||||||
Accumulated Other | Accumulated Other | ||||||||||||||||||||||||||
Comprehensive Loss (1) | Comprehensive Income (1) | ||||||||||||||||||||||||||
($ in millions) | Affected Line Item in | Affected Line Item in | |||||||||||||||||||||||||
For the three months | For the three months | the Statement Where | For the three months ended | For the nine months ended | the Statement Where | ||||||||||||||||||||||
Details about Accumulated Other | ended September 30, | ended September 30, | Net Income (Loss) | September 30, | September 30, | Net Income (Loss) | |||||||||||||||||||||
Comprehensive Loss Components | 2022 | 2021 | is Presented | 2023 | 2022 | 2023 | 2022 | is Presented | |||||||||||||||||||
Amortization of OPEB Cost Items Prior-service costs | $ | 4 | $ | 2 | Income (Loss) before income taxes | ||||||||||||||||||||||
Amortization of OPEB Cost Items Prior-service credits (costs) | $ | 6 | $ | 4 | $ | 16 | $ | 10 | Income (loss) before income taxes | ||||||||||||||||||
Tax impact | - | (1) | Income tax benefit | (2) | - | (4) | (2) | Income tax benefit | |||||||||||||||||||
$ | 4 | $ | 1 | Net income (loss) | $ | 4 | $ | 4 | $ | 12 | $ | 8 | Net income (loss) | ||||||||||||||
Successor | Predecessor | |||||||||||
Amount Reclassified from | ||||||||||||
Accumulated Other | ||||||||||||
Comprehensive Loss (1) | ||||||||||||
($ in millions) | Affected Line Item in | |||||||||||
For the nine months | For the five months | For the four months | the Statement Where | |||||||||
Details about Accumulated Other | ended September 30, | ended September 30, | ended April 30, | Net Income (Loss) | ||||||||
Comprehensive Loss Components | 2022 | 2021 | 2021 | is Presented | ||||||||
Amortization of Pension Cost Items Actuarial losses | $ | - | $ | - | $ | (24) | Income (Loss) before income taxes | |||||
Tax impact | - | - | 5 | Income tax benefit | ||||||||
$ | - | $ | - | $ | (19) | Net income (loss) | ||||||
Amortization of OPEB Cost Items | ||||||||||||
Prior-service costs | $ | 10 | $ | 3 | $ | 10 | ||||||
Actuarial losses | - | - | (5) | |||||||||
10 | 3 | 5 | Income (Loss) before income taxes | |||||||||
Tax impact | (2) | (1) | (1) | Income tax benefit | ||||||||
$ | 8 | $ | 2 | $ | 4 | Net income (loss) | ||||||
(1)These accumulated other comprehensive lossincome components are included in the computation of net periodic pension and OPEB costs (See(see Note 15 - Retirement Plans for additional details).
PART I. FINANCIAL INFORMATION (Continued)
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(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 statementstatements of income.
The following tables provide the components of total pension benefit cost:
Pension Benefits | |||||||||||
For the three months ended September 30, | For the three months ended September 30, | ||||||||||
($ in millions) | 2022 | 2021 | |||||||||
Components of total pension benefit cost | |||||||||||
Service cost | $ | 14 | $ | 20 | |||||||
Interest cost on projected benefit obligation | 22 | 26 | |||||||||
Expected return on plan assets | (46) | (49) | |||||||||
Amortization of unrecognized loss | - | - | |||||||||
Net periodic pension (benefit) | (10) | (3) | |||||||||
Pension settlement costs | 50 | - | |||||||||
Pension remeasurement gain | (91) | - | |||||||||
Total pension (benefit) | $ | (51) | $ | (3) | |||||||
Successor | Predecessor | ||||||||||
Pension Benefits | |||||||||||
For the nine months ended September 30, | For the five months ended September 30, | For the four months ended April 30, | |||||||||
($ in millions) | 2022 | 2021 | 2021 | ||||||||
Components of total pension benefit cost | |||||||||||
Service cost | $ | 55 | $ | 33 | $ | 32 | |||||
Interest cost on projected benefit obligation | 71 | 44 | 31 | ||||||||
Expected return on plan assets | (145) | (80) | (61) | ||||||||
Amortization of unrecognized loss | - | - | 24 | ||||||||
Net periodic pension (benefit) cost | $ | (19) | $ | (3) | $ | 26 | |||||
Pension settlement costs | 50 | - | - | ||||||||
Pension remeasurement gain | (91) | - | - | ||||||||
Total pension (benefit) cost | $ | (60) | $ | (3) | $ | 26 | |||||
Pension Benefits | ||||||||||||||
For the three months ended | For the nine months ended | |||||||||||||
($ in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||
Components of total pension benefit cost | ||||||||||||||
Service cost | $ | 12 | $ | 14 | $ | 39 | $ | 55 | ||||||
Interest cost on projected benefit obligation | 31 | 22 | 97 | 71 | ||||||||||
Expected return on plan assets | (36) | (46) | (111) | (145) | ||||||||||
Net periodic pension (benefit) | 7 | (10) | 25 | (19) | ||||||||||
Pension settlement costs | - | 50 | - | 50 | ||||||||||
Pension remeasurement gain | - | (91) | - | (91) | ||||||||||
Total pension benefit cost (income) | $ | 7 | $ | (51) | $ | 25 | $ | (60) | ||||||
The components of net periodic benefit cost other than the service cost component are included in “Investment and other income” on the consolidated statementstatements of income.
The value of our pension plan assets decreased $696increased $50 million from $2,655$2,033 million at December 31, 20212022 to $1,959$2,083 million at September 30, 2022.2023. This decreaseincrease primarily resulted from changes in the market value of investments of $635$85 million includingnet of plan expenses, and contributions of $116 million, offset by benefit payments to participants of $233 million, partially offset by contributions of $172$151 million.
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
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
pension benefit cost. During the nine months ended September 30, 2022, lump sum pension settlement payments to terminated or retired individuals amounted to $177 million, which exceeded the settlement threshold of $169 million, and as a result, Frontier recognized non-cash settlement charges totaling $50 million during the nine months ended September 30, 2022.
As a result of pension settlement charges incurred during the period, Frontier remeasured its pension plan obligations resulting in a remeasurement gain of $91 million for the nine months ended September 30, 2022. Upon emergence from bankruptcy, Frontier revised its accounting policy to recognize actuarial gains and losses in the period in which they occur. As such, this gain was recorded in “Investment and other income, net” on our consolidated statements of income.
PART I. FINANCIAL INFORMATION (Continued)
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The following tables provide the components of total postretirement benefit cost:
Postretirement | ||||||||||||||
For the three months ended | For the nine months ended September 30, | |||||||||||||
($ in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||
Components of net periodic postretirement benefit cost | ||||||||||||||
Service cost | $ | 2 | $ | 3 | $ | 6 | $ | 10 | ||||||
Interest cost on projected benefit obligation | 8 | 9 | 23 | 23 | ||||||||||
Amortization of prior service credit (gain) loss recognized | (6) | (4) | (16) | (10) | ||||||||||
OPEB remeasurement (gain) loss | (46) | (84) | (38) | (234) | ||||||||||
Total periodic postretirement (benefit) cost | $ | (42) | $ | (76) | $ | (25) | $ | (211) | ||||||
In the first nine months of 2023, Frontier amended the medical coverage for certain postretirement benefit plans, which resulted in a $38 million net remeasurement gain. The net gain was comprised of a loss of $20 million in the first quarter, offset by remeasurement gains of $12 million in the second quarter and $46 million in the third quarter, primarily due to discount rate changes.
For the nine months ended September 30 2022, Frontier amended the medical coverage for certain postretirement benefit plans, which necessitated a remeasurement of its OPEB obligations. This remeasurement resulted in the recognition of a net actuarial gain of $234 million, which was driven primarily from a higher assumed discount rate relative to the previous measurement date. Upon emergence from bankruptcy, Frontier revised its accounting policy to recognizerecognizes actuarial gains and losses in the period in which they occur. As such, this gain was recorded in “Investment and other income, net” on our consolidated statements of income.
The following tables provide the components of total postretirement benefit cost:
Postretirement | |||||||||||
For the three months ended September 30, | For the three months ended September 30, | ||||||||||
($ in millions) | 2022 | 2021 | |||||||||
Components of net periodic postretirement benefit cost | |||||||||||
Service cost | $ | 3 | $ | 4 | |||||||
Interest cost on projected benefit obligation | 9 | 7 | |||||||||
Amortization of prior service benefit | (4) | (2) | |||||||||
OPEB remeasurement (gain) loss | (84) | 54 | |||||||||
Total periodic postretirement (benefit) cost | $ | (76) | $ | 63 | |||||||
Successor | Predecessor | ||||||||||
Postretirement | |||||||||||
For the nine months ended September 30, | For the five months ended September 30, | For the four months ended April 30, | |||||||||
($ in millions) | 2022 | 2021 | 2021 | ||||||||
Components of net periodic postretirement benefit cost | |||||||||||
Service cost | $ | 10 | $ | 7 | $ | 7 | |||||
Interest cost on projected benefit obligation | 23 | 12 | 9 | ||||||||
Amortization of prior service benefit | (10) | (3) | (10) | ||||||||
OPEB remeasurement (gain) loss | (234) | 67 | - | ||||||||
Amortization of unrecognized loss | - | - | 5 | ||||||||
Net periodic postretirement (benefit) cost | $ | (211) | $ | 83 | $ | 11 | |||||
During the nine months ended September 30, 2023, and 2022 we capitalized $14 million and $15 million of pension and OPEB expense, respectively, into the cost of our capital expenditures, as the costs relate to our engineering and plant construction activities. During the four months of April 30, 2021, we capitalized $7 million of pension and OPEB expense into the cost
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
of our capital expenditures, as the costs relate to our engineering and plant construction activities. During the three and five months ended September 30, 2021, we capitalized $6 million and $10 million of pension and OPEB expense, respectively.
(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 expansion build, we have prioritized diversifying our vendor base and finalizingsolidifying partnership agreements with vendors for relevant labor and materials.materials, to enable our build growth and customer expansion. Some of these key supplier agreements have initial two-yearmulti-year terms with an optionand purchase commitments as we deem advisable in order to extend for two years through 2025.strengthen future supply.
In 2015,2014, Citynet, a competitive local exchange carrier doing business in West Virginia, filed a qui tam action in federal court in the District Court for the Southern District of West Virginia against Frontier accepted the FCC’s CAF Phase II offer, which provided $313 million in annual support through 2021, to make available 10 Mbps downstream/1 Mbps upstream broadband service to households across someWest Virginia, Inc. and others on behalf of the 25 states where we operate.U.S. Government concerning billing practices relating to a government grant. The deployment deadline was December 31, 2021,complaint became public in 2016 after the U.S. Government declined to participate in the case and final review and audit of households is not complete. Toinstead allowed Citynet to pursue the extent it is determined we did not enable the required number of households with 10 Mbps downstream/1 Mbps upstream broadband service or we were unable to satisfy other CAF Phase II requirements, Frontier will be required to return a portionclaims on behalf of the funds previously 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.
U.S. On January 30, 2020, the FCC adopted an order establishing RDOF, a competitive reverse auction to provide support to serve high cost areas. Under the FCCs RDOF Phase I auction, 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). Frontier began receiving RDOF funding in the second quarter of 2022 and we will be required to complete the buildout to the awarded locations by December 31, 2028, with interim target milestones over this period.
On July 27,6, 2022, the Connecticut Public Utility Regulatory Authority (“PURA”) issuedparties reached a Noticesettlement in principle. On May 23, 2023, the parties finalized the terms of Violationthe settlement agreement to resolve the case in its entirety, the terms of which were made part of the public record and Assessmentwhich requires a payment 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 alleged that Frontier and its contractors failed to comply with certain state excavation regulations which created public safety and compliance issues. The NOV prescribed a fine and ordered Frontier to discontinue certain underground fiber deployment work until the Company submitted a compliance plan to ensure compliance with the applicable regulations. Frontier submitted a compliance and inspection plan consistent with the NOV and paid the fine. On August 26, 2022, PURA approved Frontier’s compliance and inspection plan, and the Company is proceeding with underground fiber deployment in Connecticut.approximately $18 million.
In addition, we are party to various legal proceedings (including individual actions, class and putative class actions, and governmental investigations) arising in the normal course of our business covering a wide range
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
of matters and types of claims including, but not limited to, general 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, regulatory, environmental, 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.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
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,transaction, 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,estimable, and we do not expect that any potential penalties, if ultimately incurred, will be material.
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.
In 2015, Frontier accepted the FCC’s CAF Phase II offer, which provided $313 million in annual support through 2021 in our current 25 states in return for the Company’s commitment to make broadband available to households within the CAF II eligible areas. The Company was required to complete the CAF II deployment by December 31, 2021. Thereafter, the FCC has been reviewing carriers’ CAF II program completion data, and if the FCC determines that the Company did not satisfy applicable FCC CAF Phase II requirements, Frontier could be required to return a portion of the funds previously received and may be subject to certain fines, or additional requirements and obligations.
On January 30, 2020, the FCC adopted an order establishing the RDOF competitive reverse auction to provide support to serve high-cost areas. Under the FCCs RDOF Phase I auction, we were 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). We began receiving RDOF funding in the second quarter of 2022 and we will be required to complete the buildout to the awarded locations by December 31, 2028, with interim target milestones over this period. To the extent that Frontier is unable to meet the milestones or construct to all locations by the required deadlines, Frontier could be required to return a portion of funds previously received and may be subject to certain fines or additional requirements and obligations.
The FCC currently classifies fixed consumer broadband services as information services, subject to light-touch regulation. In October 2023 the FCC released a notice of proposed rulemaking seeking to reclassify certain broadband services as lightly regulated telecommunications services imposing certain network neutrality requirements on the reclassified internet services. At this time, it remains uncertain whether the FCC will adopt these new network neutrality regulations and what impact that may have on Frontier’s business.
On November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act (IIJA) into law. The legislation appropriated funding for the establishment of the Affordable Connectivity Program (ACP), and FCC-administered monthly, low-income broadband benefit program. The ACP provides qualified customers
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
up to $30 dollars per month (or $75 dollars per month for those on Tribal lands) to assist with their internet bill. Frontier is a participating provider in the ACP program. Absent additional funding, at present pace, the ACP funds will likely exhaust in 2024.
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 total expected rent payments on a straight-line basis over the lease term. Certain leases also have renewal options. Renewal options that are reasonably assured are included in determining the lease term.
We are party to contracts with several unrelated long-distance carriers. The contracts provide fees based on traffic they carry for us subject to minimum monthly fees.
PART I. FINANCIAL INFORMATION (Continued)
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" related to future events. Forward-looking statements address our expectations or beliefs concerning future events, including, without limitation, our future operating and financial performance, our ability to implement strategic initiatives, such as our fiber build and fiber penetration and our ability to realize cost savings initiatives, our ability to comply with the covenants in the agreements governing our indebtedness, our capital expenditures and 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,” “may,” “will,” “would,” or “target.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. We do not intend, nor do we undertake any duty, to update any forward-looking statements.statements, except as required by law.
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 may reduce our operating and financial flexibility;
declines in Adjusted EBITDA and revenue relative to historical levels that we are unable to offset;
economic uncertainty, volatility in financial markets, and rising interest rates could limit our ability to access capital or increase the cost of capital needed to fund business operations, including our fiber expansion plans;
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;
inflationary pressures on costs, including tightening labor markets and increased fuel and electricity costs, and potential disruptions in our supply chain and the effects of inflation resulting from the COVID-19 pandemic, the global microchip shortage, or otherwise, which could adversely impact our businessfinancial condition or results of operations and hinder our fiber expansion plans;
our ability to effectively manage our operations, operating expenses, capital expenditures, debt service requirementrequirements and cash paid for income taxes and liquidity;
the impact of potential information technology or data security breaches or other cyber-attacks or other disruptions;
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 existing 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)
declines in revenue from our voice services, switched and non-switched access and video and data services that we cannot stabilize or offset with increases in revenue from other products and services;
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 ourcomply with the applicable CAF II and RDOF obligationsrequirements and the risk of penalties or obligations to return certain CAF II and RDOF funds;
our ability to defend against litigation or government investigations and potentially unfavorable results from current pending and future litigation;litigation or investigations;
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;metrics or regulatory requirements;
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, increased fuel and electricity costs, the cost of borrowing, or other adverse changes resulting from epidemics, pandemics and outbreaks of contagious diseases, including the COVID-19 pandemic, natural disasters, economic or political instability, terrorist attacks and wars, including the ongoing war in Ukraine, or other adverse public healthwidespread developments;
potential adverse impacts of the COVID-19 pandemic on our businessclimate change and operations, including potential disruptions to the work of our employees arising from healthincreasingly stringent environmental laws, rules and safety measures such as social distancing, working remotelyregulations, and recent applicable federal, statecustomer expectations and local mandates and prohibitions, our ability toother environmental liabilities;
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 thedue to 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.
This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative and is not intended to be exhaustive. 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. 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.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Frontier Communications Parent, Inc. is a leading communications and technology provider of communications services in the United States,offering gigabit speeds that empower and connect approximately 2.9 million broadband subscribers, with approximately 2.8 million broadband customers and 14,74613,800 employees, operating in 25 states as of September 30, 2022.2023. We offerare building critical infrastructure across the country with our fiber-optic network and cloud-based solutions, enabling secure high-speed connections. Rallied around our purpose of Building Gigabit AmericaTM, we are focused on supporting a broad portfolio of communications services for consumerdigital society, closing the digital divide, and business customers. These services include data and Internet services, video services, voice services, access services, and advanced hardware and network solutions. working toward a more sustainable environment.
Business Overview
Frontier’s purpose is to Build Gigabit AmericaTM by expandingIn 2020, we began the expansion and transformingtransformation of 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 reachpass 10 million total fiber passings by December 31, 2025.locations with fiber. We are prioritizing our fiber build activities to locations which we believe will provide the highest investment returns. In these expansion markets, we target penetration between 15% and 20% within 12 months and between 25% and 30% within 24 months. 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, operational efficiency, and improving the customer experience, and operational efficiency.experience. We accomplished the following objectives in the third quarter of 2022:2023:
We builtpassed 332,000 new fiber tolocations. As of September 30, 2023, we had approximately 351,000 locations, resulting in approximately 4.86.2 million total locations passed with fiber as of September 30, 2022.fiber.
We added 66,00079,000 fiber broadband customer net additions, resulting in fiber broadband customer growth of 15.8% versus19% as compared to the third quarter of 2021.
oIn our Base Fiber Network of 3.2 million locations, we achieved broadband penetration of 42.9%, an increase of 140bps from the third quarter of 2021 and approaching our terminal penetration target of 45%.
oIn our Expansion Fiber markets, our target penetration is 15% - 20% after 12 months, 25% - 30% penetration after 24 months, and a terminal penetration of 45%. We have met or exceeded our targets for fiber locations constructed in 2020 and 2021:
Fiber locations constructed in 2020 reached broadband penetration of 22% and 42% after 12 and 24 months, respectively.
Fiber locations constructed in 2021 reached penetration of 17% after 12 months, which is within our target range of 15% - 20%.
prior year period. Fiber broadband customer net additions continued to outpace copper broadband customer net losses, resulting in 4,00016,000 total broadband customer net additions.
Consumer fiber revenue growth of 13% offset consumer copper revenue declines of 15%, resulting in positive consumer revenue growth for the first time as a new public company.
We continue to make progress towards achieving our annualized gross run rate cost savings target of $500 million by the end of 2023. As of September 30, 2023, we had realized $244$484 million of gross annualized cost savings as of September 30, 2022, achieving our 2023 target more than one year ahead of plan, and raised our target of gross annualized cost savings to $400 million by the end of 2024.since 2021.
DuringWe completed $2.1 billion offering of secured fiber revenue term notes in August 2023, consisting of $1.6 billion of aggregate principal amount of secured fiber network revenue term notes and $500 million in Series 2023-2 Secured Fiber Network Revenue Variable Funding Senior Notes.
We announced the third quarterrelocation of 2022, markets remained volatile and the economic outlook remains uncertain. We continueour corporate headquarters to closely monitor market factors including potential disruptions in our supply chain, tightening labor markets, actual or perceived inflation, increased fuel and electricity costs, the cost of borrowing, and evolution of the ongoing 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 conditionDallas, Texas.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Our fiber build plans include significant expenditures which could be adversely impacted by supply chain delays, actual or perceived inflation, tightening labor markets, increased fuel and electricity costs, increases in the cost of borrowing, and other risks. In addition to higher costs, the availability of building materials and other supply chain risks could negatively impact our ability to achieve the fiber build plans we are executing against. During the third quarter of 2023, markets remained volatile, and the economic outlook was uncertain. We continue to closely monitor and 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 operations. Through September 30, 2022 the overall operational and financial impacts to our business have not been material.
Financial Overview – Operating Income
We reported operating income of $169$114 million and $284$169 million for the three months ended September 30, 20222023 and 2021,2022, respectively, a decrease of $115$55 million.
We reported operating income of $456$372 million and Non-GAAP operating income of $841$456 million for the nine months ended September 30, 20222023 and 2021,2022, respectively, a decrease of $385$84 million. After adjusting for the impact of fresh start accounting, our Non-GAAP operating income would have decreased by $365 million, as compared to the prior year period.
Our operating resultsOperating income decreased primarily due to decreases in subsidy and other revenue from voice and video services and lease impairment charges,increases in depreciation and amortization expense. These factors were partially offset by a reductionan increase in cost ofdata and internet services, as well as decreases in selling, general and depreciationadministrative expenses and amortization expense as a result of the lower asset bases established upon our implementation of fresh start accounting and lower video content costsother charges as compared to the corresponding periodsperiod in 2021.2022.
Presentation of Results of Operations
The sections below include tables that present customer counts, average monthly consumer revenue per customer (“ARPC”), average monthly revenue per unit (“ARPU”), and consumer customer churn. We define churn as the number of consumer customer deactivations during the month divided by the number of consumer customers at the beginning of the month and utilize the average of each monthly churn in the period. Management believes that consumer customer counts, ARPC, ARPU, and average monthly revenue perconsumer customer churn 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 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, 2021.2022. 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 nine months ended September 30, 2022,2023, as compared to the financial results for the three and nine months ended September 30, 2021.2022.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Customer Trends
As of or for the three months ended September 30, | |||||||||||
(Customer and Employee Metrics in thousands) | 2022 | 2021 | % Change | ||||||||
Customers | |||||||||||
Consumer | 3,142 | 3,173 | (1) | % | |||||||
Consumer Customer Metrics | |||||||||||
Net customer additions (losses) | (17) | (23) | (26) | % | |||||||
ARPC | $ | 83.05 | $ | 83.77 | (1) | % | |||||
Customer Churn | 1.76% | 1.64% | 7 | % | |||||||
Broadband Customer Metrics (1) | |||||||||||
Fiber Broadband | |||||||||||
Consumer customers | 1,502 | 1,292 | 16 | % | |||||||
Business customers | 104 | 95 | 9 | % | |||||||
Consumer net customer additions | 64 | 29 | 121 | % | |||||||
Consumer customer churn | 1.60% | 1.56% | 3 | % | |||||||
Consumer customer ARPU | $ | 62.97 | $ | 63.35 | (1) | % | |||||
Copper Broadband | |||||||||||
Consumer customers | 1,105 | 1,264 | (13) | % | |||||||
Business customers | 120 | 138 | (13) | % | |||||||
Consumer net customer additions (losses) | (58) | (33) | 76 | % | |||||||
Consumer customer churn | 2.02% | 1.89% | 7 | % | |||||||
Consumer customer ARPU | $ | 49.65 | $ | 45.44 | 9 | % | |||||
Other Metrics | |||||||||||
Employees | 14,746 | 15,803 | (7) | % | |||||||
As of or for the three months ended September 30, | |||||||||||
(Customer and Employee Metrics in thousands) | 2023 | 2022 | % Change | ||||||||
Customers | |||||||||||
Consumer | 3,118 | 3,142 | (1) | % | |||||||
Consumer Customer Metrics | |||||||||||
Net customer losses | (9) | (17) | (47) | % | |||||||
ARPC | $ | 83.99 | $ | 83.05 | 1 | % | |||||
Customer Churn | 1.70% | 1.76% | (4) | % | |||||||
Broadband Customer Metrics (1) | |||||||||||
Fiber Broadband | |||||||||||
Consumer customers | 1,797 | 1,502 | 20 | % | |||||||
Business customers | 117 | 104 | 13 | % | |||||||
Consumer net customer additions | 75 | 64 | 17 | % | |||||||
Consumer customer churn | 1.47% | 1.60% | (8) | % | |||||||
Consumer customer ARPU | $ | 64.49 | $ | 62.97 | 2 | % | |||||
Copper Broadband | |||||||||||
Consumer customers | 870 | 1,105 | (21) | % | |||||||
Business customers | 97 | 120 | (19) | % | |||||||
Consumer net customer losses | (58) | (58) | - | % | |||||||
Consumer customer churn | 2.18% | 2.02% | 8 | % | |||||||
Consumer customer ARPU | $ | 54.62 | $ | 49.65 | 10 | % | |||||
Other Metrics | |||||||||||
Employees | 13,756 | 14,746 | (7) | % | |||||||
For the nine months ended September 30, | |||||||||||
(Customer and Employee Metrics in thousands) | 2022 | 2021 | % Change | ||||||||
Consumer Customer Metrics | |||||||||||
Net customer additions (losses) | (23) | (92) | (75) | % | |||||||
ARPC | $ | 82.68 | $ | 85.49 | (3) | % | |||||
Customer Churn | 1.55% | 1.54% | 1 | % | |||||||
Broadband Customer Metrics (1) | |||||||||||
Fiber Broadband | |||||||||||
Consumer net customer additions | 166 | 54 | 207 | % | |||||||
Consumer customer churn | 1.41% | 1.50% | (6) | % | |||||||
Consumer customer ARPU | $ | 62.84 | $ | 62.38 | 1 | % | |||||
Copper Broadband | |||||||||||
Consumer net customer additions (losses) | (129) | (85) | 52 | % | |||||||
Consumer customer churn | 1.76% | 1.73% | 2 | % | |||||||
Consumer customer ARPU | $ | 47.93 | $ | 44.47 | 8 | % | |||||
(1) | Amounts presented exclude related metrics for our wholesale customers. |
For the nine months ended September 30, | |||||||||||
(Customer and Employee Metrics in thousands) | 2023 | 2022 | % Change | ||||||||
Consumer Customer Metrics | |||||||||||
Net customer losses | (15) | (23) | (35) | % | |||||||
ARPC | $ | 82.49 | $ | 82.68 | (0) | % | |||||
Customer Churn | 1.55% | 1.55% | 0 | % | |||||||
Broadband Customer Metrics (1) | |||||||||||
Fiber Broadband | |||||||||||
Consumer net customer additions | 222 | 166 | 34 | % | |||||||
Consumer customer churn | 1.36% | 1.41% | (4) | % | |||||||
Consumer customer ARPU | $ | 63.10 | $ | 62.84 | 0 | % | |||||
Copper Broadband | |||||||||||
Consumer net customer losses | (173) | (129) | 34 | % | |||||||
Consumer customer churn | 1.91% | 1.76% | 9 | % | |||||||
Consumer customer ARPU | $ | 51.81 | $ | 47.93 | 8 | % | |||||
(1) | Amounts presented exclude related metrics for our wholesale customers. |
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Customers
We experienced a decrease in consumer customers of approximately 1% as of September 30, 2022,2023, as compared to the prior year period.
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 initiatives resulted in an increase in the number of our consumer broadband customers and a migration of our customer base to fiber.
We lost approximately 9,000 and 15,000 consumer customers for the three and nine months ended September 30, 2023, and lost approximately 17,000 and 23,000 consumer customers for the three and nine months ended September 30, 2022, driven by losses in copper broadband, voice and video customers, offset by growth in fiber broadband customers.
In the three and nine months ended September 30, 2023, we experienced a net gain of consumer broadband customers of approximately 17,000 and 49,000 as compared to a net gain of approximately 6,000 and 37,000 for the three and nine months ended September 30, 2022.
oThe average monthly consumer revenue per customer (“consumer ARPC”) decreased $0.72,increased $0.94, or 1%, to $83.05$83.99 for the three months ended September 30, 2022,2023, compared to the prior year period;period. The slight increase was driven primarily by growth in fiber data and decreased $2.81, or 3%, to $82.68 for the nine months ended September 30, 2022, compared to the prior year period.
The decrease for the quarter ended September 30, 2022, was primarily a result of decreased videovalue-added services and consumer voice services, slightlyalong with price increases, partially offset by increased fiber data as well as price adjustments and promotional roll-offs on ourdeclines in 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 historically been a material part of the overall ARPC. In our expansion markets,Going forward, we expect fibermoderate movements in ARPC as our customer mix becomes more weighted towards broadband penetration of 15% and 20% within 12 months and 25% - 30% after 24 months.services.
oARPC decreased $0.19, or less than 1%, to $82.49 for the nine months ended September 30, 2023, compared to the prior year period. The slight decrease was driven primarily by growth in fiber data and value-added services, more than offset by declines in voice and video services.
Fiber Broadband Customers
We have initiated anOur investment strategy is focused on expanding and improving our fiber network. In conjunction with this strategy, we are also working to improve our 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 September 30, 20222023 represents the thirteenthseventeenth consecutive quarter of positive consumer fiber net adds. For the quarterthree and nine months ended September 30, 2022, Frontier2023, we added 64,000approximately 75,000 and 222,000 consumer fiber broadband customers compared to 29,00064,000 and 166,000 for the three and nine months ended September 30, 2021.2022. Customers who migrated from our copper base constituted a minorsmall portion of these consumer fiber broadband customer net additions in the three and nine months ended September 30, 2022.2023.
For the three and nine months ended September 30, 2022, Frontier2023, we added 2,000approximately 4,000 and 8,00010,000 business fiber broadband customers compared to zeroapproximately 2,000 and 8,000 net additions for both the three and nine months ended September 30, 2021.2022.
Our focus on expanding and improving our fiber network is contributinghas contributed to healthy customer retention. Our average monthly consumer fiber broadband churn was 1.60%1.47% and 1.36% for the three and nine months ended September 30, 2023, respectively, compared to 1.60% and 1.41% for the three and nine months ended September 30, 2022, compared to 1.56% for the prior year period. Improvements in customer churn due torespectively. These improvements were driven by our increased focus aton key customer touchpoints such as installation and first bill and reflect the end of certain promotion pricing periods, and improved retention activities associated with inflation-related pricing actions, were offset by increases in involuntary related churn.actions.
The average monthly consumer fiber broadband revenue per customer (“Consumer ARPU”) decreased $0.38 to $62.97 for the three months ended September 30, 2022, compared to the prior year period, as the positive impacts of price increases and customers adopting faster speed tiers were offset by the negative impacts of gift cards and auto-pay discounts. During the three months ended September 30, 2022 we had a greater degree of gift card issuances than we did in the prior year quarter. Gift cards had a negative impact to consumer fiber broadband ARPU of $1.66 for the three months ended September 30, 2022, as compared to $0.24 for the three months ended September 30, 2021.
Consumer ARPU increased $0.46 to $62.84 for the nine months ended September 30, 2022, compared to the prior year period, primarily due to price increases and shifting mix towards higher speed tiers, a shift which has accelerated since the launch of our 2 gigabit offering on February 22, 2022. Gift cards had a negative impact to ARPU of $1.38 for the nine months ended September 30, 2022, as compared to $0.08 for the nine months ended September 30, 2021.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
oThe average monthly consumer fiber broadband revenue per customer (“consumer ARPU”) increased $1.52, or 2%, to $64.49 and $0.26, or less than 1%, to $63.10 for the three and nine months ended September 30, 2023, respectively, compared to the prior year periods.
oThe increase in consumer ARPU for the three and nine months ended September 30, 2023 was due to higher intake pricing, customer shifts to higher broadband speeds, customers rolling off promotional pricing, and lower gift card redemptions, all partially offset by increased retention activity and autopay take rates.
Copper Broadband Customers
For the three and nine months ended September 30, 2022, Frontier2023, we lost approximately 58,000 and 173,000 consumer copper broadband customers compared to a loss of 33,000approximately 58,000 and 129,000 for the three months ended September 30, 2021.
Consumer copper broadband customer losses were 129,000 for theand nine months ended September 30, 2022, compared to a loss of 85,000 for the nine months ended September 30, 2021.2022.
For the three and nine months ended September 30, 2022,2023, Frontier lost 4,000approximately 5,000 and 17,000 business copper broadband customers compared to a loss of approximately 4,000 and 13,000 in the three months ended September 30, 2021. Business copper broadband customers losses were 13,000 in theand nine months ended September 30, 2022, compared to a loss of 14,000 in the nine months ended September 30, 2021.2022.
Our average monthly consumer copper broadband churn was 2.02%2.18% and 1.91% for the three months ended September 30, 2022, compared to 1.89% in the three months ended September 30, 2021. Consumer copper broadband churn was 1.76% for theand nine months ended September 30, 2022,2023, compared to 1.73%2.02% and 1.76% in the three and nine months ended September 30, 2021.2022. The increase in consumer copper broadband churn was driven by the impact of inflationary price increases, copper to fiber migration activities reducing the copper customer base in newly built fiber areas, the rationalization ofand changes to our copper acquisition strategy, and adverse weather.
broadband go to market approach which impacted gross add volume.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Financial Results
For the three months ended September 30, | For the three months ended September 30, | |||||||||||
2022 | 2021 | % Change | ||||||||||
Data and Internet services | $ | 848 | $ | 834 | 2 | % | ||||||
Voice services | 369 | 411 | (10) | % | ||||||||
Video services | 127 | 149 | (15) | % | ||||||||
Other | 82 | 99 | (17) | % | ||||||||
Revenue from contracts with customers | 1,426 | 1,493 | (4) | % | ||||||||
Subsidy and other revenue | 18 | 83 | (78) | % | ||||||||
Revenue | 1,444 | 1,576 | (8) | % | ||||||||
Operating expenses: | ||||||||||||
Cost of Service | 544 | 590 | (8) | % | ||||||||
Selling, general, and administrative expenses | 431 | 421 | 2 | % | ||||||||
Depreciation and amortization | 296 | 273 | 8 | % | ||||||||
Restructuring costs and other charges | 4 | 8 | (50) | % | ||||||||
Total operating expenses | $ | 1,275 | $ | 1,292 | (1) | % | ||||||
Operating income | 169 | 284 | (40) | % | ||||||||
Consumer | 785 | 800 | (2) | % | ||||||||
Business and wholesale | 641 | 693 | (8) | % | ||||||||
Revenue from contracts with customers | $ | 1,426 | $ | 1,493 | (4) | % | ||||||
Fiber revenue | 691 | 684 | 1 | % | ||||||||
Copper revenue | 735 | 809 | (9) | % | ||||||||
Revenue from contracts with customers | $ | 1,426 | $ | 1,493 | (4) | % | ||||||
For the three months ended September 30, | % | For the nine months ended September 30, | % | ||||||||||||||||
($ in millions) | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||
Data and Internet services | $ | 895 | $ | 848 | 6 | % | $ | 2,637 | $ | 2,531 | 4 | % | |||||||
Voice services | 341 | 369 | (8) | % | 1,044 | 1,136 | (8) | % | |||||||||||
Video services | 104 | 127 | (18) | % | 333 | 398 | (16) | % | |||||||||||
Other | 81 | 82 | (1) | % | 253 | 245 | 3 | % | |||||||||||
Revenue from contracts with customers | 1,421 | 1,426 | (0) | % | 4,267 | 4,310 | (1) | % | |||||||||||
Subsidy and other revenue | 15 | 18 | (17) | % | 58 | 40 | 45 | % | |||||||||||
Revenue | 1,436 | 1,444 | (1) | % | 4,325 | 4,350 | (1) | % | |||||||||||
Operating expenses: | |||||||||||||||||||
Cost of service | 545 | 544 | 0 | % | 1,615 | 1,643 | (2) | % | |||||||||||
Selling, general, and administrative expenses | 405 | 431 | (6) | % | 1,250 | 1,293 | (3) | % | |||||||||||
Depreciation and amortization | 356 | 296 | 20 | % | 1,040 | 870 | 20 | % | |||||||||||
Restructuring costs and other charges | 16 | 4 | 300 | % | 48 | 88 | (45) | % | |||||||||||
Total operating expenses | $ | 1,322 | $ | 1,275 | 4 | % | $ | 3,953 | $ | 3,894 | 2 | % | |||||||
Operating income | 114 | 169 | (33) | % | 372 | 456 | (18) | % | |||||||||||
Consumer | 787 | 785 | 0 | % | 2,323 | 2,352 | (1) | % | |||||||||||
Business and wholesale | 634 | 641 | (1) | % | 1,944 | 1,958 | (1) | % | |||||||||||
Revenue from contracts with customers | $ | 1,421 | $ | 1,426 | (0) | % | $ | 4,267 | $ | 4,310 | (1) | % | |||||||
Fiber revenue | 760 | 691 | 10 | % | 2,235 | 2,048 | 9 | % | |||||||||||
Copper revenue | 661 | 735 | (10) | % | 2,032 | 2,262 | (10) | % | |||||||||||
Revenue from contracts with customers | $ | 1,421 | $ | 1,426 | (0) | % | $ | 4,267 | $ | 4,310 | (1) | % | |||||||
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Successor | Predecessor | Non-GAAP Combined | |||||||||||||||
For the nine months ended September 30, | For the five months ended September 30, | For the four months ended April 30, | For the nine months ended September 30, | ||||||||||||||
2022 | 2021 | 2021 | 2021 | % Change | |||||||||||||
Data and Internet services | $ | 2,531 | $ | 1,390 | $ | 1,125 | $ | 2,515 | 1 | % | |||||||
Voice services | 1,136 | 694 | 647 | 1,341 | (15) | % | |||||||||||
Video services | 398 | 254 | 223 | 477 | (17) | % | |||||||||||
Other | 245 | 161 | 125 | 286 | (14) | % | |||||||||||
Revenue from contracts with customers | 4,310 | 2,499 | 2,120 | 4,619 | (7) | % | |||||||||||
Subsidy and other revenue | 40 | 138 | 111 | 249 | (84) | % | |||||||||||
Revenue | 4,350 | 2,637 | 2,231 | 4,868 | (11) | % | |||||||||||
Operating expenses: | |||||||||||||||||
Cost of Service | 1,643 | 986 | 830 | 1,816 | (10) | % | |||||||||||
Selling, general, and administrative expenses | 1,293 | 690 | 537 | 1,227 | 5 | % | |||||||||||
Depreciation and amortization | 870 | 452 | 506 | 958 | (9) | % | |||||||||||
Restructuring costs and other charges | 88 | 19 | 7 | 26 | 238 | % | |||||||||||
Total operating expenses | $ | 3,894 | $ | 2,147 | $ | 1,880 | $ | 4,027 | (3) | % | |||||||
Operating income | 456 | 490 | 351 | 841 | (46) | % | |||||||||||
Consumer | 2,352 | 1,343 | 1,133 | 2,476 | (5) | % | |||||||||||
Business and wholesale | 1,958 | 1,156 | 987 | 2,143 | (9) | % | |||||||||||
Revenue from contracts with customers | $ | 4,310 | $ | 2,499 | $ | 2,120 | $ | 4,619 | (7) | % | |||||||
Fiber revenue | 2,048 | 1,139 | 903 | 2,042 | 0 | % | |||||||||||
Copper revenue | 2,262 | 1,360 | 1,140 | 2,500 | (10) | % | |||||||||||
Non-network specific revenue | - | - | 77 | 77 | (100) | % | |||||||||||
Revenue from contracts with customers | $ | 4,310 | $ | 2,499 | $ | 2,120 | $ | 4,619 | (7) | % | |||||||
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
REVENUE
The table below presents our revenue by technology for the periods indicated:
Successor | ||||||||||||||
For the three months | For the three months | |||||||||||||
ended September 30, | ended September 30, | $ Increase | % Increase | |||||||||||
($ in millions) | 2022 | 2021 | (Decrease) | (Decrease) | ||||||||||
Fiber | $ | 691 | $ | 684 | $ | 7 | 1 | % | ||||||
Copper | 735 | 809 | (74) | (9) | % | |||||||||
Revenue from contracts with customers (1) | 1,426 | 1,493 | (67) | (4) | % | |||||||||
Subsidy revenue | 18 | 83 | (65) | (78) | % | |||||||||
Total revenue | $ | 1,444 | $ | 1,576 | $ | (132) | (8) | % | ||||||
For the three months ended | ||||||||||||||
September 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2023 | 2022 | (Decrease) | (Decrease) | ||||||||||
Fiber | $ | 760 | $ | 691 | $ | 69 | 10 | % | ||||||
Copper | 661 | 735 | (74) | (10) | % | |||||||||
Revenue from contracts with customers (1) | 1,421 | 1,426 | (5) | (0) | % | |||||||||
Subsidy revenue | 15 | 18 | (3) | (17) | % | |||||||||
Total revenue | $ | 1,436 | $ | 1,444 | $ | (8) | (1) | % | ||||||
Successor | Non-GAAP Combined | |||||||||||||
For the nine months | For the nine months | |||||||||||||
ended September 30, | ended September 30, | $ Increase | % Increase | |||||||||||
($ in millions) | 2022 | 2021 | (Decrease) | (Decrease) | ||||||||||
Fiber | $ | 2,048 | $ | 2,042 | $ | 6 | 0 | % | ||||||
Copper | 2,262 | 2,500 | (238) | (10) | % | |||||||||
Other (2) | - | 77 | (77) | (100) | % | |||||||||
Revenue from contracts with customers (1) | 4,310 | 4,619 | (309) | (7) | % | |||||||||
Subsidy revenue | 40 | 249 | (209) | (84) | % | |||||||||
Total revenue | $ | 4,350 | $ | 4,868 | $ | (518) | (11) | % | ||||||
For the nine months ended | ||||||||||||||
September 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2023 | 2022 | (Decrease) | (Decrease) | ||||||||||
Fiber | $ | 2,235 | $ | 2,048 | $ | 187 | 9 | % | ||||||
Copper | 2,032 | 2,262 | (230) | (10) | % | |||||||||
Revenue from contracts with customers (1) | 4,267 | 4,310 | (43) | (1) | % | |||||||||
Subsidy revenue | 58 | 40 | 18 | 45 | % | |||||||||
Total revenue | $ | 4,325 | $ | 4,350 | $ | (25) | (1) | % | ||||||
(1)Includes lease revenue of $15$14 million and $16$44 million for the three and nine months ended September 30, 20222023, and 2021, respectively. Lease revenue was$15 million and $48 million and $47 million for the three and nine months ended September 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 generated bya result of recurring data, voice, and video services delivered over either our fiber and copper or fiber network. Revenues are considered copperfiber or fibercopper based on 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, we are experiencing growth in fiber broadband revenue and a decline in copper revenue. We expect this trend to continue and accelerate due to strong fiber demand and the migration of customers from copper to fiber once theas we expand our fiber network is available.network.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
RevenueThe table below presents our revenue for our consumer and business and wholesale customers was as follows:for the periods indicated:
Successor | ||||||||||||||
For the three months ended September 30, | For the three months ended September 30, | $ Increase | % Increase | |||||||||||
($ in millions) | 2022 | 2021 | (Decrease) | (Decrease) | ||||||||||
Consumer | $ | 785 | $ | 800 | $ | (15) | (2) | % | ||||||
Business and wholesale | 641 | 693 | (52) | (8) | % | |||||||||
Revenue from contracts with customers (1) | 1,426 | 1,493 | (67) | (4) | % | |||||||||
Subsidy and other revenue | 18 | 83 | (65) | (78) | % | |||||||||
Total revenue | $ | 1,444 | $ | 1,576 | $ | (132) | (8) | % | ||||||
Successor | Non-GAAP Combined | |||||||||||||
For the nine months ended September 30, | For the nine months ended September 30, | $ Increase | % Increase | |||||||||||
($ in millions) | 2022 | 2021 | (Decrease) | (Decrease) | ||||||||||
Consumer | $ | 2,352 | $ | 2,476 | $ | (124) | (5) | % | ||||||
Business and wholesale | 1,958 | 2,143 | (185) | (9) | % | |||||||||
Revenue from contracts with customers (1) | 4,310 | 4,619 | (309) | (7) | % | |||||||||
Subsidy and other revenue | 40 | 249 | (209) | (84) | % | |||||||||
Total revenue | $ | 4,350 | $ | 4,868 | $ | (518) | (11) | % | ||||||
For the three months ended | $ Increase | % Increase | ||||||||||||
($ in millions) | 2023 | 2022 | (Decrease) | (Decrease) | ||||||||||
Consumer | $ | 787 | $ | 785 | $ | 2 | 0 | % | ||||||
Business and wholesale | 634 | 641 | (7) | (1) | % | |||||||||
Revenue from contracts with customers (1) | 1,421 | 1,426 | (5) | (0) | % | |||||||||
Subsidy and other revenue | 15 | 18 | (3) | (17) | % | |||||||||
Total revenue | $ | 1,436 | $ | 1,444 | $ | (8) | (1) | % | ||||||
For the nine months ended | $ Increase | % Increase | ||||||||||||
($ in millions) | 2023 | 2022 | (Decrease) | (Decrease) | ||||||||||
Consumer | $ | 2,323 | $ | 2,352 | $ | (29) | (1) | % | ||||||
Business and wholesale | 1,944 | 1,958 | (14) | (1) | % | |||||||||
Revenue from contracts with customers (1) | 4,267 | 4,310 | (43) | (1) | % | |||||||||
Subsidy and other revenue | 58 | 40 | 18 | 45 | % | |||||||||
Total revenue | $ | 4,325 | $ | 4,350 | $ | (25) | (1) | % | ||||||
(1)Includes lease revenue of $15$14 million and $16$44 million for the three months ended September 30, 2022 and 2021, respectively. Lease revenue was $48 million and $47 million for the nine months ended September 30, 20222023, and 2021,$15 million and $48 million for the three and nine months ended September 30, 2022, 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 expected credit losses.
Consumer
For the three and nine months ended September 30, 2023, compared to the three and nine months ended September 30, 2022:
Consumer revenues were up less than 1% for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. The revenue growth was the result of growth in fiber data and value added service revenues along with inflationary price increases, offset by declines in voice, video, and copper broadband.
We experienced a 1% decline in consumer revenues for nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. This decline was predominantly a result of decreases in voice, video, and copper broadband, offset by increases in fiber broadband. Our fiber initiative will result in increasing revenue mix toward fiber broadband.
oWe experienced 22% and 20% improvement in consumer fiber broadband revenues for the three and nine months ended September 30, 2023, as compared to the three and nine months ended September 30, 2022.
oThis improvement is a result of higher consumer fiber broadband ARPU as well as continued net adds of consumer fiber broadband customers due to our expanded fiber footprint and continued focus on product positioning in both new and existing markets.
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 are resulting in a migration of our customer base to fiber.
We lost 17,000 and 23,000 consumer customers in the three months ended September 30, 2022 and 2021.
We lost 23,000 and 92,000 consumer customers in the nine months ended September 30, 2022 and 2021.
Our loss in 2022 includes net gains of consumer broadband customers of 6,000 and 37,000 for the three and nine months ended September 30, 2022.
Our improvement in consumer broadband customers is a direct result of our fiber initiatives.
For the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021:
We experienced 2% decline in consumer revenues for the three months ended September 30, 2022, driven by a 1% decrease in ARPC, as compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, consumer revenues declined 5% driven by a 3% decrease in ARPC and 1% decline in the number of customers as compared to the same period in 2021. This decline was driven predominantly as a result of decreases in voice, video and copper broadband, offset by increases in fiber broadband. The Company’s fiber initiative will result in our revenue mix continuing to move to fiber broadband.
We experienced 14% and 13% improvement in consumer fiber broadband revenues for the three and nine months ended September 30, 2022, respectively. This improvement is a result of our fiber initiative which resulted in net adds of 210,000 customers during the twelve month period, and our continued focus on product positioning in both new and existing markets which resulted in ARPU decline of $0.38 and improvement of $0.46 for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021. ARPU for both periods of 2022 were impacted by credits issued to incentivize customers to auto-pay bills and by the issuance of gift cards as part of our acquisition offers.
We experienced approximately 3%13% and 3%12% decline in consumer copper broadband revenues for the three and nine months ended September 30, 2022.2023. As our copper footprint is transitionedtransitions to fiber, we expect fewer copper sales opportunities, and will proactively migrate certain existing broadband customers from copper to fiber, both of which will reduce our copper net adds.
Business
For the three and nine months ended September 30, 2022, we experienced an 8% and 9% decline in2023, our business and wholesale revenues respectively. Business revenues declined primarilydecreased 1%, as compared to the prior year periods. This decline was driven by decreases in voice revenue predominantly in business, largely offset by increases in fiber broadband and network access services. The increase in fiber broadband was due to the secular pressurescontinued growth of our customer base, and a shift towards higher broadband speeds. The increase in copper voice revenuenetwork access services is due primarily to price adjustments 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,install and lower rates for our network access services charged to our wholesale customers for the nine months ended September 30, 2022.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
RevenueThe table below presents our revenue by product and service type was as follows:for the periods indicated:
For the three months ended September 30, | For the three months ended September 30, | $ Increase | % Increase | |||||||||||
($ in millions) | 2022 | 2021 | (Decrease) | (Decrease) | ||||||||||
Data and Internet services | $ | 848 | $ | 834 | $ | 14 | 2 | % | ||||||
Voice services | 369 | 411 | (42) | (10) | % | |||||||||
Video services | 127 | 149 | (22) | (15) | % | |||||||||
Other | 82 | 99 | (17) | (17) | % | |||||||||
Revenue from contracts with customers (1) | 1,426 | 1,493 | (67) | (4) | % | |||||||||
Subsidy and other revenue | 18 | 83 | (65) | (78) | % | |||||||||
Total revenue | $ | 1,444 | $ | 1,576 | $ | (132) | (8) | % | ||||||
Successor | Non-GAAP Combined | |||||||||||||
For the nine months ended September 30, | For the nine months ended September 30, | $ Increase | % Increase | |||||||||||
($ in millions) | 2022 | 2021 | (Decrease) | (Decrease) | ||||||||||
Data and Internet services | $ | 2,531 | $ | 2,515 | $ | 16 | 1 | % | ||||||
Voice services | 1,136 | 1,341 | (205) | (15) | % | |||||||||
Video services | 398 | 477 | (79) | (17) | % | |||||||||
Other | 245 | 286 | (41) | (14) | % | |||||||||
Revenue from contracts with customers (1) | 4,310 | 4,619 | (309) | (7) | % | |||||||||
Subsidy and other revenue | 40 | 249 | (209) | (84) | % | |||||||||
Total revenue | $ | 4,350 | $ | 4,868 | $ | (518) | (11) | % | ||||||
For the three months ended | $ Increase | % Increase | ||||||||||||
($ in millions) | 2023 | 2022 | (Decrease) | (Decrease) | ||||||||||
Data and Internet services | $ | 895 | $ | 848 | $ | 47 | 6 | % | ||||||
Voice services | 341 | 369 | (28) | (8) | % | |||||||||
Video services | 104 | 127 | (23) | (18) | % | |||||||||
Other | 81 | 82 | (1) | (1) | % | |||||||||
Revenue from contracts with customers (1) | 1,421 | 1,426 | (5) | (0) | % | |||||||||
Subsidy and other revenue | 15 | 18 | (3) | (17) | % | |||||||||
Total revenue | $ | 1,436 | $ | 1,444 | $ | (8) | (1) | % | ||||||
For the nine months ended | $ Increase | % Increase | ||||||||||||
($ in millions) | 2023 | 2022 | (Decrease) | (Decrease) | ||||||||||
Data and Internet services | $ | 2,637 | $ | 2,531 | $ | 106 | 4 | % | ||||||
Voice services | 1,044 | 1,136 | (92) | (8) | % | |||||||||
Video services | 333 | 398 | (65) | (16) | % | |||||||||
Other | 253 | 245 | 8 | 3 | % | |||||||||
Revenue from contracts with customers (1) | 4,267 | 4,310 | (43) | (1) | % | |||||||||
Subsidy and other revenue | 58 | 40 | 18 | 45 | % | |||||||||
Total revenue | $ | 4,325 | $ | 4,350 | $ | (25) | (1) | % | ||||||
(1)Includes lease revenue of $15$14 million and $16$44 million for the three months ended September 30, 2022 and 2021, respectively. Lease revenue was $48 million and $47 million for the nine months ended September 30, 20222023, and 2021,$15 million and $48 million for the three and nine months ended September 30, 2022, respectively.
We categorize our products, services, and other revenues into the following five categories:
Data and Internet Services
We provide data and Internet services to our consumer, business, and wholesale customers. Data and Internet services consist of fiber broadband services, copper broadband services, and network access revenues.revenues (data transmission services and dedicated high-capacity circuits including data services to wireless providers commonly called wireless backhaul). Network access services are provided primarily to our business and wholesale customers, while fiber and copper broadband are provided to all customer segments.
Our fiber expansion strategy is expected to positively impact data and Internet services. This network expansion willis designed to provide faster, symmetrical broadband speeds and provide customer and revenue growth opportunities for fiber broadband and certain network access products like ethernet. This initiative will also create an opportunity for us to provide more fiber-based services to our customers.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
for fiber broadband and certain network access products like ethernet. We believe this initiative will create opportunities for us to provide more fiber-based services to our customers.
($ in millions) | For the three months ended | For the nine months ended | |||||
Data and Internet services revenue, September 30, 2021 | $ | 834 | $ | 2,515 | |||
Change in fiber broadband revenue | 38 | 101 | |||||
Change in copper broadband revenue | (9) | (31) | |||||
Change in other data and Internet services | (15) | (52) | |||||
Impact of fresh start accounting | - | (2) | |||||
Data and Internet services revenue, September 30, 2022 | $ | 848 | $ | 2,531 | |||
($ in millions) | For the three months ended | For the nine months ended | |||||
Data and Internet services revenue, September 30, 2022 | $ | 848 | $ | 2,531 | |||
Change in fiber broadband revenue | 65 | 167 | |||||
Change in copper broadband revenue | (26) | (72) | |||||
Change in other data and internet services | 8 | 11 | |||||
Data and Internet services revenue, September 30, 2023 | $ | 895 | $ | 2,637 | |||
Upon emergence from bankruptcy, the accumulated balances in deferred installation feeData and internet services 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 aincreased $47 million, or 6%, to $895 million, and 5% improvement in our broadband revenue offset by declines in other data revenueincreased $106 million, or 4%, to $2,637 million for the three and nine months ended September 30, 2022,2023, respectively, as compared to the corresponding periods in 2021.prior year periods. The increases in broadband revenue wereincrease was driven by growth in the fiber broadband revenue, partly offset somewhat by continued declines in copper. The other data revenues declines were the result of an ongoing migration of our carrier customers from legacy technology circuits to lower priced ethernet circuits. The period over period decrease in data and Internet services revenue continued to improve for the three and nine months ended September 30, 2022, as a result of the Company’s initiatives.copper broadband revenue.
Voice Servicesservices
The Company providesWe provide voice services consisting of traditional local and long-distance service and voice over Internet protocol (VoIP) service provided over our fiber and copper broadband products. It also includes enhanced features such as call waiting, caller identification, and voice messaging services.
($ in millions) | For the three months ended | For the nine months ended | |||||
Voice services revenue, September 30, 2021 | $ | 411 | $ | 1,341 | |||
Change in other voice services revenue | (42) | (129) | |||||
Impact of fresh start accounting | - | (76) | |||||
Voice services revenue, September 30, 2022 | $ | 369 | $ | 1,136 | |||
Upon implementation of fresh start accounting policies, Frontier is recording bothVoice services revenue declined $28 million, or 8%, to $341 million, and expense related$92 million, or 8%, to Universal Service Fund (“USF”) surcharges on a net basis,$1,044 million for the three and nine months ended September 30, 2023, respectively, as opposedcompared to recording each on a gross basisthe prior to emergence. These declines wereyear periods. The decline was primarily due to net losses in business and consumer customers in addition to fewer customers bundling voice services with broadband.broadband as compared to the prior year period, all partially offset by higher voice services ARPU.
Video Servicesservices
Video services include revenues generated from traditional television (TV) services provided directly to consumer customers as well as satellite TV services provided through Dish.various satellite providers. Video services also includes pay-per-view revenues, video on demand, equipment rentals, and video advertising. The Company hasWe have made the strategic decision to limit sales of new 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 broadband products.
Video services revenue declined $23 million, or 18%, to $104 million and $65 million, or 16%, to $333 million for the three and nine months ended September 30, 2023, as compared to the prior year period. The decline was primarily driven by linear video customer losses, partially offset by price increases as compared to the prior year period.
Other
Other customer revenue includes non-recurring equipment sales, network facility rental income, ancillary customer fees, directory listing services and switched access revenue. Switched access revenue includes revenue derived from allowing other carriers to use our network to originate and/or terminate their local and long-distance voice traffic. These switched access services are primarily billed on a minutes-of-use basis applying tariffed rates filed with the FCC or state agencies.
Other customer services revenue decreased $1 million, or 1%, to $81 million for the three months ended September 30, 2023, as compared to the prior year period driven primarily by declines in switched network access revenue. Other customer services revenue increased by $8 million, or 3%, to $253 million for the nine months ended
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
($ in millions) | For the three months ended | For the nine months ended | |||||
Video services revenue, September 30, 2021 | $ | 149 | $ | 477 | |||
Change in video services revenue | (22) | (71) | |||||
Impact of fresh start accounting | - | (8) | |||||
Video services revenue, September 30, 2022 | $ | 127 | $ | 398 | |||
Under our fresh start accounting policies, Frontier is recording both revenue and expense 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 revenue includes revenue 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 minutes-of-use basis applying tariffed rates filed with the FCC or state agencies.
($ in millions) | For the three months ended | For the nine months ended | |||||
Other revenue, September 30, 2021 | $ | 99 | $ | 286 | |||
Change in other services revenue | (17) | (49) | |||||
Impact of fresh start accounting | - | 8 | |||||
Other revenue, September 30, 2022 | $ | 82 | $ | 245 | |||
Under our fresh start accounting policies, we have 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 $14 million for the nine months ended September 30, 2022. Additionally, the accumulated balances in deferred installation fee revenue were eliminated as part of fresh start accounting, which has resulted in a $6 million decline in revenue recognized for the nine months ended September 30, 2022,2023, as compared to the prior year periods. After adjusting for the impacts of these policy changes, other customer services revenue declined $49 million for the nine months ended September 30, 2022. These decreases were primarilyperiod driven by reductionsincreases in CPE sales, late payment fees, early terminationpole rentals and related application fees and reconnect fees.equipment sales partially offset by declines in switched network access revenue.
Subsidy and other revenue
Subsidy and other revenue decreased $3 million, or 17%, to $15 million for the three months ended September 30, 2023, compared to the prior year period, and increased $18 million, or 45%, to $58 million for the nine months ended September 30, 2022,2023, compared to the prior year period primarily due to the completion of the CAF II programincreases in 2021.
($ in millions) | For the three months ended | For the nine months ended | |||||
Subsidy and other revenue, September 30, 2021 | $ | 83 | $ | 249 | |||
Change in CAF II subsidies | (74) | (231) | |||||
Change in RDOF, subsidy, and other services revenue | 9 | 17 | |||||
Impact of fresh start accounting | - | 5 | |||||
Subsidy and other revenue, September 30, 2022 | $ | 18 | $ | 40 | |||
As a result of a fresh start accounting policy change, 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 subsidy, resulting in increases to subsidyRDOF and other revenue of $5 million for the nine months ended September 30, 2022.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
OPERATING EXPENSES
The table below presents our operating expenses for the periods indicated:
For the three months | For the three months | ||||||||||||
($ in millions) | ended September 30, | ended September 30, | ($) | % | |||||||||
2022 | 2021 | Variance | Variance | ||||||||||
Operating expenses: | |||||||||||||
Cost of Service | $ | 544 | $ | 590 | $ | (46) | (8) | % | |||||
Selling, general, and administrative expenses | 431 | 421 | 10 | 2 | % | ||||||||
Depreciation and amortization | 296 | 273 | 23 | 8 | % | ||||||||
Restructuring costs and other charges | 4 | 8 | (4) | (50) | % | ||||||||
Total operating expenses | $ | 1,275 | $ | 1,292 | $ | (17) | (1) | % | |||||
For the three months ended | |||||||||||||
September 30, | $ Increase | % Increase | |||||||||||
($ in millions) | 2023 | 2022 | (Decrease) | (Decrease) | |||||||||
Operating expenses: | |||||||||||||
Cost of Service | $ | 545 | $ | 544 | $ | 1 | 0 | % | |||||
Selling, general, and administrative expenses | 405 | 431 | (26) | (6) | % | ||||||||
Depreciation and amortization | 356 | 296 | 60 | 20 | % | ||||||||
Restructuring costs and other charges | 16 | 4 | 12 | 300 | % | ||||||||
Total operating expenses | $ | 1,322 | $ | 1,275 | $ | 47 | 4 | % | |||||
Successor | Non-GAAP Combined | ||||||||||||
For the nine months | For the nine months | ||||||||||||
($ in millions) | ended September 30, | ended September 30, | ($) | % | |||||||||
2022 | 2021 | Variance | Variance | ||||||||||
Operating expenses: | |||||||||||||
Cost of Service | $ | 1,643 | $ | 1,816 | $ | (173) | (10) | % | |||||
Selling, general, and administrative expenses | 1,293 | 1,227 | 66 | 5 | % | ||||||||
Depreciation and amortization | 870 | 958 | (88) | (9) | % | ||||||||
Restructuring costs and other charges | 88 | 26 | 62 | 238 | % | ||||||||
Total operating expenses | $ | 3,894 | $ | 4,027 | $ | (133) | (3) | % | |||||
For the nine months ended | |||||||||||||
September 30, | $ Increase | % Increase | |||||||||||
($ in millions) | 2023 | 2022 | (Decrease) | (Decrease) | |||||||||
Operating expenses: | |||||||||||||
Cost of Service | $ | 1,615 | $ | 1,643 | $ | (28) | (2) | % | |||||
Selling, general, and administrative expenses | 1,250 | 1,293 | (43) | (3) | % | ||||||||
Depreciation and amortization | 1,040 | 870 | 170 | 20 | % | ||||||||
Restructuring costs and other charges | 48 | 88 | (40) | (45) | % | ||||||||
Total operating expenses | $ | 3,953 | $ | 3,894 | $ | 59 | 2 | % | |||||
Cost of service
Cost of service expenses include access charges and other third-party costs directly attributable to connecting customer locations to our network, 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.
As 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, costCost of service increased $1 million and decreased by $84$28 million for the nine months ended September 30, 2022. After adjusting for this fresh start change, cost of service declined $89 million for the nine months ended September 30, 2022. For the three and nine months ended September 30, 2022,2023, respectively, as compared to the prior year period. For the nine months ended September 30, 2023, the decrease in cost of service expense was driven by lower video content costs as a result of declines in video customers, non-renewal of certain content agreements, and decreased CPE costs.costs, and no rebranding costs in 2023. These decreases more than offset higher fuelenergy and energy prices,benefits costs and outside service rate increases resulting from increased inflation.higher inflation.
Selling, general,General, and administrative expensesAdministrative Expenses
Selling, general, and administrative expenses (SG&A expenses) include the salaries, wages and the related benefits and the related costs of corporate and sales personnel, travel, insurance, non-network related rent, advertising, and other administrative expenses.
As a result of the fresh start accounting policy change to classify the provision for bad debt as an expense rather than a reduction to revenue, SG&A expenses were $14 million higher for the nine months ended September 30, 2022. Additionally, as a result of fresh start accounting policy changes, we have expensed $17 million of certain administrative items that were previously capitalized by the predecessor for nine months ended September 30, 2022. After adjusting for the fresh start impacts, SG&A expenses increased by $35 million for the nine months ended September 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 $11 million sales tax refund in 2022.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
SG&A expense decreased by $26 million and $43 million for the three and nine months ended September 30, 2023 as compared to the prior year period.This decrease was primarily a result of lower compensation and benefit costs, and other fees, partially offset by increased commissions and a non-recurring $11 million sales tax refund in 2022.
Pension and Other Postretirement Employee Benefit (OPEB)post-employment benefits (“OPEB”) costs
Frontier allocatesWe allocate certain pension/OPEB expense to Costcost of service and SG&A expenses. Total pension and OPEB service costs were as follows:
($ in millions) | For the three months ended September 30, 2022 | For the three months ended September 30, 2021 | ||||||
Total pension/OPEB expenses | $ | 17 | $ | 24 | ||||
Less: costs capitalized into capital expenditures | (4) | (6) | ||||||
Net pension/OPEB costs | $ | 13 | $ | 18 | ||||
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||
($ in millions) | 2023 | 2022 | 2023 | 2022 | ||||||||||
Total pension/OPEB expenses | $ | 14 | $ | 17 | $ | 45 | $ | 65 | ||||||
Less: costs capitalized into capital expenditures | (5) | (4) | (14) | (15) | ||||||||||
Net pension/OPEB expense | $ | 9 | $ | 13 | $ | 31 | $ | 50 | ||||||
Successor | Non-GAAP Combined | |||||||
($ in millions) | For the nine months ended September 30, 2022 | For the nine months ended September 30, 2021 | ||||||
Total pension/OPEB expenses | $ | 65 | $ | 79 | ||||
Less: costs capitalized into capital expenditures | (15) | (17) | ||||||
Net pension/OPEB costs | $ | 50 | $ | 62 | ||||
Depreciation and amortizationAmortization
As a result of fresh start accounting, both Frontier’s fixed assets and intangible assets were adjusted to fair value as of the Effective Date. These changes decreased the carrying value of its fixed assets and increased the carrying value of its intangible assets. For the three and nine months ended September 30, 2022,2023, the decreasedincreased depreciation and amortization expense was driven by lowerhigher depreciation expense as a result of reduced fixed asset bases following the fresh start adjustment noted above.higher property, plant and equipment in service.
Restructuring costs and other charges
Restructuring costs and other charges consist of consulting and advisory fees, related to our balance sheet restructuring prior to filing our Chapter 11 Cases and subsequent to the Effective Date, workforce reductions, transformation initiatives, lease impairment costs, and other restructuring expenses.
For the three months ended September 30, 2022,2023, restructuring costs and other charges decreasedincreased $12 million, as compared to the three months ended September 30, 2022, primarily due to lowerhigher severance and employee costs resulting from workforce reductionscosts. For the nine months ended September 30, 2023, restructuring cost and other charges decreased $40 million, as compared to the nine months ended September 30, 2022, due to the non-recurrence of $3a one-time lease impairment charge of $44 million in the prior year, and lower costs related to other restructuring activities, of $1 million.
For the nine months ended September 30, 2022, restructuring costs and other charges increased due to partially offset by higher$44 million of lease impairment costs from the strategic exit of certain facilities, $35 million of severance and employee costs resulting from workforce reductions, and $9 million of costs related to other restructuring activities. Of the $35 million in severance and employee costs, approximately $26 million related to the second quarter of 2022, as a result of larger workforce reductions in that period.
.
PART I. FINANCIAL INFORMATION (Continued)
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OTHER NON-OPERATING INCOME AND EXPENSE
For the three months ended September 30, | For the three months ended September 30, | $ | % | |||||||||||||||||||
($ in millions) | 2022 | 2021 | Variance | Variance | ||||||||||||||||||
Investment and other income (loss), net | $ | 211 | $ | (37) | $ | 248 | NM | |||||||||||||||
Pension settlement costs | $ | (50) | $ | - | $ | (50) | 100 | % | ||||||||||||||
Interest expense | $ | (135) | $ | (90) | $ | (45) | 50 | % | ||||||||||||||
Income tax expense | $ | 75 | $ | 31 | $ | 44 | 142 | % | ||||||||||||||
Successor | Predecessor | Non-GAAP Combined | ||||||||||||||||||||
For the nine months ended September 30, | For the five months ended September 30, | For the four months ended April 30, | For the nine months ended September 30, | $ | % | |||||||||||||||||
($ in millions) | 2022 | 2021 | 2021 | 2021 | Variance | Variance | ||||||||||||||||
Investment and other income (loss), net | $ | 410 | $ | (39) | $ | 1 | $ | (38) | $ | 448 | NM | |||||||||||
Pension settlement costs | $ | (50) | $ | - | $ | - | $ | - | $ | (50) | 100 | % | ||||||||||
Reorganization items, net | $ | - | $ | - | $ | 4,171 | $ | 4,171 | $ | (4,171) | (100) | % | ||||||||||
Interest expense | $ | (356) | $ | (152) | $ | (118) | $ | (270) | $ | (86) | 32 | % | ||||||||||
Income tax expense (benefit) | $ | 174 | $ | 74 | $ | (136) | $ | (62) | $ | 236 | (381) | % | ||||||||||
NM - Not meaningful | ||||||||||||||||||||||
For the three months ended September 30, | $ Increase | % Increase | ||||||||||||
($ in millions) | 2023 | 2022 | (Decrease) | (Decrease) | ||||||||||
Investment and other income, net | $ | 67 | $ | 211 | $ | (144) | (68) | % | ||||||
Pension settlement costs | $ | - | $ | (50) | $ | 50 | 100 | % | ||||||
Interest expense | $ | (170) | $ | (135) | $ | (35) | 26 | % | ||||||
Income tax expense | $ | - | $ | 75 | $ | (75) | (100) | % | ||||||
For the nine months ended | $ Increase | % Increase | ||||||||||||
($ in millions) | 2023 | 2022 | (Decrease) | (Decrease) | ||||||||||
Investment and other income, net | $ | 101 | $ | 410 | $ | (309) | (75) | % | ||||||
Pension settlement costs | $ | - | $ | (50) | $ | 50 | (100) | % | ||||||
Interest expense | $ | (460) | $ | (356) | $ | (104) | 29 | % | ||||||
Income tax expense | $ | 1 | $ | 174 | $ | (173) | (99) | % | ||||||
Investment and other income, (loss), net
Investment and other income, net increaseddecreased by $248$144 million and $448$309 million for the three and nine months ended September 30, 2022, respectively. These increases were2023, as compared to September 30, 2022. This decrease was primarily driven by a remeasurement gainsgain for our other postretirement benefit obligation of $84 million for the three months ended September 30, 2022 and $234 million for the nine months ended September 30, 2022. Additionally, we recorded a remeasurement gain related to our pension plan of $91 million during the three months ended September 30, 2022.
We had additional increases as a result of favorable changes in our non-operating pension and other postretirement costs of $55$46 million and $99$38 million for the three and nine months ended September 30, 2022, respectively,2023, compared to a remeasurement gain of $84 million and $234 million for the three and nine months ended September 30, 2022; a decrease of $91 million for both the three and nine months ended September 30, 2023, due to the non-recurrence of a $91 million pension remeasurement in the third quarter of 2022; a decrease of $16 million and $54 million in pension and other postretirement benefits for the three and nine months ended September 30, 2023; partially offset by an $6 million and $36 million increase in interest and dividend income, as compared to the prior year periods.
Pension settlement
During the nine months ended September 30, 2022, lump sum pension settlement payments to terminated or retired individuals amounted to $177 million, which exceeded the settlement threshold of $169 million, and as a result, Frontier recognized non-cash settlement charges totaling $50 million for the nine months ended September 30, 2022.
Reorganization items, net
We 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 nine months ended September 30, 2021, Frontier recognized $4,171 million in reorganization items associated with the restructuring of our balance sheet.
Interest expense
For the three and nine months ended September 30, 2022,2023, interest expense increased $45$35 million and $86
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
$104 million, respectively, as compared to the same periods in 2021.2022. The increase in interest expense was primarily driven by a higher debt balance, as well as higher interest rates.
Income tax expense
During the three and nine months ended September 30, 2023, we recorded an income tax expense of less than $1 million and $1 million, on pre-tax income of $11 million and $13 million, respectively. During the three and nine months ended September 30, 2022, we recorded income tax expense of $75 million on pre-tax income of $195 million. During the three months ended September 30, 2021, we recorded income tax expense of $31 million on pretax income of $157 million.
During the nine months ended September 30, 2022 we recorded income tax expense ofand $174 million on pre-tax income of $195 million and $460 million. During the five months ended September 30, 2021, we recorded income tax expense of $74 million, on pre-tax income of $299 million.During the four months ended April 30, 2021, we recorded an income tax benefit of $136 million on pre-tax income of $4,405 million.respectively.
Our effective tax rates for the three and nine months ended September 30, 2022 were 38.5%2023 was 0.7% and 37.8%, respectively. The effective rate 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. Our effective tax rates9.7% and for the fivethree and nine months ended September 30, 20212022 was 38.5% and the four months ended April 30, 2021 were 24.7% and (3.1%), respectively.37.8%.
PART I. FINANCIAL INFORMATION (Continued)
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(b) Liquidity and Capital Resources
As of September 30, 2022,2023, we had liquidity of approximately $3,322$3,374 million, comprised of $948 million of cash and cash equivalents, of $230 million, $2,325$1,275 million of short-term investments consisting 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, $500 million available variable funding note capacity, subject to customary conditions to draw, and our available capacity on our undrawn revolving credit facility of $767$651 million.
Analysis of Cash Flows
As of September 30, 2022,2023, we had unrestricted cash and cash equivalents aggregating $230$948 million. For the nine months ended September 30, 2022,2023, we used cash flow from operations, cash on hand, and cash from prior year borrowings principally to fund our cash investing and financing activities, which were primarily short-term investments and capital expenditures.
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 operating costs arising from our fiber build and expansion of its fiber customer base, and for other general corporate purposes.
As of September 30, 2022,2023, we had a working capital surplus of $1,101$747 million compared to a $1,237$302 million surplus at December 31, 2021.2022. The primary driver for the change in the working capital surplus at September 30, 2022 was driven by an increase in short-termcash, net of movements between short term investments, as a result of funding our capital expenditures related to our fiber build, partially offset by a decrease in accounts payablepayable.
In August 2023, our limited-purpose, bankruptcy remote, subsidiary, Frontier Issuer LLC (“Frontier Issuer”), issued $1.586 billion aggregate principal amount of secured fiber network revenue term notes, less $58 million in original issue discounts, consisting of $1,120 million 6.60% Series 2023-1, Class A-2 term notes, $155 million 8.30% Series 2023-1, Class B term notes and accrued interest.$312 million 11.50% Series 2023-1, Class C term notes (collectively, the “Fiber Term Notes”), each with an anticipated repayment date, or ARD, in July 2028, in an offering exempt from registration under the Securities Act. We intend to use the proceeds from the offering of the Fiber Term Notes for, among other things, general corporate purposes, including potential investments or expenditures, such as capital expenditures and research and development, in line with our fiber expansion and copper migration strategies. In addition, we used a portion of the proceeds to retire and defease certain outstanding indebtedness of our subsidiary Frontier Southwest Incorporated.
Cash Flows fromprovided by Operating Activities
Cash flows provided fromby operating activities increased $712$7 million to $1,041$1,048 million for the nine months ended September 30, 20222023 as compared to the nine months ended September 30, 2021.2022. The overall increase in operating cash flows was primarily the result of changes in working capital.
We paid $1 million and $7 million in net cash taxes during the nine months ended September 30, 2023 and 2022, and $36 million in Non-GAAP combined net cash taxes during the Non-GAAP combined nine months ended September 30, 2021.respectively.
Cash Flows fromused by Investing Activities
Cash flows used inby investing activities were $4,178$2,451 million for the nine months ended September 30, 2022,2023, compared to Non-GAAP combined cash flows used in investing activities of $1,135$4,178 million for the corresponding period in 2021.prior year period. Given the long-term nature of our fiber build, as of September 30, 2022,2023, we have invested $2,325$1,275 million cash in short-term investments to improve interest income, while preserving funding flexibility.
Capital Expenditures
For the nine months ended September 30, 20222023 and 2021,2022, our capital expenditures were $2,882 million and $1,860 million, and $1,146 million, respectively. Approximately 57% of our capital expenditures in the first nine months of 2022 related to fiber network projects. The increase in capital expenditures was driven by increased spending for fiber upgrades to our existing copper network, a trend that we expect to continue as we execute our strategytransformation of investing in our fiber network. In addition to the We expect cash capital expenditures noted above, we had a balance of $431 millionto be approximately $3.0 billion to $3.2 billion in “Accounts payable” on our consolidated balance sheet related to capital expenditures that had not been paid as of September 30, 2022.
Cash Flows from Financing Activities2023.
Cash flows provided from financing activities increased $1,039 million to $1,219 million for the nine months ended September 30, 2022 as compared to the Non-GAAP combined corresponding period in 2021. The increase in financing activities was primarily driven by $1,200 million proceeds from long-term debt borrowings partially offset
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Cash Flows provided from Financing Activities
Cash flows provided from financing activities increased $916 million to $2,135 million for the nine months ended September 30, 2023 as compared to the corresponding period in 2022. The increase in financing activities was primarily driven by financing costs, lease obligations payments,an increase in proceeds from long-term debt principal payments and other costs.borrowings in the first three quarters of 2023 as compared to the prior year period.
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 operations, cash on hand and borrowing capacity under our $900 million Revolving Facility (as reduced by $133$249 million of revolver Letters of Credit.)Credit). In addition, potential future sources of capital may include debt and equity (or equity-linked) financing and $500 million in Series 2023-2 Secured Fiber Network Revenue Variable Funding Senior Notes.
On May 12, 2022,March 8, 2023, Frontier Holdings entered into an amendment to its Revolving Facility which, among other things, increased(i) extends the maturity with respect to the commitments of certain revolving lenders (in addition to certain amendments to springing maturity provisions); (2) amends the financial maintenance covenant for the benefit of the Revolving Facility by an additional $275 million,increasing the maximum first lien leverage ratio thereunder to a total of $900 million3.50:1.00, with step-downs to: (a) 3.25:1.00 in aggregate principal amount of revolving credit commitments,2026; and provided that the Revolving Facility be amended(b) 3.00:1.00 in 2027 and continuing thereafter; and (3) provides for certain amendments to reflect Secured Overnight Financing Rate “SOFR” based interest rates (including a customary spread adjustment). We anticipate that Frontier Holdings will transition to SOFR based borrowing under its Term Loan Facility, in accordance with the terms thereof, upon the final phase out of LIBOR at the end of June 2023. We do not expect this transition to materially impact the amount of interest payments under the Term Loan Facility.debt incurrence and other restrictive covenants.
During the nine months ended September 30, 2023, we paid $449 million of cash interest. Our Amended and Restated Credit Agreement, including our $1,453 million Term Loan Facility$1.4 billion term loan facility and $900 million Revolving Facility, and the indentures governing our outstanding secured First Lien Notesfirst lien notes and Second Lien Notessecond lien notes are described in detail in Note 8 to the financial statements contained in Part I of this report. A summary of certain covenants and our borrowing capacity is provided below.
In August 2023, our limited-purpose, bankruptcy remote, subsidiary, Frontier Issuer, issued $1.6 billion of aggregate principal amount of secured Fiber Term Notes, less $58 million in original issue discounts, consisting of $1.120 billion 6.60% Series 2023-1, Class A-2 term notes, $155 million 8.30% Series 2023-1, Class B term notes and $312 million 11.50% Series 2023-1, Class C term notes, each with an anticipated repayment date of five years. The Notes are secured by certain of Frontier’s fiber assets and associated customer contracts in the Dallas, Texas metropolitan area. Certain cash and other accounts for the benefit of the Trustee and noteholders are restricted.
In connection with the offering of the Fiber Term Notes, Frontier Issuer entered into a $500 million variable funding note facility with a delayed draw feature, subject to leverage tests and other customary drawing conditions.
We have negotiated payment terms with certain of our vendors, (referred to as vendor financing), which are excluded from capital expenditures and reported as financing activities. As of September 30, 2023 we have $169 million of vendor financing liabilities included in “Other current liabilities” on our consolidated balance sheets. No vendor financing payments were made as of September 30, 2023.
As of September 30, 2023, the Company extinguished $53 million of notes and transferred assets to an escrow account to pay the future interest and principal on the remaining $47 million of notes, which remain on the Company’s balance sheet as outstanding debt and restricted assets.
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
We have assessed our current and expected funding requirements and our current and expected sources of liquidity, and have determined, based on our forecasted financial results and financial condition as of September 30, 2022,2023, that our operating cash flows and existing cash balances, will be adequate to finance our working capital requirements, fund capital expenditures, make required debt interest and principal payments, pay taxes and make other payments.payments over the next twelve months. A number of factors, including but not limited to, lossesloss 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.
Debt Covenants and Borrowing Capacity
Our Amended and Restated Credit Agreement includes usual and customary negative covenants for loan agreements of this type, including covenants limiting us and our restricted subsidiaries’ (other than certain covenants therein which are limited to subsidiary guarantors) ability to, among other things, incur additional indebtedness, create liens on assets, make investments, loans or advances, engage in mergers, consolidations, sales of assets and acquisitions, pay dividends and distributions and make payments in respect of certain material subordinated indebtedness, in each case subject to customary exceptions for loan agreements of this type.
Our Amended and Restated Credit Agreement also contains a “financial covenant” which provides that our first lien leverage ratio shall not exceed as of the last day of each fiscal quarter 3.50:1.00, with step-downs to: (a) 3.25:1.00 in 2026; and (b) 3.00:1.00 in 2027 and continuing thereafter.
This financial covenant is only applicable for the benefit of the Revolving Lenders (as defined in the Amended and Restated Credit Agreement) thereunder and failure to comply with the financial covenant would not cause an Event of Default with respect to any loans pursuant to our term loan facility unless and until the Required Revolving Lenders (as defined in the Amended and Restated Credit Agreement) have declared all amounts outstanding under the revolving facility to be immediately due and payable and all outstanding commitments under the revolving facility to be immediately terminated.
The indentures governing our First Lien Notes and Second Lien Notes also include usual and customary negative covenants for debt securities of this type, including covenants limiting us and our restricted subsidiaries’ (other than certain covenants therein which are limited to subsidiary guarantors) ability to, among other things, incur additional indebtedness, create liens on assets, make investments, loans or advances, engage in mergers, consolidations, sales of assets and acquisitions, pay dividends and distributions and make payments in respect of certain material subordinated indebtedness, in each case subject to customary exceptions for debt securities of this type.
The indentures governing the outstanding subsidiary debentures include covenants that limit such subsidiary’s ability to create liens and/or merge or consolidate with other companies. These covenants are subject to important exceptions and qualifications.
The indenture governing Frontier Issuer’s Fiber Term Notes includes covenants and restrictions customary for transactions of this type. These covenants and restrictions include the maintenance of a liquidity reserve account to be used to make required payments in respect of the Fiber Term Notes, provisions relating to prepayments, required indemnification payments in certain circumstances. The Fiber Term Notes are also subject to rapid amortization in the event of a failure to maintain a stated debt service coverage ratio. A rapid amortization may be cured if the debt service coverage ratio exceeds a certain threshold for a certain period of time, upon which cure, regular amortization, if any, will resume. The Fiber Term Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal or other amounts due on or with respect to the Fiber Term Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective and certain judgments.
The Fiber Term Notes are subject to covenants and restrictions customary for transactions of this type, including (i) that the Issuer maintains specified reserve accounts to be used to make required payments in respect of the Fiber
PART I. FINANCIAL INFORMATION (Continued)
(Unaudited)
Term Notes and pay certain reserved fixed costs of the fiber networks, (ii) provisions relating to optional and mandatory prepayments of the Fiber Term Notes and the related payment of specified amounts, including specified make-whole payments in the case of prepayments of the Fiber Term Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Fiber Term Notes are in stated ways defective or ineffective, and (iv) covenants relating to recordkeeping, access to information and similar matters. In addition, the terms of the indenture governing the Fiber Term Notes provide that a larger portion of Frontier Issuer’s available funds will be used towards the repayment of the Fiber Term Notes during a cash sweep period, which period would result from, among other things, the failure to maintain a certain debt service coverage ratio or a certain minimum penetration rate in the markets that were securitized at closing. The Fiber Term Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain stated debt service coverage ratios, the acceleration of the maturity of the Fiber Term Notes following the occurrence of an event of default and the failure to repay or refinance on the applicable anticipated repayment date.
The customary events of default to which the Fiber Term Notes are subject include events relating to non-payment of required interest, principal or other amounts due on or with respect to the Fiber Term Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective and certain judgments. In addition, the Indenture and the related management agreement contain various covenants that limit the ability of the Company’s securitized subsidiaries to engage in specified types of transactions, subject to certain exceptions, including, for example, to incur or guarantee additional indebtedness, sell certain assets, create or incur liens on certain assets to secure indebtedness or consolidate, merge, sell or otherwise dispose of all or substantially all of their assets.
As of September 30, 2023, we were in compliance with all of the covenants under our existing indentures and the Amended and Restated Credit Agreement.
Net Operating Losses
In connection with Frontier’sour emergence from bankruptcy, we consummated a taxable disposition of substantially all of the assets and/or subsidiary stock of the Company. Certain of the NOLsnet operating losses (“NOLs”) were utilized in offsetting gains from the disposition, certain of the NOLSNOLs were extinguished as part of attribute reduction and certain subsidiary NOLSNOLs 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 a go forward basis.NOLs. Such net operating losses would be carried forward indefinitely but would be subject to an 80% limitation on U.S. taxable income.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial statements.
Future Contractual Obligations and Commitments
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, thereThere have been no material changes outside the ordinary course of business to the information provided with respect to our contractual obligations,
PART I. FINANCIAL INFORMATION (Continued)
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including indebtedness and purchase and lease obligations, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.2022.
Future Commitments
See “Regulatory Developments” immediately below for information regarding Frontier’s known and potential future commitments related to our participation in the FCC’s CAF Phase II program and RDOF Phase I auction.
Regulatory Developments
Connect America Fund (“CAF”)/ Rural Digital Opportunity Fund (“RDOFRDOF”)”): In 2015, Frontier accepted the FCC’s CAF Phase II offer, which provided $313 million in annual support through 2021 in return for the Company’s commitment
PART I. FINANCIAL INFORMATION (Continued)
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to make available 10 Mbps downstream/1 Mbps upstream broadband serviceavailable to households across some ofwithin the CAF II areas in our existing 25 states where we operate.states. The Company was required to complete the CAF II deployment deadline wasby December 31, 2021,2021. Thereafter, the FCC has been reviewing carriers’ CAF II program completion data, and final review and audit of households is not complete. Toif the extent it is determined weFCC determines that the Company did not enable the required number of households with 10 Mbps downstream/1 Mbps upstream broadband service or we were unable to satisfy othercertain applicable CAF Phase II requirements, Frontier willcould be required to return a portion of the funds previously received and may be subject to certain other fines, 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.
On January 30, 2020, the FCC adopted an order establishing the RDOF a competitive reverse auction to provide support to serve high costhigh-cost areas. UnderThe FCC announced the FCC’sresults 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). FrontierWe began receiving RDOF funding under RDOF in the second quarter of 2022 and we will be required to complete the buildout to thesethe awarded locations by December 31, 2028, with interim target milestones over this period. To the extent that Frontier is unable to meet the milestones or construct to all locations by the required deadlines, Frontier could be required to return a portion of funds previously received and may be subject to certain fines or additional requirements and obligations.
As part of its RDOF order, the FCC indicated 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.infrastructure.
COVID-19 InitiativesInternet: The Federal government has undertaken several measuresFCC currently classifies fixed consumer broadband services as information services, subject to addresslight-touch regulation. In October 2023 the ongoing impactsFCC released a notice of proposed rulemaking seeking to reclassify certain broadband services as lightly regulated telecommunications services imposing certain network neutrality requirements on 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 beyondreclassified internet services. At this time, it remains uncertain whether the FCC will adopt these new network neutrality regulations and difficult to predict.what impact that may have on Frontier’s business.
CurrentOn November 15, 2021, President Biden signed the Infrastructure Investment and Potential Internet Regulatory Obligations: On October 1, 2019,Jobs Act (IIJA) into law. The legislation appropriated funding for the D.C. Circuit Court largely upheld the FCC decision in its 2018 Restoring Internet Freedom Order to reclassify broadband as an “information service.” However, the Court invalidated the FCC’s preemption of a state’s ability to pass their own network neutrality rules and remanded back to the FCC other partsestablishment of the 2018 Order. California’s network neutrality provisions have gone into effect. ItAffordable Connectivity Program (ACP), and FCC-administered monthly, low-income broadband benefit program. The ACP provides qualified customers up to $30 per month (or $75 per month for those on Tribal lands) to assist with their internet bill. Frontier is unclear whether pending or future appealsa participating provider in the ACP program. Absent additional funding, at present pace, the ACP funds will have any impact on the regulatory structure, and it is unclear what impact future federal and/or state legislative or regulatory actions will have on net neutrality issues.likely exhaust in 2024.
PrivacyPrivacy:: Our businesses are subject to federal and state laws and regulations that impose various restrictions and obligations related to privacy and the handling of customers’ personal information. Privacy-related legislation has been consideredadopted in a number of states. Legislative and regulatory action could resultstates in which we operate. Certain state requirements give consumers increased 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 consumersrights including 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 deletionobtain a copy of this information. Subject to certain exceptions, it also gives consumers the right tosuch information, opt-out of the sale of personal information or sharing of personal information for purposes of certain targeted advertising, and to request the correction or deletion of this information. The law appliesComplying with such laws, as well as other legislative and regulatory action related to privacy, could result in increased costs of compliance, claims against the same rulesCompany or investigations related to all companies that collect
PART I. FINANCIAL INFORMATION (Continued)
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compliance, and increased uncertainty in the use and availability of certain 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.data.
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 local 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 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 event of a material breach or expire in the ordinary course. In addition, most franchises require payment of a franchise fee as a requirement to the granting of authority.
PART I. FINANCIAL INFORMATION (Continued)
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Many franchises establish comprehensive facilities and service requirements, as well as specific customer service standards and monetary penalties for 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.
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 local exchange carrier subsidiaries we operate are subject to federal, state, and local laws, and regulations governing the use, 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 could impose liability for the entire cost of cleanup at contaminated sites, including sites formerly owned by us or our predecessors, 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 regulations.
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.
There have been no material changes to our critical accounting policies and estimates from the information provided in 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, 2021.2022.
Recent Accounting Pronouncements
SeeFor additional information regarding FASB Accounting Standards Updates (‘‘ASU’’s) that have been issued but not yet adopted and that may impact the Company, refer to Note 2 of– ‘‘Recent Accounting Pronouncements’’ to the Notes to Consolidated Financial Statements included in Part I of this report for additional information related to recent accounting literature.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk in the normal course of our business operations due to ongoing investing and funding activities, including those associated with our pension plan assets. Market risk refers to the potential change in fair value of a financial instrument as a result of fluctuations in interest rates and equity prices. We do not hold or issue derivative instruments, derivative commodity instruments or other financial instruments for trading purposes. As a
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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 September 30, 2022, 84%2023, 87% of our total debt had fixed interest rates. We had no interest rate swap agreements in effect at September 30, 2022.2023. 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 our $1.45$1.4 billion term loan facility has a floating interest rate at September 30, 2022. The2023. Commencing July 1, 2023 the annual impact of a 100 basis pointpoints change in LIBORthe SOFR would result in approximately $15$14 million of additional interest expense, provided that the LIBORSOFR rate exceeds the LIBORSOFR 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. InterestTo date, interest income from cash invested in term deposits offsetshas offset the impact of higher interest expense from floating rate debt. Based
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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.
TheOur discount rate assumption for our pension benefit obligation is determined at least annually, or whenwhenever required, with assistance from our actuaries. The discount rate is 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 December 31, 2021, the discount rate was 2.90%. As of September 30, 2022, the discount rate is 5.60% whichutilized in calculating our benefit plan obligation was updated in connection with the September 30, 2022 remeasurement. 5.50%.
The discount rate assumption for our OPEB obligation is determined in a similar manner to the pension plan. As of December 31, 2021, the2022, our discount rate utilized in calculating our benefit plan obligation was 3.00%5.50%. The discount rate was updated in connection with the remeasurements in February, May, July and September of 2022. As of September 30, 2022, the discount rate is 5.60% which was updated in connection with the September 30, 2022 remeasurement.
At September 30, 2022,2023, the fair value of our debt was estimated to be approximately $8.02$10 billion, based on quoted market prices, our overall weighted average borrowing rate was 6.366%7.098% and our overall weighted average maturity was approximately seven5.74 years. Refer to Note 8 for discussion of the impact of the Chapter 11 Cases on our debt obligations.
Our exposure to market risks for changes in equity security prices as of September 30, 20222023 is primarily limited to our pension plan assets. We have no other security investments of any significant amount.
The value of our pension plan assets decreased $696increased $50 million from $2,655$2,033 million at December 31, 20212022 to $1,959$2,083 million at September 30, 2022.2023. This decreaseincrease primarily resulted from changes in the market value of investments of $635$85 million includingnet of plan expenses, and contributions of $116 million, offset by benefit payments to participants of $233 million, partially offset by contributions of $172$151 million.While there is a significant reduction in the assets of the pension plan, the related liability is also expected to decrease due to increases in the related discount rate.
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While there is a significant reduction in the assets of the pension plan, discount rates have risen by 270 basis points from 2.90% as of December 31, 2021, to 5.60% as of September 30, 2022. If these discount rates remain in effect through the end of 2022, the projected benefit obligation at December 31, 2022 would be lower by $930 million compared to the projected benefit obligation at December 31, 2021. On the funding side, a sustained pension asset loss could result in a reduced funding percentage and an increased minimum required contribution for the 2023 plan year.
Item 4. Controls and Procedures
(a)Evaluation of disclosure controlsDisclosure Controls and proceduresProcedures
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, 2022,2023, that our disclosure controls and procedures were 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.effective.
(b)Changes in internal control over financial reporting
There have been no changes into our internal control over financial reporting (as such term is defined in RulesRule 13a-15(f) and 15d-15(f) under the Securities Exchange Act)Act of 1934, as amended) identified in an evaluation thereof that occurred during the first nine months of 20222023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For more information regarding pending and threatened legal actions and proceedings see Note 16 - ‘‘Commitments and Contingencies’’ to the Consolidated Financial Statements included in Part I of this report.
In 2014, Citynet, a competitive local exchange carrier doing business in West Virginia, filed a qui tam action in federal court in the District Court for the Southern District of West Virginia against Frontier West Virginia, Inc. and others on behalf of the U.S. Government concerning billing practices relating to a government grant. The complaint became public in 2016 after the U.S. Government declined to participate in the case and instead allowed Citynet to pursue the claims on behalf of the U.S. On July 27,December 6, 2022, the Connecticut Public Utility Regulatory Authority (“PURA”) issuedparties reached a Noticesettlement in principle. On May 23, 2023, the parties finalized the terms of Violationthe settlement agreement to resolve the case in its entirety, the terms of which were made part of the public record and Assessmentwhich requires a payment 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 alleged that Frontier and its contractors failed to comply with certain state excavation regulations which created public safety and compliance issues. The NOV prescribed a fine and ordered Frontier to discontinue certain underground fiber deployment work until the Company submitted a compliance plan to ensure compliance with the applicable regulations. Frontier submitted a compliance and inspection plan consistent with the NOV and paid the fine. On August 26, 2022, PURA approved Frontier’s compliance and inspection plan, and the Company is proceeding with underground fiber deployment in Connecticut.approximately $18 million.
In addition, we are party to various other legal proceedings (including individual, class and putative class 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, environmental, tort, claims of competitors and disputes with other carriers. Such matters are subject to uncertainty and the outcome of individual matters is not predictable. However, we believe that the ultimate resolution of these 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.
Item 1A. Risk Factors
ThereExcept as disclosed in our Quarterly Report for the quarterly period ended June 30, 2023, there have been no material changes to the Risk Factors described in Part 1, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities2022 and Use of Proceeds
There were no unregistered sales of equity securities duringQuarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2022.2023.
PART II. OTHER INFORMATION
Item 6. Exhibits
(a) | Exhibits: | ||||||||||
Exhibit Number | Description | ||||||||||
101 | The following materials from Frontier’s Quarterly Report on Form 10-Q for the quarter ended September 30, | ||||||||||
104 | Cover Page from Frontier’s Quarterly Report on Form 10-Q for the quarter ended September 30, |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FRONTIER COMMUNICATIONS PARENT, INC. | |
By: /s/ William McGloin | |
William McGloin | |
Chief Accounting Officer and Controller | |
(Principal Accounting Officer) | |
Date: November | |