Q2 2015 Form 10-Q

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C.  20549

 

FORM 10-Q

(Mark One)

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

 

or

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________to__________

 

Commission file number:  001-11001

 

FRONTIER COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

06-0619596

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

 

 

401 Merritt 7

 

 

Norwalk, Connecticut  

 

06851

(Address of principal executive offices)

 

(Zip Code)

 

 

 

 

(203) 614-5600

(Registrant's telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  X       No ___

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes  X       No ___

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer            Accelerated filer            Non-accelerated filer          Smaller reporting company 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes           No X   

 

The number of shares outstanding of the registrant’s Common Stock as of July 31,  2015 was 1,168,207,000

 


 

 

 

 

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

Index

 

 

 

 

 

Page No.

Part I.  Financial Information (Unaudited)

 

 

 

Item 1.  Financial Statements

 

 

 

Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014

2

 

 

Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2014

3

 

 

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended

 

June 30, 2015 and 2014

3

 

 

Consolidated Statement of Equity for the six months ended June 30, 2015

4

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014

5

 

 

Notes to Consolidated Financial Statements

6

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

37

 

 

Item 4.  Controls and Procedures

38

 

 

Part II.  Other Information

 

 

 

Item 1.  Legal Proceedings

39

 

 

Item 1A.  Risk Factors

39

 

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

Item 4.  Mine Safety Disclosure

39

 

 

Item 6.  Exhibits

40

 

 

Signature

41

 

 

 

 

 

 

1

 


 

 

 

PART I.  FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

($ in millions and shares in thousands, except for per-share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

June 30, 2015

 

December 31, 2014

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,246 

 

$

682 

Accounts receivable, less allowances of $59 and $72, respectively

 

 

541 

 

 

614 

Restricted cash

 

 

1,840 

 

 

 -

Prepaid expenses

 

 

68 

 

 

61 

Income taxes and other current assets

 

 

393 

 

 

129 

Total current assets

 

 

4,088 

 

 

1,486 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

8,432 

 

 

8,566 

Goodwill

 

 

7,234 

 

 

7,205 

Other intangibles, net

 

 

1,300 

 

 

1,500 

Other assets

 

 

232 

 

 

217 

Total assets

 

$

21,286 

 

$

18,974 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Long-term debt due within one year

 

$

97 

 

$

298 

Accounts payable

 

 

324 

 

 

379 

Advanced billings

 

 

170 

 

 

179 

Accrued other taxes

 

 

70 

 

 

80 

Accrued interest

 

 

220 

 

 

214 

Pension and other postretirement benefits

 

 

127 

 

 

124 

Other current liabilities

 

 

400 

 

 

238 

Total current liabilities

 

 

1,408 

 

 

1,512 

 

 

 

 

 

 

 

Deferred income taxes

 

 

3,060 

 

 

2,939 

Pension and other postretirement benefits

 

 

1,122 

 

 

1,141 

Other liabilities

 

 

208 

 

 

238 

Long-term debt

 

 

9,440 

 

 

9,486 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Preferred stock, $0.01 par value (50,000 authorized shares,

 

 

 

 

 

 

11.125%, Series A, 19,250 shares issued and outstanding

 

 

 

 

 

 

at June 30, 2015)

 

 

 -

 

 

 -

Common stock, $0.25 par value (1,750,000 authorized shares, 1,192,986

 

 

 

 

 

 

and 1,027,986 issued and 1,168,266 and 1,002,469 outstanding,

 

 

 

 

 

 

respectively, at June 30, 2015 and December 31, 2014)

 

 

298 

 

 

257 

Additional paid-in capital

 

 

6,394 

 

 

3,990 

Retained earnings

 

 

30 

 

 

109 

Accumulated other comprehensive loss, net of tax

 

 

(396)

 

 

(404)

Treasury stock

 

 

(278)

 

 

(294)

Total equity

 

 

6,048 

 

 

3,658 

Total liabilities and equity

 

$

21,286 

 

$

18,974 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

2

 


 

 

PART I.  FINANCIAL INFORMATION (Continued)

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

($ in millions, except for per-share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

June 30,

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,368 

 

$

1,147 

 

$

2,739 

 

$

2,301 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Network access expenses

 

 

161 

 

 

106 

 

 

316 

 

 

213 

Network related expenses

 

 

313 

 

 

259 

 

 

638 

 

 

522 

Selling, general and administrative expenses

 

 

331 

 

 

265 

 

 

661 

 

 

531 

Depreciation and amortization

 

 

335 

 

 

274 

 

 

676 

 

 

555 

Acquisition and integration costs

 

 

35 

 

 

19 

 

 

92 

 

 

30 

Total operating expenses

 

 

1,175 

 

 

923 

 

 

2,383 

 

 

1,851 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

193 

 

 

224 

 

 

356 

 

 

450 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment and other income, net

 

 

 

 

 -

 

 

 

 

Interest expense

 

 

260 

 

 

167 

 

 

505 

 

 

338 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

(66)

 

 

57 

 

 

(147)

 

 

113 

Income tax expense (benefit)

 

 

(38)

 

 

19 

 

 

(68)

 

 

36 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(28)

 

$

38 

 

$

(79)

 

$

77 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per share

 

$

(0.03)

 

$

0.04 

 

$

(0.08)

 

$

0.08 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

($ in millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

For the six months ended

 

 

June 30,

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(28)

 

$

38 

 

$

(79)

 

$

77 

Other comprehensive income, net of tax (see Note 13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(23)

 

$

41 

 

$

(71)

 

$

83 

 

 

 

 

 

 

 

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

3

 


 

 

PART I.  FINANCIAL INFORMATION (Continued)

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2015

($ in millions and shares in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury Common Stock

 

Total

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Loss

 

Shares

 

Amount

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 1, 2015

 

 -

 

$

 -

 

1,027,986 

 

$

257 

 

$

3,990 

 

$

109 

 

$

(404)

 

(25,517)

 

$

(294)

 

$

3,658 

Issuance of common stock

 

 -

 

 

 -

 

165,000 

 

 

41 

 

 

758 

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

799 

Issuance of preferred stock

 

19,250 

 

 

 -

 

 -

 

 

 -

 

 

1,866 

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

1,866 

Stock plans

 

 -

 

 

 -

 

 -

 

 

 -

 

 

(9)

 

 

 -

 

 

 -

 

797 

 

 

16 

 

 

Dividends on common stock

 

 -

 

 

 -

 

 -

 

 

 -

 

 

(211)

 

 

 -

 

 

 -

 

 -

 

 

 -

 

 

(211)

Net loss

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

(79)

 

 

 -

 

 -

 

 

 -

 

 

(79)

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of tax

 

 -

 

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

 -

 

 

 -

 

 

Balance June 30, 2015

 

19,250 

 

$

 -

 

1,192,986 

 

$

298 

 

$

6,394 

 

$

30 

 

$

(396)

 

(24,720)

 

$

(278)

 

$

6,048 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

4

 


 

PART I.  FINANCIAL INFORMATION (Continued)

 

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014

($ in millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Cash flows provided from (used by) operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

(79)

 

$

77 

Adjustments to reconcile net income (loss) to net cash provided by

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

676 

 

 

555 

Stock based compensation expense

 

 

12 

 

 

12 

Other non-cash adjustments

 

 

128 

 

 

20 

Deferred income taxes

 

 

115 

 

 

(66)

Change in accounts receivable

 

 

77 

 

 

15 

Change in accounts payable and other liabilities

 

 

(99)

 

 

(35)

Change in prepaid expenses, income taxes and other current assets

 

 

(214)

 

 

63 

Net cash provided from operating activities

 

 

616 

 

 

641 

 

 

 

 

 

 

 

Cash flows provided from (used by) investing activities:

 

 

 

 

 

 

Capital expenditures - Business operations

 

 

(348)

 

 

(261)

Capital expenditures - Integration activities

 

 

(38)

 

 

(42)

Network expansion funded by Connect America Fund

 

 

(16)

 

 

(25)

Grant funds received for network expansion from Connect America Fund

 

 

 -

 

 

Cash transferred (to)/from escrow

 

 

(1,840)

 

 

Cash paid for an acquisition

 

 

(16)

 

 

 -

Other

 

 

 

 

23 

Net cash used by investing activities

 

 

(2,257)

 

 

(293)

 

 

 

 

 

 

 

Cash flows provided from (used by) financing activities:

 

 

 

 

 

 

Long-term debt borrowings

 

 

 

 

11 

Long-term debt payments

 

 

(250)

 

 

(230)

Proceeds from issuance of common stock, net

 

 

799 

 

 

 -

Proceeds from issuance of preferred stock, net

 

 

1,866 

 

 

 -

Dividends paid

 

 

(211)

 

 

(200)

Other

 

 

(2)

 

 

(8)

Net cash provided from (used by) financing activities

 

 

2,205 

 

 

(427)

 

 

 

 

 

 

 

Increase/(Decrease) in cash and cash equivalents

 

 

564 

 

 

(79)

Cash and cash equivalents at January 1,

 

 

682 

 

 

880 

 

 

 

 

 

 

 

Cash and cash equivalents at June 30,

 

$

1,246 

 

$

801 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

358 

 

$

319 

Income taxes, net

 

$

20 

 

$

14 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

 

5

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(1)   Summary of Significant Accounting Policies:

(a)   Basis of Presentation and Use of Estimates:

Frontier Communications Corporation and its subsidiaries are referred to as “we,” “us,” “our,” “Frontier,” or the “Company” in this report. Our interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2014. Certain reclassifications of amounts previously reported have been made to conform to the current presentation. All significant intercompany balances and transactions have been eliminated in consolidation. These interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring accruals) considered necessary, in the opinion of Frontier’s management, to present fairly the results for the interim periods shown. Revenues, net income (loss) and cash flows for any interim periods are not necessarily indicative of results that may be expected for the full year. For our interim financial statements as of and for the period ended June 30, 2015, we evaluated subsequent events and transactions for potential recognition or disclosure through the date that we filed this quarterly report on Form 10-Q with the Securities and Exchange Commission (SEC).

 

Effective October 24, 2014, Frontier’s scope of operations and balance sheet capitalization changed materially as a result of the completion of the Connecticut Acquisition, as described in Note 3 - Acquisitions. Historical financial data presented for Frontier is not indicative of the future financial position or operating results for Frontier, and includes the results of the Connecticut operations, as defined in Note 3 – Acquisitions, from the date of acquisition on October 24, 2014.

 

The preparation of our interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities at the date of the financial statements, (ii) the disclosure of contingent assets and liabilities, and (iii) the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. Estimates and judgments are used when accounting for the allowance for doubtful accounts,  asset impairments, indefinite-lived intangibles, depreciation and amortization, income taxes, business combinations, and pension and other postretirement benefits, among others. Certain information and footnote disclosures have been excluded and/or condensed pursuant to SEC rules and regulations.

 

We operate in one reportable segment. Frontier provides both regulated and unregulated voice, data and video services to residential, business and wholesale customers and is typically the incumbent voice services provider in its service areas. We have utilized the aggregation criteria to combine our six operating segments because all of our properties share similar economic characteristics, in that they provide the same products and services to similar customers using comparable technologies in all of the states in which we operate. The regulatory structure is generally similar. Differences in the regulatory regime of a particular state do not significantly impact the economic characteristics or operating results of a particular property.

 

(b)   Revenue Recognition:

Revenue is recognized when services are provided or when products are delivered to customers. Revenue that is billed in advance includes: monthly recurring network access services (including data services), special access services and monthly recurring voice, video and related charges. The unearned portion of these fees is initially deferred as a component of “Advanced billings” on our consolidated balance sheet and recognized as revenue over the period that the services are provided. Revenue that is billed in arrears includes: non-recurring network access services (including data services), switched access services, non-recurring voice and video services. The earned but unbilled portion of these fees is recognized as revenue in our consolidated statements of operations and accrued in “Accounts receivable on our consolidated balance sheet in the period that the services are provided. Excise taxes are recognized as a liability when billed. Installation fees and their related direct and incremental costs are initially deferred and recognized as revenue and expense over the average term of a customer relationship. We recognize as current period expense the portion of installation costs that exceeds installation fee revenue.

 

The Company collects various taxes from its customers and subsequently remits these taxes to governmental authorities. Substantially all of these taxes are recorded through the consolidated balance sheet and presented on a net basis in our

6

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

consolidated statements of operations.  We also collect Universal Service Fund (USF) surcharges from customers (primarily federal USF) that we have recorded on a gross basis in our consolidated statements of operations and included within “Revenue” and “Network related expenses” of $39 million and $31 million, and $76 million and $61 million, for the three and six months ended June 30, 2015 and 2014, respectively.

 

(c)   Goodwill and Other Intangibles:

Goodwill represents the excess of purchase price over the fair value of identifiable tangible and intangible net assets acquired. We undertake studies to determine the fair values of assets and liabilities acquired and allocate purchase prices to assets and liabilities, including property, plant and equipment, goodwill and other identifiable intangibles. We examine the carrying value of our goodwill and trade name annually as of December 31, or more frequently, as circumstances warrant, to determine whether there are any impairment losses. We test for goodwill impairment at the “operating segment” level, as that term is defined in U.S. GAAP.  During the second quarter of 2015, the Company reorganized into six regional operating segments, which are aggregated into one reportable segment.  In conjunction with the reorganization of our operating segments effective with the second quarter of 2015, we reassigned goodwill to our regional operating segments (reporting units) using a relative fair value allocation approach.  We tested for the impairment of goodwill and there was no indication of impairment at June 30, 2015.

 

The Company amortizes finite-lived intangible assets over their estimated useful lives on the accelerated method of sum of the years digits. We review such intangible assets at least annually as of December 31 to assess whether any potential impairment exists and whether factors exist that would necessitate a change in useful life and a different amortization period. 

 

 

(2)   Recent Accounting Literature:

Debt Issuance Costs

In April, 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This new standard is effective for annual and interim reporting periods beginning after December 15, 2015. Early adoption is permitted and companies must apply the requirements retrospectively. At this time, the Company has not elected the early adoption method for this standard. This new standard is not expected to have a material impact on the Company’s consolidated financial statements, as the debt issuance costs included in “Other assets” were $95 million at June 30, 2015.

 

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This standard requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This new standard is effective for annual and interim reporting periods beginning after December 15, 2017. Companies are also permitted to voluntarily adopt the new standard as of the original effective date that was for annual reporting periods beginning after December 15, 2016. Companies are permitted to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company is currently evaluating the impact of adopting the new standard,  but has not yet selected a transition method or determined the impact of adoption on its consolidated financial statements.   

 

(3)   Acquisitions:

The Connecticut Acquisition 

On October 24, 2014,  pursuant to the stock purchase agreement dated December 16, 2013, as amended, the Company acquired the wireline properties of AT&T Inc. (AT&T) in Connecticut (the Connecticut Acquisition) for a purchase price of $2.0 billion in cash.  Following the Connecticut Acquisition, Frontier now owns and operates the wireline business and fiber optic network servicing residential, commercial and wholesale customers in Connecticut. The Company also acquired the AT&T U-verse® video and DISH® satellite TV customers in Connecticut. 

 

7

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

In connection with the Connecticut Acquisition, the Company incurred $26 million of operating expenses, consisting of $1 million and $25 million of acquisition and integration costs, respectively, and $19 million in capital expenditures during the six months ended June 30, 2015. The Company incurred $30 million of operating expenses, consisting of $1 million and $29 million of acquisition and integration costs, respectively, and $42 million in capital expenditures during the six months ended June 30, 2014.

 

Our consolidated statement of operations for the six months ended June 30, 2015 includes $528 million of revenue and $47 million of operating income related to the results of the Connecticut operations.

 

The allocation of the purchase price presented below represents the effect of recording the estimates of the fair value of assets acquired, liabilities assumed and related deferred income taxes as of the date of the Connecticut Acquisition, based on the total transaction consideration of $2,018 million. These current estimates will be revised in future periods for information that is currently not available to us, primarily related to the tax basis of assets acquired, pending AT&T providing us with tax values for the assets and liabilities of the Connecticut operations; certain legal and tax accruals and contingencies; pension assets and liabilities, as well as other assumed postretirement benefit obligations, pending completion of actuarial studies.  The revisions may affect the presentation of our consolidated financial results. Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

 

    

 

 

 

Current assets

 

74 

Property, plant & equipment

 

 

1,455 

Goodwill

 

 

883 

Other intangibles - customer list

 

 

570 

Current liabilities

 

 

(98)

Deferred income taxes

 

 

(647)

Other liabilities

 

 

(219)

Total net assets acquired

 

$

2,018 

 

 

 

 

 

The stock purchase agreement provides for a post-closing adjustment for pension liabilities transferred and pension assets. Frontier and AT&T have not finalized the results of these calculations. Such calculations will be completed in accordance with the terms of the stock purchase agreement.

 

The following unaudited pro forma financial information presents the combined results of operations of Frontier and the Connecticut operations as if the Connecticut Acquisition had occurred as of January 1, 2014. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the Connecticut Acquisition been completed as of January 1, 2014. In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the future financial position or operating results of Frontier. The unaudited pro forma financial information excludes acquisition and integration costs and does not give effect to any estimated and potential cost savings or other operating efficiencies that may result from the Connecticut Acquisition.

 

 

8

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions, except per share amounts)

 

(Unaudited)

 

(Unaudited)

 

 

For the three months ended

 

For the six months ended

 

 

June 30, 2014

 

June 30, 2014

    

 

 

 

 

 

 

Revenue

 

1,455 

 

2,918 

 

 

 

 

 

 

 

Operating income

 

249 

 

494 

 

 

 

 

 

 

 

Net income

 

37 

 

73 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income per share

 

0.03 

 

0.07 

 

 

 

 

 

 

 

 

The Verizon Transaction

On February 5, 2015, we entered into an agreement with Verizon Communications Inc. (Verizon) to acquire Verizon’s wireline operations that provide services to residential, commercial and wholesale customers in California, Florida and Texas for a purchase price of $10.54 billion in cash and assumed debt (the Verizon Transaction), with adjustments for working capital.  Upon completion of the pending Verizon Transaction, Frontier will operate Verizon properties which included 3.7 million voice connections, 2.2 million broadband connections, and 1.2 million FiOS® video connections as of December 31, 2014.  Subject to regulatory approval, the transaction is expected to close in the first half of 2016. 

 

The Company incurred $66 million of operating expenses, consisting of $34 million of acquisition costs and $32 million of integration costs, related to the pending Verizon Transaction during the six months ended June 30, 2015. We also invested $19 million in capital expenditures related to the Verizon Transaction during the six months ended June 30, 2015.

 

Frontier has received a commitment for bridge financing from J.P. Morgan, Bank of America Merrill Lynch and Citibank associated with the Verizon Transaction. Separately, Frontier has also issued $2.75 billion in equity for the purpose of financing the pending Verizon Transaction. See Notes 8 and 9 for further discussion.

 

Other Acquisition

During the quarter ended June 30, 2015, we completed the acquisition of a network services company for total cash consideration of approximately $16 million, of which $13 million was attributed to goodwill.  The impact of this acquisition on Frontier’s results of operations was not material.

 

(4)   Accounts Receivable:

The components of accounts receivable, net are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   ($ in millions)

 

June 30, 2015

 

December 31, 2014

    

 

 

 

 

 

 

Retail and Wholesale

 

551 

 

$

630 

Other

 

 

49 

 

 

56 

Less: Allowance for doubtful accounts

 

 

(59)

 

 

(72)

Accounts receivable, net

 

$

541 

 

$

614 

 

We maintain an allowance for doubtful accounts based on our estimate of our ability to collect accounts receivable. Bad debt expense, which is recorded as a reduction to revenue, was $12 million for the three months ended June 30, 2015 and 2014,  and $25 million for the six months ended June 30, 2015 and 2014. Our allowance for doubtful accounts declined in the first six months of 2015, primarily as a result of the resolution of a principal carrier dispute during the first quarter.

 

9

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(5)   Property, Plant and Equipment:

Property, plant and equipment, net is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

June 30, 2015

 

December 31, 2014

    

 

 

 

 

 

 

Property, plant and equipment

 

17,280 

 

$

16,946 

Less:  Accumulated depreciation

 

 

(8,848)

 

 

(8,380)

Property, plant and equipment, net

 

$

8,432 

 

$

8,566 

 

Depreciation expense is principally based on the composite group method. Depreciation expense was $247 million and $197 million, and $496 million and $403 million, for the three and six months ended June 30, 2015 and 2014, respectively.  We adopted new estimated remaining useful lives for certain plant assets as of October 1, 2014,  as a result of our annual independent study of the estimated remaining useful lives of our plant assets, with an insignificant  impact to depreciation expense. In addition, we commissioned an independent study to determine the estimated useful lives for assets acquired during the Connecticut Acquisition. These new lives were adopted effective October 24, 2014.

 

(6)   Goodwill and Other Intangibles:

The activity in our goodwill from December 31, 2014 to June 30, 2015 is as follows:  

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

Goodwill

    

 

 

 

Balance at January 1, 2015

 

$

7,205 

Connecticut Acquisition (Note 3)

 

 

16 

Other Acquisition

 

 

13 

Balance at June 30, 2015

 

$

7,234 

 

 

 

 

 

The components of other intangibles are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

June 30, 2015

 

December 31, 2014

 

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Intangibles:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer list

 

2,998 

 

(1,820)

 

1,178 

 

3,018 

 

(1,640)

 

1,378 

Trade name

 

 

122 

 

 

 -

 

 

122 

 

 

122 

 

 

 -

 

 

122 

Total other intangibles

 

$

3,120 

 

$

(1,820)

 

$

1,300 

 

$

3,140 

 

$

(1,640)

 

$

1,500 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization expense was $88 million and $77 million, and $180 million and $152 million, for the three and six months ended June 30, 2015 and 2014, respectively. Amortization expense represents the amortization of our customer lists acquired as a result of the Connecticut Acquisition and the acquisition of certain Verizon properties in 2010 (the 2010 Acquisition) with each based on a useful life of 9 to 12 years on an accelerated method.  An adjustment to the allocation of the purchase price for the Connecticut Acquisition during the second quarter of 2015 resulted in a $20 million decrease in the valuation of the customer list.

 

(7)   Fair Value of Financial Instruments:

The following table summarizes the carrying amounts and estimated fair values for long-term debt at June 30, 2015 and December 31, 2014.  For the other financial instruments including cash, accounts receivable, long-term debt due within one year, accounts payable and other current liabilities, the carrying amounts approximate fair value due to the relatively short maturities of those instruments.

 

10

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The fair value of our long-term debt is estimated based upon quoted market prices at the reporting date for those financial instruments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

June 30, 2015

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying Amount

 

 

Fair Value

 

 

Carrying Amount

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

9,440 

 

$

9,034 

 

$

9,486 

 

$

10,034 

 

 

 

 

(8)   Long-Term Debt:

The activity in our long-term debt from December 31, 2014 to June 30, 2015 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

  

  

 

Six months ended

  

  

  

  

 

  

 

  

  

 

June 30, 2015

  

  

  

 

Interest

  

 

  

  

  

  

  

  

  

  

  

  

  

 

Rate at

  

 

December 31,

  

Payments

  

New

  

June 30,

 

June 30,

($ in millions)

 

2014

 

and Retirements

 

Borrowings

 

2015

 

2015 *

  

 

  

  

  

  

  

  

  

  

  

  

  

  

 

Senior Unsecured Debt

 

$

9,750 

 

$

(248)

 

 $

 -

  

 $

9,502 

 

7.69%

Other Secured Debt

 

 

23 

  

 

(2)

  

 

  

 

24 

 

3.50%

Rural Utilities Service Loan Contracts

 

 

 

 

 -

 

 

 -

  

 

 

6.15%

Total Long-Term Debt

 

$

9,781 

 

 $

(250)

 

 $

  

$

9,534 

 

7.68%

  

 

  

  

  

  

  

  

  

  

  

  

  

  

 

  Less: Debt (Discount)/Premium

 

 

  

  

  

  

  

  

  

 

  

 

  Less: Current Portion

 

 

(298)

  

  

  

  

  

  

  

 

(97)

  

 

 

 

$

9,486 

  

  

  

  

  

  

  

$

9,440 

  

 

 

* Interest rate includes amortization of debt issuance costs and debt premiums or discounts. The interest rates at June 30, 2015 represent a weighted average of multiple issuances.

11

 


 

 

PART I. FINANCIAL INFORMATION (Continued)

FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Additional information regarding our Senior Unsecured Debt is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

June 30, 2015

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal

 

Interest

 

Principal

 

Interest

 

 

Outstanding

 

Rate

 

Outstanding

 

Rate

 

 

 

 

 

 

 

 

 

 

 

Senior Notes and Debentures Due: