FRONTIER COMMUNICATIONS PARENT, INC. Frontier Communications Parent, Inc. is a provider of communications services inthe United States , with approximately 2.8 million broadband customers and 15,074 employees, operating in 25 states as ofJune 30, 2022 . We offer a broad portfolio of communications services for consumer and business customers. These services include data and Internet services, video services, voice services, access services, and advanced hardware and network solutions.
Business Overview
Frontier's purpose is to Build Gigabit AmericaTM by expanding and transforming our fiber network in order to meet the rapidly increasing demand for data from both our consumer and business customers. We believe that a fiber network has competitive advantages to be able to meet this growing demand, including faster download speeds, faster upload speeds, and lower latency levels than alternative broadband services. InAugust 2021 , we announced our plan to accelerate our fiber build to reach 10 million total fiber passings byDecember 31, 2025 . We are prioritizing our fiber build activities to locations which we believe will provide the highest investment returns. Over time, we expect our business mix will shift significantly, with a larger percentage of revenue coming from fiber as we implement our expansion plan. Our strategy focuses on four levers of value creation: fiber deployment, fiber broadband penetration, improving the customer experience, and operational efficiency. We accomplished the following objectives in the second quarter of 2022:
?We built fiber to approximately 281,000 locations, resulting in approximately
4.4 million total locations passed with fiber as of
?We accelerated our fiber build and announced that we expect to exceed our 2022 build target of 1 million locations by an additional 100,000 to 200,000 locations. Our plan remains on track, within our established cost parameters, and we have solidified our fiber build supply chain with multi-year agreements with key labor and equipment partners.
?We added 54,000 fiber broadband customer net additions, resulting in fiber broadband customer growth of 13.4% versus the second quarter of 2021.
oIn our Base Fiber Network of 3.2 million locations, we achieved broadband penetration of 43%, an increase of 140bps from the second quarter of 2021 and approaching our terminal penetration target of 45%.
oFiber locations constructed in 2020 reached broadband penetration of 22% and 44% after 12 and 24 months, respectively.
oFiber locations constructed in 2021 reached penetration of 17% after 12 months.
?Fiber broadband customer net additions continued to outpace copper broadband customer net losses, resulting in 8,000 total broadband customer net additions.
?We achieved sequential growth in consumer revenue for the first time in more than three years, led by strong fiber broadband growth.
?We realized
?We successfully completed an offering of$1.2 billion first lien notes, further strengthening our balance sheet and securing funding for our fiber build through mid-2024. 40
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PART I. FINANCIAL INFORMATION (Continued)
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During the first half of 2022, markets remained volatile and the economic
outlook remains uncertain. We continue to closely monitor market factors
including potential disruptions in our supply chain, tightening labor markets,
actual or perceived inflation, 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
condition and results of operations. Through June 30, 2022 the overall
operational and financial impacts to our business have not been significant.
Financial Overview
We reported operating income of$166 million and Non-GAAP operating income of$298 million for the three months endedJune 30, 2022 and 2021, respectively, a decrease of$132 million . After adjusting for the impact of fresh start accounting, our Non-GAAP operating income would have decreased by$127 million , as compared to the prior year period. We reported operating income of$287 million and Non-GAAP operating income of$557 million for the six months endedJune 30, 2022 and 2021, respectively, a decrease of$270 million . After adjusting for the impact of fresh start accounting, our Non-GAAP operating income would have decreased by$250 million , as compared to the prior year period. Our operating results decreased primarily due to decreases in subsidy and other revenue, and lease impairment charges, partially offset by a reduction in depreciation and amortization expense as a result of the lower asset bases established upon our implementation of fresh start accounting and lower video content costs as compared to the corresponding period in 2021.
Presentation of Results of Operations
The sections below include tables that present customer counts, average monthly
consumer revenue per customer ("ARPC") and consumer customer churn. We define
churn 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 and average monthly revenue per customer are important
factors in evaluating our consumer customer trends. Among the key services we
provide to consumer customers are voice service, data service and video service.
We continue to explore the potential to provide additional services to our
customer base, with the objective of meeting 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 . The following charts present
key customer metrics, disaggregation of revenue, and the results of operations
of the consolidated company.
(a)Results of Operations
Unless otherwise indicated, the discussion of the customer metrics and
components of operating income for the table that follows relates only to the
Non-GAAP financial results for the three and six months ended June 30, 2022 , as
compared to the financial results for the three and six months ended June 30,
2021 .
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PART I. FINANCIAL INFORMATION (Continued)
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Customer Trends
As of or for the three months
ended
(Customer and Employee Metrics in thousands) 2022 2021 % Change Customers Consumer 3,159 3,196 (1) % Consumer Customer Metrics Net customer additions (losses) (10) (38) (74) % ARPC $ 83.35$ 85.65 (3) % Customer Churn 1.53% 1.54% (1) %
Broadband Customer Metrics (1)
Fiber Broadband Consumer customers 1,438 1,263 14 % Business customers 102 95 7 % Consumer net customer additions 50 12 317 % Consumer customer churn 1.43% 1.53% (6) % Consumer customer ARPU $ 63.35$ 63.10 0 % Copper Broadband Consumer customers 1,163 1,297 (10) % Business customers 124 143 (13) %
Consumer net customer additions
(losses) (41) (30) 37 % Consumer customer churn 1.73% 1.67% 3 % Consumer customer ARPU $ 48.47$ 44.80 8 % Other Metrics Employees 15,074 16,005 (6) % For the six months ended June 30, (Customer and Employee Metrics in thousands) 2022
2021 % Change
Consumer Customer Metrics
Net customer additions (losses) (6) (68) (91) %
ARPC $ 82.51 $ 86.34 (4) %
Customer Churn 1.44% 1.49% (3) %
Broadband Customer Metrics (1)
Fiber Broadband
Consumer net customer additions 102 25 308 %
Consumer customer churn 1.31% 1.47% (11) %
Consumer customer ARPU $ 62.76 $ 61.88 1 %
Copper Broadband
Consumer net customer additions (71) (52) 37 %
Consumer customer churn 1.63% 1.65% (1) %
Consumer customer ARPU $ 47.09 $ 43.98 7 %
(1) Amounts presented exclude related metrics for our wholesale customers.
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FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
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Customers
We experienced a decrease in customers of approximately 1% as of
The average monthly consumer revenue per customer ("consumer ARPC") decreased
$2.30 , or 3%, to $83.35 and $3.83 , or 4%, to $82.51 for the three and six months
ended June 30, 2022 , compared to the three and six months ended June 30, 2021 ,
respectively.
The decrease for the quarter ended June 30, 2022 , was primarily a result of
decreased video services and consumer voice services, slightly offset by
increased fiber data as well as price adjustments and promotional roll-offs on
our voice, data and video services. The moderate decline in ARPC is expected to
continue as our customer mix becomes more weighted towards broadband service. We
have de-emphasized the sale of low margin video products, which have been a
material part of the overall ARPC. In our expansion markets, we expect 15% and
20% penetration within 12 months and 25% after 24 months.
Fiber Broadband Customers
The Company has initiated an investment strategy focused on expanding and improving its fiber network. In conjunction with this strategy, the Company is also working to improve its product positioning in both existing and new fiber markets. Although still in the early stages of this fiber investment strategy, results are promising. The quarter endedJune 30, 2022 represents the twelfth consecutive quarter of positive consumer fiber net adds. For the quarter endedJune 30, 2022 , Frontier added 50,000 consumer fiber broadband customers compared to 12,000 for the three months endedJune 30, 2021 . Customers who migrated from our copper base constituted a minor portion of these consumer fiber broadband customer net additions in the six months endedJune 30, 2022 . For the three and six months endedJune 30, 2022 , Frontier added 4,000 and 6,000 business fiber broadband customers compared to zero net additions for both the three and six months endedJune 30, 2021 . Our focus on expanding and improving our fiber network is contributing to improved customer retention. Our average monthly consumer fiber broadband churn was 1.43% and 1.31% for the three and six months endedJune 30, 2022 , compared to 1.53% and 1.47% for the three and six months endedJune 30, 2021 , respectively. The improvements in customer churn were driven partly by increased focus at key customer touchpoints such as installation, first bill, and end of promotion periods, and partly by improved retention associated with inflation-related pricing actions, which were implemented in first quarter of 2021 and second quarter of 2022. In addition to our improvement in fiber net adds, we continue to see improvements in the average monthly consumer fiber broadband revenue per customer which increased$0.25 to$63.35 and$0.88 to$62.76 for the three and six months endedJune 30, 2022 , compared to the three and six months endedJune 30, 2021 , respectively. These increases are due to price increases and shifting mix towards higher speed tiers, a shift which has accelerated since the launch of our 2 gigabit offering onFebruary 22, 2022 .
Copper Broadband Customers
For the three and six months endedJune 30, 2022 , Frontier lost 41,000 and 71,000 consumer copper broadband customers compared to a loss of 30,000 and 52,000 for the three and six months endedJune 30, 2021 , respectively. Our fiber investment strategy has impacted these results as new fiber markets will not only cease selling the copper broadband product, but we will focus on converting existing copper broadband customers to a fiber product. For the three and six months endedJune 30, 2022 , Frontier lost 5,000 and 9,000 business copper broadband customers compared to a loss of 4,000 and 9,000 in the three and six months endedJune 30, 2021 , respectively.
Our average monthly consumer copper broadband churn was 1.73% and 1.63% for the three and six months ended
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
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Financial Results
Non-GAAP
Successor Successor Predecessor Combined
For the three For the two For the one For the three
months ended June months ended June month ended months ended
30, 30, April 30, June 30,
2022 2021 2021 2021 % Change
Data and Internet
services $ 847 $ 556 $ 283 $ 839 1 %
Voice services 381 283 160 443 (14) %
Video services 134 105 54 159 (16) %
Other 80 62 30 92 (13) %
Revenue from contracts
? with customers 1,442 1,006 527 1,533 (6) %
Subsidy and other
revenue 17 55 28 83 (80) %
Revenue 1,459 1,061 555 1,616 (10) %
Operating expenses:
Cost of Service 546 396 210 606 (10) %
Selling, general and
administrative expenses 427 269 129 398 7 %
Depreciation and
amortization 290 179 119 298 (3) %
Restructuring costs and
other
charges 30 11 5 16 88 %
Total operating expenses $ 1,293 $ 855 $ 463 $ 1,318 (2) %
Operating income 166 206 92 298 (44) %
Consumer 791 543 283 826 (4) %
Business and wholesale 651 463 244 707 (8) %
Revenue from contracts
? with customers $ 1,442 $ 1,006 $ 527 $ 1,533 (6) %
Fiber revenue 685 455 225 680 1 %
Copper revenue 757 551 283 834 (9) %
Non-network specific
revenue - - 19 19 (100) %
Revenue from contracts
? with customers $ 1,442 $ 1,006 $ 527 $ 1,533 (6) %
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT , INC. AND SUBSIDIARIES
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Non-GAAP
Successor Successor Predecessor Combined
For the six For the two For the four For the six
months ended June months ended June months ended months ended
30, 30, April 30, June 30,
2022 2021 2021 2021 % ChangeData and Internet services $ 1,683 $ 556 $ 1,125 $ 1,681 0 % Voice services 767 283 647 930 (18) % Video services 271 105 223 328 (17) % Other 163 62 125 187 (13) %
Revenue from contracts
? with customers 2,884 1,006 2,120 3,126 (8) % Subsidy and other revenue 22 55 111 166 (87) % Revenue 2,906 1,061 2,231 3,292 (12) %
Operating expenses:
Cost of Service 1,099 396 830 1,226 (10) %
Selling, general and
administrative expenses 862 269 537 806 7 %
Depreciation and
amortization 574 179 506 685 (16) %
Restructuring costs and
other
charges 84 11 7 18 367 % Total operating expenses $ 2,619 $ 855 $ 1,880 $ 2,735 (4) % Operating income 287 206 351 557 (48) % Consumer 1,567 543 1,133 1,676 (7) % Business and wholesale 1,317 463 987 1,450 (9) %
Revenue from contracts
? with customers $ 2,884 $ 1,006 $ 2,120 $ 3,126 (8) % Fiber revenue 1,357 455 903 1,358 (0) % Copper revenue 1,527 551 1,140 1,691 (10) %
Non-network specific revenue - - 77 77 (100) % Revenue from contracts ? with customers $ 2,884 $ 1,006 $
2,120 $ 3,126 (8) %
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT , INC. AND SUBSIDIARIES
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REVENUE
The table below presents our revenue by technology for the periods indicated:
Non-GAAP
Successor Combined
For the three
For the three months months
ended June 30, ended June 30, $ Increase % Increase
($ in millions) 2022 2021 (Decrease) (Decrease)
Fiber $ 685 $ 680 $ 5 1 %
Copper 757 834 (77) (9) %
Other (2) - 19 (19) (100) %
Revenue from contracts with
customers (1) 1,442 1,533 (91) (6) %
Subsidy revenue 17 83 (66) (80) %
Total revenue $ 1,459 $ 1,616 $ (157) (10) %
Successor Non-GAAP Combined
For the six months For the six months
ended June 30, ended June 30, $ Increase % Increase
($ in millions) 2022 2021 (Decrease) (Decrease)
Fiber $ 1,357 $ 1,358 $ (1) (0) %
Copper 1,527 1,691 (164) (10) %
Other (2) - 77 (77) (100) %
Revenue from contracts with
customers (1) 2,884 3,126 (242) (8) %
Subsidy revenue 22 166 (144) (87) %
Total revenue $ 2,906 $ 3,292 $ (386) (12) %
(1)Includes
(2)Includes USF fees that, in conjunction with the application of fresh start accounting, are now recorded net.
Our revenue streams are primarily a result of recurring data, voice, and video
services delivered over either our copper or fiber network. Revenues are
considered copper or fiber 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, the company is experiencing growth in fiber broadband revenue and a
decline in copper revenue. We expect this trend to continue due to strong fiber
demand and the migration of customers from copper to fiber once the fiber
network is available.
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT , INC. AND SUBSIDIARIES
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Revenue for our consumer and business and wholesale customers was as follows:
Successor Non-GAAP Combined
For the three For the three
months ended June months ended June
30, 30, $ Increase % Increase
($ in millions) 2022 2021 (Decrease) (Decrease)
Consumer $ 791 $ 826 $ (35) (4) %
Business and wholesale 651 707 (56) (8) %
Revenue from contracts
with customers (1) 1,442 1,533 (91) (6) %
Subsidy and other revenue 17 83 (66) (80) %
Total revenue $ 1,459 $ 1,616 $ (157) (10) %
Successor Non-GAAP Combined
For the six months For the six months
ended June 30, ended June 30, $ Increase % Increase
($ in millions) 2022 2021 (Decrease) (Decrease)
Consumer $ 1,567 $ 1,676 $ (109) (7) %
Business and wholesale 1,317 1,450 (133) (9) %
Revenue from contracts
with customers (1) 2,884 3,126 (242) (8) %
Subsidy and other revenue 22 166 (144) (87) %
Total revenue $ 2,906 $ 3,292 $ (386) (12) %
(1)Includes
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.
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
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Consumer
Consumer customer losses were driven by reductions in our copper broadband and stand-alone voice customers, partially offset by net additions of fiber broadband customers. Customer preferences as well as our fiber investment initiative is resulting in a migration of the customer base to fiber.
For the three and six months endedJune 30, 2022 , Frontier lost 10,000 and 6,000 consumer customers compared to a loss of 38,000 and 68,000 for the three and six months endedJune 30, 2021 . This includes net gains of consumer broadband customers of 9,000 and 31,000 for the three and six months endedJune 30, 2022 , as compared to net losses of our consumer broadband customers of approximately 18,000 and 27,000 during the same periods in 2021. This improvement is a direct result of our fiber initiatives.
For the three and six months ended
?we experienced 4% and 7% decline in consumer revenues for the three and six months endedJune 30, 2022 , respectively, driven by a 3% and 4% decrease in ARPC and 1% decline in the number of customers as compared to the same periods in 2021. This decline was driven predominantly 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 13% and 12% improvement in consumer fiber broadband revenues for the three and six months endedJune 30, 2022 , respectively. This improvement is a result of our fiber initiative which resulted in net adds of 175,000 customers during the 12 month period, and our continued focus on product positioning in both new and existing markets which resulted in ARPU improvements of$0.25 and$0.88 for the three and six months endedJune 30, 2022 . ?we experienced approximately 2% and 3% decline in consumer copper broadband revenues for the three and six months endedJune 30, 2022 . As our copper footprint is transitioned to fiber, we expect fewer copper sales opportunities, and will proactively migrate existing broadband customers from copper to fiber, both of which will reduce our copper net adds.
Business
For the three and six months endedJune 30, 2022 , we experienced an 8% and 9% decline in our business and wholesale revenues, respectively. Business revenues declined primarily due to the secular pressures in copper voice revenue as well as the loss of equipment revenue associated with the sale of our equipment subsidiary. Wholesale revenues declined primarily due to secular pressures in copper voice revenue, legacy circuit revenue, and lower rates for our network access services charged to our wholesale customers for the six months endedJune 30, 2022 . 48
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
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Revenue by product and service type was as follows:
Successor Non-GAAP Combined
For the three For the three
months ended months ended
June 30, June 30, $ Increase % Increase
($ in millions) 2022 2021 (Decrease) (Decrease)
Data and Internet services $ 847 $ 839 $ 8 1 %
Voice services 381 443 (62) (14) %
Video services 134 159 (25) (16) %
Other 80 92 (12) (13) %Revenue from contracts with
customers (1) 1,442 1,533
(91) (6) %
Subsidy and other revenue 17 83
(66) (80) %
Total revenue $ 1,459 $ 1,616$ (157) (10) % Successor Non-GAAP Combined For the six months For the six months ended June 30, ended June 30, $ Increase % Increase ($ in millions) 2022 2021
(Decrease) (Decrease)
Data and Internet services $ 1,683 $ 1,681 $ 2 0 % Voice services 767 930 (163) (18) % Video services 271 328 (57) (17) % Other 163 187 (24) (13) %
Revenue from contracts with
customers (1) 2,884 3,126
(242) (8) %
Subsidy and other revenue 22 166 (144) (87) % Total revenue $ 2,906 $ 3,292$ (386) (12) %
(1)Includes
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.
Our fiber expansion strategy is expected to positively impact data and Internet
services. This network expansion will provide faster, symmetrical broadband
speeds and provide customer and revenue growth opportunities for 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.
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($ in millions) For the three months ended Forthe six months ended
Data and Internet services revenue, June 30, 2021 $ 839 $ 1,681 Change in fiber broadband revenue 34 63 Change in copper broadband revenue (9) (21) Change in other data and Internet services (16) (38) Impact of fresh start accounting (1) (2) Data and Internet services revenue, June 30, 2022 $ 847 $ 1,683
Upon emergence from bankruptcy, the accumulated balances in deferred installation fee revenue were eliminated as part of fresh start accounting, which has resulted in a decline in revenue recognition.
The revenue growth was primarily driven by 4% improvement in our broadband revenue offset by declines in other data revenue for both the three and six months endedJune 30, 2022 , as compared to the corresponding periods in 2021. The increases in broadband revenue were driven by growth in fiber, offset somewhat by continued declines in copper. The other data revenues declines were the result of an ongoing migration of our carrier customers from legacy technology circuits to lower priced ethernet circuits. The period over period decrease in data and Internet services revenue continued to improve for the three and six months endedJune 30, 2022 , as a result of the Company's initiatives.
Voice Services
The Company provides 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 six months ended
Voice services revenue, June 30, 2021 $ 443 $ 930 Change in other voice services revenue (43) (87) Impact of fresh start accounting (19) (76) Voice services revenue, June 30, 2022 $ 381 $ 767 Upon implementation of fresh start accounting policies, Frontier is recording both revenue and expense related toUniversal Service Fund ("USF") surcharges on a net basis, as opposed to recording each on a gross basis prior to emergence. These declines were primarily due to net losses in business and consumer customers in addition to fewer customers bundling voice services with broadband.
Video Services
Video services include revenues generated from traditional television (TV)
services provided directly to consumer customers as well as satellite TV
services provide through Dish. Video services also includes pay-per-view
revenues, video on demand, equipment rentals, and video advertising. The Company
has made the strategic decision to limit sales of new traditional TV services,
focusing on our broadband products and OTT video options. We are partnering with
OTT video providers and expect this to grow as OTT options are offered with our
broadband products.
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($ in millions) For the three months ended Forthe six months ended
Video services revenue, June 30, 2021 $ 159 $ 328 Change in video services revenue (23) (49) Impact of fresh start accounting (2) (8) Video services revenue, June 30, 2022 $ 134 $ 271 Under our fresh start accounting policies, Frontier is recording both revenue and 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 theFCC or state agencies. ($ in millions) For the three months ended For
the six months ended
Other revenue, June 30, 2021 $ 92 $ 187 Change in other services revenue (14) (32) Impact of fresh start accounting 2 8 Other revenue, June 30, 2022 $ 80 $ 163 Under our fresh start accounting policies, Frontier has classified the provision for bad debt as expense, rather than a reduction of revenue as it was recorded prior to emergence, resulting in increases to other customer revenues of$4 million and$14 million for the three and six months endedJune 30, 2022 , respectively. Additionally, the accumulated balances in deferred installation fee revenue were eliminated as part of fresh start accounting, which has resulted in a$2 million and$6 million decline in revenue recognized for the three and six months endedJune 30, 2022 , as compared to the prior year periods. After adjusting for the impacts of these policy changes, other customer services revenue declined$14 million and$32 million for the three and six months endedJune 30, 2022 , respectively. These decreases were primarily driven by reductions in CPE sales, late payment fees, early termination fees and reconnect fees.
Subsidy and other revenue
Subsidy and other revenue decreased$66 million and$144 million for the three and six months endedJune 30, 2022 , compared to the prior year period, primarily due to the CAF II program which was completed in 2021. ($ in millions) For the three months ended For
the six months ended
Subsidy and other revenue, June 30, 2021 $ 83 $ 166 Change in CAF II subsidies (78) (157) Change in RDOF, subsidy, and other services revenue 11 8 Impact of fresh start accounting 1 5 Subsidy and other revenue, June 30, 2022 $ 17 $ 22 Upon implementation of new fresh start accounting policies, certain governmental grants that were historically presented on a net basis as part of capital expenditures, are presented on a gross basis and included in subsidy, resulting in increases to Subsidy and other revenue of$1 million and$5 million for the three and six months endedJune 30, 2022 . 51 -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION (Continued)FRONTIER COMMUNICATIONS PARENT , INC. AND SUBSIDIARIES (Unaudited) OPERATING EXPENSES Successor Non-GAAP Combined For the three months For the three months ($ in millions) ended June 30, ended June 30, ($) % 2022 2021 Variance Variance Operating expenses: Cost of Service $ 546 $ 606 $ (60) (10) % Selling, general and administrative expenses 427 398 29 7 % Depreciation and amortization 290 298 (8) (3) % Restructuring costs and other charges 30 16 14 88 % Total operating expenses $ 1,293 $ 1,318 $ (25) (2) % Non-GAAP Successor Combined For the six For the six months months ($ in millions) ended June 30, ended June 30, ($) % 2022 2021 Variance Variance Operating expenses: Cost of Service $ 1,099$ 1,226 $ (127) (10) % Selling, general and administrative expenses 862 806 56 7 % Depreciation and amortization 574 685 (111) (16) % Restructuring costs and other charges 84 18 66 367 % Total operating expenses $ 2,619$ 2,735 $ (116) (4) % Cost of 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, cost of service decreased by$21 million and$84 million for the three and six months endedJune 30, 2022 , respectively. After adjusting for this fresh start change, cost of service declined$39 million and$43 million for the three and six months endedJune 30, 2022 , respectively. For the three and six months endedJune 30, 2022 , 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. These decreases more than offset higher fuel and energy prices, and outside service rate increases resulting from increased inflation.
Selling, general, and administrative expenses
Selling, general, and administrative expenses (SG&A expenses) include the salaries, wages and related benefits and the related costs of corporate and sales personnel, travel, insurance, non-network related rent, advertising, and other administrative expenses.
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$4 million and$14 million higher for the three and six months endedJune 30, 2022 , respectively. Additionally, as a result of fresh start accounting policy changes, we have expensed$4 million and$17 million of certain administrative items that were previously capitalized by the predecessor for the three and six months endedJune 30, 2022 . After adjusting for the fresh start impacts, SG&A expenses increased by$21 million and$25 million for the three and six months endedJune 30, 2022 . This increase was primarily a result of transformational investments that are non-recurring such as rebranding costs, higher professional services and recruiting fees, partially offset by a non-recurring$8 million sales tax refund in the current quarter. 52 --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (Continued)
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Pension and Other Postretirement Employee Benefit (OPEB) costs
Frontier allocates certain pension/OPEB expense to Cost of service and SG&A expenses. Total pension and OPEB service costs were as follows:
Successor Non-GAAP Combined
For the three For the three
months ended months ended
($ in millions) June 30, 2022 June 30, 2021
Total pension/OPEB expenses $ 23 $ 26
Less: costs capitalized into capital
expenditures (5) (5)
Net pension/OPEB costs $ 18 $ 21
Successor Non-GAAP Combined
For the six months For the six months
ended June 30, ended June 30,
($ in millions) 2022 2021Total pension/OPEB expenses $ 48 $ 55 Less: costs capitalized into capital expenditures (11) (11) Net pension/OPEB costs $ 37 $ 44
Depreciation and amortization
As a result of fresh start accounting, both Frontier's fixed assets and intangible assets were adjusted to fair value as of the Effective Date. These changes, which decreased the carrying value of its fixed assets and increased the carrying value of its intangible assets. For the three and six months endedJune 30, 2022 , the decreased depreciation and amortization expense was driven by lower depreciation expense as a result of reduced fixed asset bases following the fresh start adjustment noted above.
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 Emergence Date, workforce reductions, transformation initiatives, lease impairment costs, and other restructuring expenses. For the three months endedJune 30, 2022 , restructuring costs and other charges increased due to,$26 million of severance and employee costs resulting from workforce reductions, and$4 million of costs related to other restructuring activities. For the six months endedJune 30, 2022 , restructuring costs and other charges increased due to$44 million of lease impairment costs from the strategic exit of certain facilities,$32 million of severance and employee costs resulting from workforce reductions, and$8 million of costs related to other restructuring activities. Of the$32 million in severance and employee costs, approximately$26 million related to the second quarter of 2022, as a result of larger workforce reductions. ? 53
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
(Unaudited)
OTHER NON-OPERATING INCOME AND EXPENSE
Non-GAAP
Successor Successor Predecessor Combined
For the three For the two For the three
months ended months ended For the one month months ended
June 30, June 30, ended April 30, June 30, $ %
($ in millions) 2022 2021 2021 2021 Variance Variance
Investment and other
income (loss), net $ 122 $ (2) $ (1) $ (3) $ 125 NM
Reorganization items,
net $ - $ - $ 4,196 $ 4,196 $ (4,196) (100) %
Interest expense $ (118) $ (62) $ (29) $ (91) $ (27) 30 %
Income tax expense
(benefit) $ 69 $ 43 $ (223) $ (180) $ 249 (138) %
NM - Not meaningful
Non-GAAP
Successor Successor Predecessor Combined
For the six For the two For the four For the six
months ended months ended months ended April months ended
June 30, June 30, 30, June 30, $ %
($ in millions) 2022 2021 2021 2021 Variance Variance
Investment and other
income (loss), net $ 199 $ (2) $ 1 $ (1) $ 200 NM
Reorganization items,
net $ - $ - $ 4,171 $ 4,171 $ (4,171) (100) %
Interest expense $ (221) $ (62) $ (118) $ (180) $ (41) 23 %
Income tax expense
(benefit) $ 99 $ 43 $ (136) $ (93) $ 192 (206) %
NM - Not meaningful
Investment and other income, net
Investment and other income, net increased by$125 million and$200 million for the three and six months endedJune 30, 2022 , driven by a remeasurement gain related to our other postretirement benefit obligation of$96 million and$150 million . This was partially offset by an increase of$10 million and$31 million non-operating pension income, as a result of actuarial losses that are no longer being amortized from accumulated other comprehensive income (loss).
Reorganization items, net
The Company has incurred costs associated with the reorganization, primarily the write-off of certain debt issuance costs and net discounts, financing costs, and legal and professional fees and fresh start accounting adjustments. These include expenses incurred subsequent to the Petition Date. During the three and six months endedJune 30, 2021 , Frontier recognized$4,196 million and$4,171 million in reorganization items associated with the restructuring of our balance sheet. Interest expense For the three and six months endedJune 30, 2022 , interest expense increased$27 million and$41 million , as compared to the same period in 2021. The increase in interest expense was primarily driven by a higher debt balance, partially offset by lower interest rates. Income tax expense During the three and six months endedJune 30, 2022 , the successor recorded income tax expense of$69 million and$99 million on pre-tax income of$170 million and$265 million , respectively. During the four months endedApril 30, 2021 , the Predecessor recorded an income tax benefit of$136 million on pre-tax income of$4,405 million . During the two months endedJune 30, 2021 , the successor recorded income tax expense of$43 million on pre-tax income 54 --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
(Unaudited)
of $142 million . Our effective tax rates for the three and six months ended June
30, 2022 were 40.6% and 37.4%, 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 rates for the four
months ended April 30, 2021 and the two months ended June 30, 2021 were (3.1%)
and 30.3%, respectively.
?
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
(Unaudited)
(b) Liquidity and Capital Resources
As ofJune 30, 2022 , we had liquidity of approximately$3,745 million , comprised of cash and cash equivalents of$678 million , short-term investments consisting of$2,300 million of term deposits earning interest in excess of traditional bank deposit rates, and placed with banks with A-1/P-1 or equivalent credit quality, and undrawn revolving credit facility of$767 million .
Analysis of Cash Flows
As ofJune 30, 2022 , we had unrestricted cash and cash equivalents aggregating$678 million . For the six months endedJune 30, 2022 , 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. OnMay 12, 2022 , our consolidated subsidiaryFrontier 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 ofJune 30, 2022 , we had a working capital surplus of$1,723 million compared to a$1,237 million surplus atDecember 31, 2021 . The primary driver for the change in the working capital surplus atJune 30, 2022 was an increase in short-term investments, accounts payable and accrued interest. Cash Flows from Operating Activities Cash flows provided from operating activities increased$1,031 million to$757 million for the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 . The overall increase in operating cash flows was primarily the result of changes in working capital. We paid$9 million in net cash taxes during the six months endedJune 30, 2022 and$33 million in Non-GAAP combined net cash taxes during the Non-GAAP combined six months endedJune 30, 2021 . Cash Flows from Investing Activities Cash flows used in investing activities were$3,385 million for the six months endedJune 30, 2022 , compared to Non-GAAP combined cash flows used in investing activities of$759 million for the corresponding period in 2021. Given the long-term nature of our fiber build, as ofJune 30, 2022 , we have invested$2,300 million cash in short-term investments to improve interest income, while preserving funding flexibility.
Capital Expenditures
For the six months endedJune 30, 2022 and 2021, our capital expenditures were$1,088 million and$769 million , respectively. Approximately 58% of our capital expenditures in the second quarter of 2022 related to fiber network projects. The driver for the increase in capital expenditure was increased spending for fiber upgrades to our existing copper network, a trend that we expect to continue as we execute our strategy of investing in our fiber network. In addition to the capital expenditures noted above, we had a balance of$250 million in "Accounts payable" on our consolidated balance sheet related to capital expenditures that had not been paid as ofJune 30, 2022 . Cash Flows from Financing Activities
Cash flows used by financing activities increased
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
(Unaudited)
lease obligations payments, long-term debt principal payments and other costs.
Capital Resources
Our primary anticipated uses of liquidity are to fund the costs of operations, working capital and capital expenditures and to fund interest payments on our long-term debt. Our primary sources of liquidity are cash flows from operations, cash on hand and borrowing capacity under our$900 million Revolving Facility (as reduced by$133 million of Letters of Credit.) OnMay 12, 2022 ,Frontier Holdings entered into an amendment to its Revolving Facility which, among other things, increased the Revolving Facility by an additional$275 million , to a total of$900 million in aggregate principal amount of revolving credit commitments. Our Amended and Restated Credit Agreement, including our$1,456 million Term Loan Facility and$900 million Revolving Facility, and the indentures governing our outstanding secured First Lien Notes and Second Lien Notes are described in detail in Note 8 to the financial statements contained in Part I of this report.
During the six months ended
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 ofJune 30, 2022 , 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. A number of factors, including but not limited to, losses of customers, pricing pressure from increased competition, lower subsidy and switched access revenues, and the impact of economic conditions may negatively affect our cash generated from operations.
Net Operating Losses
In connection with the Company's emergence from bankruptcy, we consummated a taxable disposition of substantially all of the assets and/or subsidiary stock of the Company. Certain of the NOLs were utilized in offsetting gains from the disposition, certain of the NOLS were extinguished as part of attribute reduction and certain subsidiary NOLS were carried over. Under Section 338(h)(10) of the Code, Predecessor and Successor made elections to step-up tax basis of certain subsidiary assets. Such Section 338(h)(10) elections will generate depreciation and amortization expense going forward, which may result in net operating losses on a go forward basis. Such net operating losses would be carried forward indefinitely but would be subject to an 80% limitation onU.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.
Contractual Obligations
Other than as disclosed elsewhere in this report with respect to the filing of the Chapter 11 Cases, the acceleration of substantially all of our debt, and the application of fresh start accounting, there have been no material changes outside the ordinary course of business to the information provided with respect to our contractual obligations, including indebtedness and purchase and lease obligations, as disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 57
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
(Unaudited)
Future Commitments
Frontier participated in theFCC 's CAF Phase II program, which was intended to provide long-term support for broadband in high-cost unserved or underserved areas. We accepted theFCC 's CAF Phase II offer in 25 states, which provided$313 million in annual support through 2021, to make available 10 Mbps downstream/1 Mbps upstream broadband service to households across some of the 25 states where we operate. The deployment deadline for CAF Phase II wasDecember 31, 2021 , and final review and audit of households is not complete. To 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 otherFCC CAF Phase II requirements, Frontier will 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 probable and reasonably estimated, and we do not expect that any potential penalties, if ultimately incurred, will be material in comparison to the established accrual. OnJanuary 30, 2020 , theFCC adopted an order establishing RDOF, a competitive reverse auction to provide support to serve high cost areas. TheFCC announced the results of its RDOF Phase I auction onDecember 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 , andWest Virginia ). TheFCC approved Frontier's Long Form application inMarch 2022 and Frontier began receiving funding in the second quarter of 2022. Frontier will be required to complete the buildout to these locations byDecember 31, 2028 , with interim target milestones over this period.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires management to make estimates and assumptions. There are inherent uncertainties with respect to such estimates and assumptions; accordingly, it is possible that actual results could differ from those estimates and changes to estimates could occur in the near term. These critical accounting estimates have been reviewed with the Audit Committee of our Board of Directors.
There have been no material changes to our critical accounting policies and
estimates from the information provided in Item 7. "Management Discussion and
Analysis of Financial Condition and Results of Operations" included in our
Annual Report on Form 10-K for the year ended
Recent Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements included in Part I of this report for additional information related to recent accounting literature.
Regulatory Developments
Connect America Fund ("CAF")/Rural Digital Opportunity Fund ("RDOF"): In 2015, Frontier accepted theFCC 's CAF Phase II offer in 29 states, which provided$332 million in annual support and in return the Company is committed to make broadband with at least 10 Mbps downstream/1 Mbps upstream speeds available to approximately 774,000 high-cost unserved or underserved locations within its footprint. This amount included approximately 41,000 locations and$19 million in annual support related to the four states of the Northwest Operations, which were disposed onMay 1, 2020 . The deployment deadline for the CAF phase II program wasDecember 31, 2021 and funding ended on that date. Thereafter, theFCC has initiated a review of carriers'CAF II program completion data, and if theFCC determines that the Company did not satisfy certain applicable CAF Phase II requirements, Frontier could be required to return a portion of the funds previously received and may be subject to certain other requirements and obligations. OnJanuary 30, 2020 , theFCC adopted an order establishing RDOF, a competitive reverse auction to provide support to serve high cost areas. TheFCC announced the results of its RDOF Phase I auction onDecember 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 , 58 --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
(Unaudited)
Illinois , New York , Pennsylvania , Texas , and West Virginia ). The FCC approved
Frontier's Long Form application in March 2022 and Frontier began receiving
funding in the second quarter of 2022. Frontier will be required to complete the
buildout to these locations by December 31, 2028 , with interim target milestones
over this period.
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.
COVID-19 Initiatives: The Federal government has undertaken several measures to
address the ongoing impacts of the COVID-19 pandemic and to facilitate enhanced
access to high speed broadband, including through several new funding programs.
As these large amounts of federal funding flow through the broadband ecosystem,
we will evaluate and pursue funding opportunities that make sense for our
business. Because of the severity, magnitude and duration of the COVID-19
pandemic and its economic consequences are uncertain and rapidly changing, the
impact of the crisis and the governmental responses to the crisis on our
business in 2022 and beyond remains uncertain and difficult to predict.
Current and Potential Internet Regulatory Obligations: On October 1, 2019 , the
D.C. Circuit Court largely upheld the FCC decision in its 2018 Restoring
Internet Freedom Order to reclassify broadband as an "information service."
However, the Court invalidated the FCC 's preemption of a state's ability to pass
their own network neutrality rules and remanded back to the FCC other parts of
the 2018 Order. California's network neutrality provisions have gone into
effect. It is unclear whether pending or future appeals 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.
Privacy: Privacy-related legislation has been considered in a number of states.
Legislative and regulatory action could result in 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 consumers the right to know
what personal information is being collected about them, and whether and to whom
it is sold or disclosed, and to access and request deletion of this information.
Subject to certain exceptions, it also gives consumers the right to opt-out of
the sale of personal information. The law applies the same rules to all
companies that collect consumer information. On May 10, 2022 , the state of
Connecticut enacted privacy legislation that became effective on July 1, 2022 .
Frontier's privacy protections are consistent with this new legislation.
Video Programming: Federal, state, and local governments extensively regulate
the video services industry. Our linear video services are subject to, among
other things: subscriber privacy regulations; requirements that we carry a 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.
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.
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
(Unaudited)
Our agreement with Verizon for use of the FiOS brand and trademark in markets
acquired from them expired on March 31, 2021 and was not renewed or extended.
Frontier rebranded our related data and video services as Frontier FiberOptic
Internet and Frontier TV, respectively.
Environmental Regulation: The 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, 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.
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