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 14,746 employees, operating in 25 states as ofSeptember 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 third quarter of 2022:
?We built fiber to approximately 351,000 locations, resulting in approximately
4.8 million total locations passed with fiber as of
?We added 66,000 fiber broadband customer net additions, resulting in fiber broadband customer growth of 15.8% versus 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%.
?Fiber broadband customer net additions continued to outpace copper broadband customer net losses, resulting in 4,000 total broadband customer net additions.
?We realized$244 million of gross annualized cost savings as ofSeptember 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. During the third quarter 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, 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 condition 38 --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (Continued)
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and results of operations. Through
Financial Overview
We reported operating income of
We reported operating income of$456 million and Non-GAAP operating income of$841 million for the nine months endedSeptember 30, 2022 and 2021, respectively, a decrease of$385 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 results decreased primarily due to decreases in subsidy and other revenue, voice and video services and lease impairment charges, partially offset by a reduction in cost of services and 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 periods 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 nine months ended
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
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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 3,142 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) % 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.
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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
$0.72 , or 1%, to $83.05 for the three months ended September 30, 2022 , compared
to the prior year period; 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 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 fiber
broadband penetration of 15% and 20% within 12 months and 25% - 30% after 24
months.
Fiber Broadband Customers
We have initiated an investment strategy 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, 2022 represents the thirteenth
consecutive quarter of positive consumer fiber net adds. For the quarter ended
September 30, 2022 , Frontier added 64,000 consumer fiber broadband customers
compared to 29,000 for the three months ended September 30, 2021 . Customers who
migrated from our copper base constituted a minor portion of these consumer
fiber broadband customer net additions in the nine months ended September 30,
2022 .
For the three and nine months ended September 30, 2022 , Frontier added 2,000 and
8,000 business fiber broadband customers compared to zero net additions for both
the three and nine months ended September 30, 2021 .
Our focus on expanding and improving our fiber network is contributing to
healthy customer retention. Our average monthly consumer fiber broadband churn
was 1.60% for the three months ended September 30, 2022 , compared to 1.56% for
the prior year period. Improvements in customer churn due to increased focus at
key customer touchpoints such as installation, first bill, end of promotion
periods, and improved retention activities associated with inflation-related
pricing actions, were offset by increases in involuntary related churn.
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 .
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
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Copper Broadband Customers
For the three months endedSeptember 30, 2022 , Frontier lost 58,000 consumer copper broadband customers compared to a loss of 33,000 for the three months endedSeptember 30, 2021 .
Consumer copper broadband customer losses were 129,000 for the nine months ended
For the three months endedSeptember 30, 2022 , Frontier lost 4,000 business copper broadband customers compared to a loss of 4,000 in the three months endedSeptember 30, 2021 . Business copper broadband customers losses were 13,000 in the nine months endedSeptember 30, 2022 , compared to a loss of 14,000 in the nine months endedSeptember 30, 2021 . Our average monthly consumer copper broadband churn was 2.02% for the three months endedSeptember 30, 2022 , compared to 1.89% in the three months endedSeptember 30, 2021 . Consumer copper broadband churn was 1.76% for the nine months endedSeptember 30, 2022 , compared to 1.73% in the nine months endedSeptember 30, 2021 . The increase in consumer copper broadband churn was driven by the impact of copper to fiber migration activities in newly built fiber areas, the rationalization of our copper acquisition strategy, and adverse weather. ? 42
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT , INC. AND SUBSIDIARIES
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Financial Results
For the three months For the three months
ended September 30, 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) %
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT , INC. AND SUBSIDIARIES
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Successor Predecessor Non-GAAP Combined
For the nine For the five For the four For the nine
months ended months ended months ended months ended
September 30, September 30, April 30, 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) %
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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:
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) %
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) %
(1)Includes lease revenue of $15 million and $16 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, 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 by 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, we are 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
For the three months For the three months
ended September 30, 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 For the nine months
ended September 30, 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) % (1)Includes lease revenue of$15 million and$16 million for the three months endedSeptember 30, 2022 and 2021, respectively. Lease revenue was$48 million and$47 million for the nine months endedSeptember 30, 2022 and 2021, respectively. We conduct business with a range of consumer, business and wholesale customers and we generate both recurring and non-recurring revenues. Recurring revenues are primarily billed at fixed recurring rates, with some services billed based on usage. Revenue recognition is not dependent upon significant judgments by management, with the exception of a determination of the provision for expected credit losses. ? 46
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PART I. FINANCIAL INFORMATION (Continued)
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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 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
?We lost 23,000 and 92,000 consumer customers in the nine months ended
?Our loss in 2022 includes net gains of consumer broadband customers of 6,000
and 37,000 for the three and nine months ended
?Our improvement in consumer broadband customers is a direct result of our fiber initiatives.
For the three and nine months ended
?We experienced 2% decline in consumer revenues for the three months endedSeptember 30, 2022 , driven by a 1% decrease in ARPC, as compared to the three months endedSeptember 30, 2021 . For the nine months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2022 compared to the three and nine months endedSeptember 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% and 3% decline in consumer copper broadband revenues for the three and nine months endedSeptember 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 nine months endedSeptember 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 nine months endedSeptember 30, 2022 . 47 --------------------------------------------------------------------------------
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Revenue by product and service type was as follows:
For the three months For the three months
ended September 30 , 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 For the nine months ended September 30, 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) % (1)Includes lease revenue of$15 million and$16 million for the three months endedSeptember 30, 2022 and 2021, respectively. Lease revenue was$48 million and$47 million for the nine months endedSeptember 30, 2022 and 2021, respectively.
We categorize our products, services, and other revenues into the following five categories:
Data and Internet Services
We provide data and Internet services to our consumer, business and wholesale customers. Data and Internet services consist of fiber broadband services, copper broadband services and network access revenues.
Our fiber expansion strategy is expected to positively impact data and Internet
services. This network expansion will provide faster, symmetrical broadband
speeds and provide customer and revenue growth opportunities for fiber broadband
and certain network access products like ethernet. This initiative will also
create an opportunity for us to provide more fiber-based services to our
customers.
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($ in millions) For the three months ended Forthe 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
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 a 6% and 5% improvement in our broadband revenue offset by declines in other data revenue for the three and nine months endedSeptember 30, 2022 , respectively, 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 nine months endedSeptember 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 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 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 provided 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 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 theFCC 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 endedSeptember 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 endedSeptember 30, 2022 , as compared to the prior year periods. After adjusting for the impacts of these policy changes, other customer services revenue declined$49 million for the nine months endedSeptember 30, 2022 . These decreases were primarily driven by reductions in CPE sales, late payment fees, early termination fees and reconnect fees.
Subsidy and other revenue
Subsidy and other revenue decreased for the three and nine months ended
($ 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 subsidy and other revenue of
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PART I. FINANCIAL INFORMATION (Continued)
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OPERATING EXPENSES
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
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) % 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) % 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$84 million for the nine months endedSeptember 30, 2022 . After adjusting for this fresh start change, cost of service declined$89 million for the nine months endedSeptember 30, 2022 . For the three and nine months endedSeptember 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$14 million higher for the nine months endedSeptember 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 endedSeptember 30, 2022 . After adjusting for the fresh start impacts, SG&A expenses increased by$35 million for the nine months endedSeptember 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$11 million sales tax refund in 2022. 51 --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
(Unaudited)
Pension and Other Postretirement Employee Benefit (OPEB) costs
Frontier allocates certain pension/OPEB expense to Cost of service and SG&A expenses. Total pension and OPEB service costs were as follows:
For the three months For the three months
ended September 30, ended September 30,
($ in millions) 2022 2021
Total pension/OPEB expenses $ 17 $ 24
Less: costs capitalized into capital
expenditures (4) (6)
Net pension/OPEB costs $ 13 $ 18
Successor Non-GAAP Combined
For the nine months For the nine months
ended September 30, ended September 30,
($ in millions) 2022 2021Total pension/OPEB expenses $ 65 $ 79 Less: costs capitalized into capital expenditures (15) (17) Net pension/OPEB costs $ 50 $ 62
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 decreased the carrying value of its fixed assets and increased the carrying value of its intangible assets. For the three and nine months endedSeptember 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 Effective Date, workforce reductions, transformation initiatives, lease impairment costs, and other restructuring expenses.
For the three months ended
For the nine months endedSeptember 30, 2022 , restructuring costs and other charges increased due to$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. ? 52
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT , INC. AND SUBSIDIARIES
(Unaudited)
OTHER NON-OPERATING INCOME AND EXPENSE
For the three For the three
months ended months ended
September 30, 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 %
Non-GAAP
Successor Predecessor Combined
For the nine For the five For the four For the nine
months ended months ended months ended months ended
September 30, September 30, April 30, 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)
Income tax expense
(benefit) $ 174 $ 74$ (136) $ (62)$ 236 (381) % NM - Not meaningful
Investment and other income (loss), net
Investment and other income, net increased by$248 million and$448 million for the three and nine months endedSeptember 30, 2022 , respectively. These increases were driven by remeasurement gains for our other postretirement benefit obligation of$84 million for the three months endedSeptember 30, 2022 and$234 million for the nine months endedSeptember 30, 2022 . Additionally, we recorded a remeasurement gain related to our pension plan of$91 million during the three months endedSeptember 30, 2022 .
We had additional increases as a result of favorable changes in our
non-operating pension and other postretirement costs of
Pension settlement
During the nine months endedSeptember 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 endedSeptember 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 endedSeptember 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
53
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
(Unaudited)
million, as compared to the same periods in 2021. 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 months endedSeptember 30, 2022 , we recorded income tax expense of$75 million on pre-tax income of$195 million . During the three months endedSeptember 30, 2021 , we recorded income tax expense of$31 million on pretax income of$157 million . During the nine months endedSeptember 30, 2022 we recorded income tax expense of$174 million on pre-tax income of$460 million . During the five months endedSeptember 30, 2021 , we recorded income tax expense of$74 million on pre-tax income of$299 million . During the four months endedApril 30, 2021 , we recorded an income tax benefit of$136 million on pre-tax income of$4,405 million . Our effective tax rates for the three and nine months endedSeptember 30, 2022 were 38.5% 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 rates for the five months endedSeptember 30, 2021 and the four months endedApril 30, 2021 were 24.7% and (3.1%), respectively. ? 54
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
(Unaudited)
(b) Liquidity and Capital Resources
As ofSeptember 30, 2022 , we had liquidity of approximately$3,322 million , comprised of cash and cash equivalents of$230 million ,$2,325 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, and our available capacity on our undrawn revolving credit facility of$767 million .
Analysis of Cash Flows
As ofSeptember 30, 2022 , we had unrestricted cash and cash equivalents aggregating$230 million . For the nine months endedSeptember 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 ofSeptember 30, 2022 , we had a working capital surplus of$1,101 million compared to a$1,237 million surplus atDecember 31, 2021 . The primary driver for the change in the working capital surplus atSeptember 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$712 million to$1,041 million for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . The overall increase in operating cash flows was primarily the result of changes in working capital. We paid$7 million in net cash taxes during the nine months endedSeptember 30, 2022 and$36 million in Non-GAAP combined net cash taxes during the Non-GAAP combined nine months endedSeptember 30, 2021 . Cash Flows from Investing Activities Cash flows used in investing activities were$4,178 million for the nine months endedSeptember 30, 2022 , compared to Non-GAAP combined cash flows used in investing activities of$1,135 million for the corresponding period in 2021. Given the long-term nature of our fiber build, as ofSeptember 30, 2022 , we have invested$2,325 million cash in short-term investments to improve interest income, while preserving funding flexibility.
Capital Expenditures
For the nine months endedSeptember 30, 2022 and 2021, our capital expenditures were$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 strategy of investing in our fiber network. In addition to the capital expenditures noted above, we had a balance of$431 million in "Accounts payable" on our consolidated balance sheet related to capital expenditures that had not been paid as ofSeptember 30, 2022 . Cash Flows from Financing Activities Cash flows provided from financing activities increased$1,039 million to$1,219 million for the nine months endedSeptember 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 55 --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
(Unaudited)
by financing costs, 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 revolver 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, and provided that the Revolving Facility be amended 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 ofJune 2023 . We do not expect this transition to materially impact the amount of interest payments under the Term Loan Facility. Our Amended and Restated Credit Agreement, including our$1,453 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 nine months endedSeptember 30, 2022 , we paid$286 million of cash interest. Our long-term debt is described in detail in Note 8 to the financial statements contained in Part I of this report. 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 ofSeptember 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 Frontier'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,
56
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PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
(Unaudited)
including indebtedness and purchase and lease obligations, as disclosed in our
Annual Report on Form 10-K for the year ended
Future Commitments
See "Regulatory Developments" immediately below for information regarding
Frontier's known and potential future commitments related to our participation
in the
Regulatory Developments
Connect America Fund ("CAF")/Rural Digital Opportunity Fund ("RDOF"): In 2015, Frontier accepted theFCC '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 some of the 25 states where we operate. The deployment deadline 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 other 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. OnJanuary 30, 2020 , theFCC adopted an order establishing RDOF, a competitive reverse auction to provide support to serve high cost areas. Under theFCC 's 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 , andWest Virginia ). Frontier began receiving funding under RDOF in the second quarter of 2022 and will be required to complete the buildout to these locations byDecember 31, 2028 , with interim target milestones over this period. As part of its RDOF order, theFCC 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: OnOctober 1, 2019 , theD.C. Circuit Court largely upheld theFCC decision in its 2018 Restoring InternetFreedom Order to reclassify broadband as an "information service." However, the Court invalidated theFCC 's preemption of a state's ability to pass their own network neutrality rules and remanded back to theFCC 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. OnJune 28, 2018 , the state ofCalifornia enacted comprehensive privacy legislation that, effective as ofJanuary 1, 2020 , givesCalifornia 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 57 --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (Continued)
FRONTIER COMMUNICATIONS PARENT, INC. AND SUBSIDIARIES
(Unaudited)
consumer information. On
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 includingCalifornia ,Connecticut ,Florida ,Indiana , andTexas 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. Our agreement with Verizon for use of the FiOS brand and trademark in markets acquired from them expired onMarch 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 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.
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
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.
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