Frontier Communications Parent, Inc. - Quarter Report: 2016 March (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 March 31, 2016



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)





(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 May 2,  2016 was 1,173,076,000.

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FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES



Index











 

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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)



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

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PART I.  FINANCIAL INFORMATION (Continued)



FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

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

(Unaudited)

















CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

($ in millions)

(Unaudited)











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

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PART I.  FINANCIAL INFORMATION (Continued)



FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2016

($ in millions and shares in thousands)

(Unaudited)











































































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

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PART I.  FINANCIAL INFORMATION (Continued)



FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

($ in millions)

(Unaudited)









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



 

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(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 (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, 2015.  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 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 March 31, 2016, we evaluated subsequent events and transactions for potential recognition or disclosure through the date that we filed this Form 10-Q with the Securities and Exchange Commission (SEC).    



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



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 regional operating segments because all of these regional operations share similar 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 region.



(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 and 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.



Frontier 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 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 $37 million for the three months ended March 31, 2016 and 2015, respectively.



In 2015 we accepted the FCC’s Connect America Fund (CAF) Phase II offer of support, which is a successor to and augments the USF frozen high cost support that we had been receiving pursuant to a 2011 FCC order.  CAF Phase II funding is a program intended to subsidize the high cost of establishing and delivering communications services to

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certain unserved or underserved areas.  We are recognizing these subsidies into revenue consistent with how the costs related to these subsidies are being and are expected to be incurred, which is on a straight line basis.  We may reserve against our subsidy revenue which would be based on our ability to meet the buildout requirements of CAF Phase II. CAF Phase II is a multi-year program which requires us to deploy broadband to a specified number of households in each of the states where funding was accepted. Failure to meet our deployment obligations at the end of the program in 2020 will result in a return of a portion of the funding received. We regularly evaluate our ability to meet our broadband deployment obligations and adjust revenue accordingly.



We categorize our products, services and other revenues among the following four categories:













The following table provides a summary of revenues from external customers by the categories of Frontier’s products and services:







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(c)   Goodwill and Other Intangibles:

Goodwill represents the excess of purchase price over the fair value of identifiable tangible and intangible net assets acquired. 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 GAAP.  



Frontier 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:



Revenue Recognition

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. Frontier 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.   



Employee Benefit Plans

In July 2015, the FASB issued ASU No. 2015-12, “Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965)”: There are three parts to the ASU that aim to simplify the accounting and presentation of plan accounting. Part I of this ASU requires fully benefit-responsive investment contracts to be measured at contract value instead of the current fair value measurement. Part II of this ASU requires investments (both participant-directed and nonparticipant-directed investments) of employee benefit plans be grouped only by general type, eliminating the need to disaggregate the investments in multiple ways. Part III of this ASU provides a similar measurement date practical expedient for employee benefit plans as available in ASU No. 2015-04, “Compensation – Retirement Benefits (Topic 715),” which allows employers to measure defined benefit plan assets on a month-end date that is nearest to the year’s fiscal year-end when the fiscal period does not coincide with a month-end. Parts I and II of the new guidance should be applied on a retrospective basis. Part III of the new guidance should be applied on a prospective basis. The adoption of ASU 2015-12 will impact certain of the disclosures related to our pension plan assets, but otherwise is not expected to have a material impact on our consolidated financial statements.



Leases

In February 2016, the FASB issued ASU No. 2016 – 02, “Leases (Topic 842).” This standard establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. Lessees will need to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. It will be critical to identify leases embedded in a contract to avoid misstating the lessee’s balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. Existing sale-leaseback guidance, including guidance for real estate, is replaced with a new model applicable to both lessees and lessors. The new guidance is effective for fiscal years beginning after December 15, 2018,  including interim periods within those fiscal years. Early application is permitted.  

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Frontier is currently evaluating the impact of adopting the new standard, but has not yet determined the impact of adoption on its consolidated financial statements.



Compensation – Stock Compensation

In April 2016 the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” to amend ASC Topic 718, “Compensation – Stock Compensation.” The proposal is part of the FASB’s ongoing simplification initiative, which is designed to reduce cost and complexity while maintaining or improving the usefulness of the information provided to the users of financial statements. The proposed simplifications address a variety of areas for public entities, including the following: 1) accounting for income taxes, 2) classification of excess tax benefits on the statement of cash flows, 3) forfeitures, 4) minimum statutory tax withholding requirements, 5) classifications of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes, and 6) classification of awards with repurchase features. The new guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.



(3)   Acquisitions:



The Verizon Transaction 

On April 1, 2016, Frontier acquired the wireline operations of Verizon Communications, Inc. in California, Texas and Florida for a purchase price of $10,540 million in cash and assumed debt (the Verizon Transaction), with adjustments for working capital, pursuant to the February 5, 2015 Securities Purchase Agreement, as amended.  Upon completion of the Verizon Transaction, Frontier operates these former Verizon properties, which included approximately 3.3 million voice connections, 2.1 million broadband connections, and 1.2 million FiOS® video connections as of December 31, 2015. 



Acquisition costs include legal, financial advisory, accounting, regulatory and other related costs.  Integration costs include expenses incurred to integrate the network and information technology platforms and to enable other integration initiatives. Frontier incurred $138 million of operating expenses, consisting of $1 million of acquisition costs and $137 million of integration costs, related to the Verizon Transaction during the three months ended March 31, 2016.  We also invested $52 million in capital expenditures related to the Verizon Transaction during the three months ended March 31, 2016. Frontier incurred $36 million of operating expenses, consisting of $33 million and $3 million of acquisition and integration costs, respectively, related to the Verizon Transaction during the three months ended March 31, 2015.  In connection with the Verizon Transaction, we will incur additional operating expenses and capital expenditures in 2016 related to integration activities. 



During 2015, we completed our financing activities associated with the Verizon Transaction, which included: 1) a private debt offering of $6,600 million of unsecured senior notes in September 2015, 2) the 2015 Credit Agreement (as defined below) for a senior secured delayed-draw term loan facility in August 2015, and 3) a registered offering of $2,750 million of preferred and common stock in June 2015.  Net proceeds from these debt and equity offerings in the amount of $8,352 million are included in “Restricted cash” in the consolidated balance sheet as of March 31, 2016, and together with the proceeds received from the delayed draw term loan facility and cash on hand were sufficient to finance the Verizon Transaction and pay related fees and expenses. Restricted cash also included $8 million of interest income earned on those proceeds during the three months ended March 31, 2016.



The Connecticut Acquisition 

On October 24, 2014, Frontier acquired the wireline properties of AT&T Inc. in Connecticut (the Connecticut Acquisition) for a purchase price of $2,018 million in cash, pursuant to the stock purchase agreement dated December 16, 2013, as amended.  



In connection with the Connecticut Acquisition, Frontier incurred $21 million of operating expenses, consisting of $1 million and $20 million of acquisition and integration costs, respectively, and invested $10 million in capital expenditures during the three months ended March 31, 2015.





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(4)   Accounts Receivable:

The components of accounts receivable, net are as follows:







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 $13 million for each of the three months ended March 31, 2016 and 2015.  



(5)   Property, Plant and Equipment:

Property, plant and equipment, net is as follows:







Depreciation expense is principally based on the composite group method. Depreciation expense was $240 million and $249 million for the three months ended March 31, 2016 and 2015, respectively.  We adopted new estimated remaining useful lives for certain plant assets as of October 1, 2015,  as a result of an annual independent study of the estimated remaining useful lives of our plant assets, with an insignificant  impact to depreciation expense.



(6)   Other Intangibles: 

The components of other intangibles are as follows:







Amortization expense was $76 million and $92 million,  for the three months ended March 31, 2016 and 2015, 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 with each based on a useful life of 9 to 12 years on an accelerated method.    



(7)   Fair Value of Financial Instruments:

The following table summarizes the carrying amounts and estimated fair values for long-term debt at March 31, 2016 and December 31, 2015.  For the other financial instruments including cash, accounts receivable, restricted cash, long-term

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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.



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



















(8)   Long-Term Debt:

The activity in our long-term debt from January 1, 2016 through March 31, 2016 is summarized as follows:









* Interest rate includes amortization of debt issuance costs and debt premiums or discounts. The interest rates at March 31, 2016 represent a weighted average of multiple issuances.

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Additional information regarding our senior unsecured debt and subsidiary debentures is as follows:







*      Represents borrowings under the 2011 CoBank Credit Agreement, as defined below.

**    Represents borrowings under the 2014 CoBank Credit Agreement, as defined below.

***  Interest rate represents a weighted average of the stated interest rates of multiple issuances.

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On September 25, 2015, Frontier completed a private offering of $6,600 million aggregate principal amount of unsecured Senior Notes, as follows: $1,000 million of 8.875% Senior Notes due 2020;  $2,000 million of 10.500% Senior Notes due 2022; and $3,600 million of 11.000% Senior Notes due 2025. Each was issued at a price equal to 100% of its principal amount. In April 2016, we launched an exchange offer of registered senior notes for the privately placed senior notes. Frontier used the proceeds from the offering to finance a portion of the cash consideration paid in connection with the Verizon Transaction and to pay related fees and expenses. The net proceeds of the debt offering (after deducting underwriting fees) of $6,485 million are included in “Restricted cash” in the consolidated balance sheet as of March 31, 2016. 



On August 12, 2015, Frontier entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, for a $1,500 million senior secured delayed-draw term loan facility (the 2015 Credit Agreement). Frontier exercised its right under the 2015 Credit Agreement to obtain additional commitments and increased the size of the facility to $1,625 million. On April 1, 2016, in connection with the closing of the acquisition, Frontier drew $1,550 million under that facility, with the additional $75 million drawn subsequently. The final maturity date is March 31, 2021.  Repayment of the outstanding principal balance will be made in quarterly installments, initially in the amount of $20 million per installment, commencing June 30, 2016.  The quarterly installments will increase to $41 million, beginning with the 13th quarterly installment.  The remaining outstanding principal balance will be repaid on the final maturity date.  Borrowings under the term loan will bear interest based on margins over the Base Rate (as defined in the 2015 Credit Agreement) or LIBOR, at the election of Frontier.  Interest rate margins under the facility (ranging from 0.75% to 1.75% for Base Rate borrowings and 1.75% to 2.75% for LIBOR borrowings) are subject to adjustment based on Frontier’s Total Leverage Ratio (as defined in the 2015 Credit Agreement).  Borrowings under the 2015 Credit Agreement are secured by a pledge of the stock of Frontier North Inc., a wholly owned subsidiary, primarily representing Frontier operations in the states of Illinois, Indiana, Michigan, Ohio and Wisconsin.



On February 5, 2015, we entered into a commitment for a bridge loan facility (the Verizon Bridge Facility) and recognized related interest expense of $10 million and $58 million during the three months ended March 31, 2016 and 2015, respectively. The accrued liabilities related to the Verizon Bridge Facility of $184 million were paid after the closing of the Verizon Transaction and are included in “Other current liabilities” in the consolidated balance sheet as of March 31, 2016.  The Verizon Bridge Facility terminated, in accordance with its terms, on September 25, 2015.



Frontier has a credit agreement with CoBank, ACB, as administrative agent, lead arranger and a lender, and the other lenders party thereto, for a $350 million senior unsecured term loan facility (the 2014 CoBank Credit Agreement). The facility was drawn upon closing of the Connecticut Acquisition with proceeds used to partially finance the acquisition. The maturity date is October 24, 2019.



Frontier has a credit agreement with CoBank, ACB, as administrative agent, lead arranger and a lender, and the other lenders party thereto, for a $575 million senior unsecured term loan with a final maturity of October 14, 2016 (the 2011 CoBank Credit Agreement).  The facility was drawn upon execution of the 2011 CoBank Credit Agreement in October 2011.



Frontier has a revolving credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, the lenders party thereto and the other parties named therein (the Revolving Credit Agreement), for a $750 million revolving credit facility (the Revolving Credit Facility) with a scheduled termination date of May 31, 2018. As of March 31, 2016, the Revolving Credit Facility was fully available and no borrowings had been made thereunder. The Revolving Credit Facility is available for general corporate purposes but may not be used to fund dividend payments.



Upon the drawdown of the term loan under the 2015 Credit Agreement, borrowings under the 2014 CoBank Credit Agreement, the 2011 CoBank Credit Agreement and the Revolving Credit Facility became secured debt. These borrowings are now secured, equally and ratably with borrowings under the 2015 Credit Agreement, by a pledge of the stock of Frontier North Inc., a wholly owned subsidiary.



As of March 31, 2016, we were in compliance with all of our debt and credit facility covenants.



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Our scheduled principal payments are as follows as of March 31, 2016:  











(9)  Income Taxes: 

The following is a reconciliation of income taxes computed at the federal statutory rate to income taxes computed at the effective rate: 







Amounts pertaining to income tax related accounts of $21 million and $50 million are included in “Income taxes and other current assets” in the consolidated balance sheets as of March 31, 2016 and December 31, 2015, respectively.



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(10)  Net Loss Per Share:

The reconciliation of the net loss per share calculation is as follows:







In calculating diluted net loss per share for the three months ended March 31, 2016 and 2015, the effect of all common stock equivalents is excluded from the computation as the effect would be antidilutive.



Stock Options

For the three months ended March 31, 2016 and 2015, options to purchase 50,000 and 83,000 shares,  respectively, issuable under employee compensation plans were excluded from the computation of diluted earnings per share (EPS) for those periods because the exercise prices were greater than the average market price of our common stock and, therefore, the effect would be antidilutive. In calculating diluted EPS, we apply the treasury stock method and include future unearned compensation as part of the assumed proceeds.



Stock Units

At March 31, 2016 and 2015, we had 1,537,000 and 1,166,000 stock units, respectively, issued under our Non-Employee Directors’ Deferred Fee Equity Plan (Deferred Fee Plan) and the Non-Employee Directors’ Equity Incentive Plan (Directors’ Equity Plan). These securities have not been included in the diluted income per share of common stock calculation because their inclusion would have an antidilutive effect. Compensation costs associated with the issuance of stock units were $2 million and $1 million for the three months ended March 31, 2016 and 2015, respectively.



Mandatory Convertible Preferred Stock

The impact of the common share equivalents associated with the 19,250,000 shares of Series A Preferred stock described above were not included in the calculation of diluted EPS as of March 31, 2016,  as their impact was antidilutive. 

 





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(11)  Stock Plans:

At March 31, 2016, we had  six  stock-based compensation plans under which grants were made and awards remained outstanding. No further awards may be granted under four of the plans: the 1996 Equity Incentive Plan (the 1996 EIP), the Amended and Restated 2000 Equity Incentive Plan (the 2000 EIP), the 2009 Equity Incentive Plan (the 2009 EIP) and the Deferred Fee Plan. At March 31, 2016, there were 22,541,000 shares authorized for grant and 8,002,500 shares available for grant under the 2013 Equity Incentive Plan (the 2013 EIP and together with the 1996 EIP, the 2000 EIP and the 2009 EIP, the EIPs) and the Directors’ Equity Plan. Our general policy is to issue shares from treasury upon the grant of restricted shares and the exercise of options.



Performance Shares

On February 11, 2016, the Compensation Committee of our Board of Directors granted approximately 1,669,000 performance shares under the Frontier Long Term Incentive Plan (the LTIP) and set the operating cash flow performance goal for 2016, which applies to the first year in the 2016-2018 measurement period, the second year of the 2015-2017 measurement period and the third year of the 2014-2016 measurement period.



The following summary presents information regarding LTIP target performance shares as of March 31, 2016 and changes during the three months then ended with regard to LTIP shares awarded under the 2009 EIP and the 2013 EIP:







For purposes of determining compensation expense, the fair value of each performance share is measured at the end of each reporting period and, therefore, will fluctuate based on the price of Frontier common stock as well as performance relative to the targets. For the three months ended March 31, 2016 and 2015,  we recognized an expense of $1 million and $2 million, respectively, for the LTIP.

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Restricted Stock

The following summary presents information regarding unvested restricted stock as of March 31, 2016 and changes during the three months then ended with regard to restricted stock under the 2009 EIP and the 2013 EIP:







For purposes of determining compensation expense, the fair value of each restricted stock grant is estimated based on the average of the high and low market price of a share of our common stock on the date of grant. Total remaining unrecognized compensation cost associated with unvested restricted stock awards at March 31, 2016 was $38 million and the weighted average period over which this cost is expected to be recognized is approximately 2 years.



Shares granted during the first three months of 2015 totaled 2,763,000. The total fair value of shares of restricted stock granted and vested at March 31, 2015 was approximately $19 million and $22 million, respectively. The total fair value of unvested restricted stock at March 31, 2015 was $51 million. The weighted average grant date fair value of restricted shares granted during the three months ended March 31, 2015 was $7.98 per share.



We have granted restricted stock awards to employees in the form of our common stock. None of the restricted stock awards may be sold, assigned, pledged or otherwise transferred, voluntarily or involuntarily, by the employees until the restrictions lapse, subject to limited exceptions. The restrictions are time-based. Compensation expense, recognized in “Selling, general and administrative expenses”, of $5 million and $4 million for the three months ended March 31, 2016 and 2015, respectively, has been recorded in connection with these grants.





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(12) Comprehensive Income (Loss):

Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting shareholders’ investment and pension/postretirement benefit (OPEB) liabilities that, under GAAP, are excluded from net loss.



The components of accumulated other comprehensive loss, net of tax at March 31, 2016 and 2015, and changes for the three months then ended, are as follows:





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The significant items reclassified from each component of accumulated other comprehensive loss for the three months ended March 31, 2016 and 2015 are as follows:



(a) Amounts in parentheses indicate losses.

(b) These accumulated other comprehensive loss components are included in the computation of net periodic pension and OPEB costs (see Note 13 - Retirement Plans for additional details).









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(13)  Retirement Plans: 

The following tables provide the components of net periodic benefit cost:











During the first three months of 2016 and 2015, we capitalized $6 million and $5 million, respectively, of pension and OPEB expense into the cost of our capital expenditures, as the costs relate to our engineering and plant construction activities. We made total cash contributions to our pension plan during the three months ended March 31, 2016 of $4 million.  We expect to make contributions to our pension plan of approximately $15 million to $25 million for the full year of 2016, including the impact of the Verizon Transaction.



Our pension plan assets increased from $1,572 million at December 31, 2015 to  $1,604 million at March 31, 2016, an increase of $32 million, or 2%. This increase is a result of positive investment returns net of investment management and administrative fees of $56 million and cash contributions of $4 million, offset by benefit payments of $27 million during the first three months of 2016.



(14)  Commitments and Contingencies:  

Although from time to time we make short-term purchasing commitments to vendors with respect to capital expenditures, we generally do not enter into firm, written contracts for such activities.



In June 2015, Frontier accepted the Federal Communications Commission’s (FCC) offer of support to price cap carriers under the Connect America Fund (CAF) Phase II program, which is intended to provide long-term support for broadband in high cost unserved or underserved areas. This provides $332 million in annual support, including $49 million in annual support related to the properties acquired in the Verizon Transaction, from 2015 through 2020 to make available 10 Mbps downstream/1 Mbps upstream broadband service to approximately 774,000 households across the 29 states where we  operate  after closing the Verizon Transaction. To the extent we do not enable the required number of households with 10 Mbps downstream/1 Mbps upstream broadband service by the end of the CAF Phase II term, we will be required to return a portion of the funds previously received.

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On April 28, 2016, the FCC completed its inquiry into whether certain terms and conditions contained in specifically identified special access tariff pricing plans offered by four carriers, including Frontier, are just and reasonable. The FCC held that certain of the tariff terms for business data TDM services, specifically DS1s and DS3s, were unreasonable.  Specifically, the FCC struck down “excessive” early termination fees and “all-or-nothing” provisions.  The FCC’s decision has no retroactive effect.  The tariffs under review must be revised prospectively; however, the FCC did not address how its ruling will affect customers currently purchasing services from these tariffs.  The FCC deferred this issue to a Notice of Proposed Rulemaking and in that Notice sought comment on proposed changes to the way the FCC regulates traditional special access services and on a proposal to adopt pricing rules for Ethernet services in markets that are found to be “noncompetitive.” 



During the first quarter of 2016, we increased our outstanding performance letters of credit from $50 million at December 31, 2015 to $125 million as of March 31, 2016.



We are party to various legal proceedings (including individual, class and putative class actions) arising in the normal course of our business covering a wide range of matters and types of claims including, but not limited to, general contracts, billing disputes, rights of access, taxes and surcharges, consumer protection, trademark and patent infringement, employment, regulatory, tort, claims of competitors and disputes with other carriers. 



We accrue an expense for pending litigation when we determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Legal defense costs are expensed as incurred.  None of our existing accruals for pending matters, after considering insurance coverage, is material.  We monitor our pending litigation for the purpose of adjusting our accruals and revising our disclosures accordingly, when required. Litigation is, however, subject to uncertainty, and the outcome of any particular matter is not predictable. We will vigorously defend our interests in pending litigation, and as of this date, we believe that the ultimate resolution of all such matters, after considering insurance coverage or other indemnities to which we are entitled, will not have a material adverse effect on our consolidated financial position, results of operations, or our cash flows. 



(15)  Subsequent Events:  

On April 1, 2016, Frontier completed its acquisition of Verizon’s wireline properties in California, Florida, and Texas. See Note 3 for further discussion.