Leases

9 Months Ended

Sep. 30, 2019

(11) Leases:

With the adoption of ASC 842 on January 1, 2019, Frontier elected to apply the ‘package of practical expedients’, which permits the Company to not reassess under the new standard its prior conclusions including lease identification, lease classification, and initial direct costs. Additionally, Frontier elected to apply the land easement practical expedient, which permits the Company to account for land easements under the new standard only on a prospective basis. Frontier did not apply the use of hindsight practical expedient.

The following table includes information for the transition adjustment recorded as of January 1, 2019 to record the cumulative impact of adoption of ASC 842 for prior periods:



			(Unaudited)
	As Reported		ASC 842			Adjusted
($ in millions)	December 31, 2018		Transition Adjustment			January 1, 2019
Assets
Other assets	$	265	$	205	⁽¹⁾	$	470

Liabilities and Equity (Deficit)
Other current liabilities	$	394	$	32	⁽²⁾	$	426
Other liabilities	$	281	$	158	⁽³⁾	$	439
Deferred income taxes	$	1,109	$	4	⁽⁴⁾	$	1,113
Accumulated deficit	$	(2,752)	$	11	⁽⁵⁾	$	(2,741)

⁽¹⁾Includes $205 million of operating Right-of-use (ROU) assets recorded upon adoption.

⁽²⁾Includes $46 million of operating lease liabilities, partially offset by $14 million recognition of the current portion of deferred gains on sale of property to accumulated deficit.

⁽³⁾Includes $168 million of operating lease liabilities, partially offset by $1 million recognition of deferred gains on sale of property to accumulated deficit and $9 million of deferred rent reclassified to Operating Right-of-use assets.

⁽⁴⁾Represents the tax effect of the recognition of $15 million in deferred gains on sale of property to accumulated deficit.

⁽⁵⁾Includes the recognition of $15 million in deferred gains on the sale of property, partially offset by $4 million tax impact on the recognition of the gain.

The components of lease cost are as follows:


	For the three months ended		For the nine months ended
($ in millions)	September 30, 2019		September 30, 2019

Lease cost:
Finance lease cost:
Amortization of right-of-use assets	$	3	$	9
Interest on lease liabilities		3		11
Finance lease cost		6		20

Operating lease cost ⁽¹⁾		19		56

Sublease income		(2)		(9)

Total Lease cost	$	23	$	67

⁽¹⁾Includes short-term lease cost of $0 and $2 million and variable lease cost of $1 million and $5 million for the three and nine months ended September 30, 2019, respectively.

Supplemental balance sheet information related to leases is as follows:



($ in millions)	September 30, 2019

Operating right-of-use assets	$	196	⁽¹⁾
Finance right-of-use assets	$	170	⁽²⁾

Operating lease liabilities	$	203	⁽³⁾
Finance lease liabilities	$	161	⁽⁴⁾

Operating leases:
Weighted-average remaining lease term		7.61	years
Weighted-average discount rate		8.26	%

Finance leases:
Weighted-average remaining lease term		8.86	years
Weighted-average discount rate		7.97	%

⁽¹⁾Operating ROU assets are included in Other assets on our consolidated balance sheet.

⁽²⁾Finance ROU assets are included in Property, plant, and equipment on our September 30, 2019 consolidated balance sheet.

⁽³⁾This amount represents $44 million and $159 million included in other current liabilities and other liabilities, respectively, on our September 30, 2019 consolidated balance sheet.

⁽⁴⁾This amount represents $28 million and $133 million included in other current liabilities and other liabilities, respectively, on our September 30, 2019 consolidated balance sheet.

Supplemental cash flow information related to leases is as follows:



	For the nine months ended
($ in millions)	September 30, 2019

Cash paid for amount included in the measurement
of lease liabilities, net of amounts received as
revenue:
Operating cash flows provided by operating leases	$	52
Operating cash flows used by operating leases	$	(53)
Operating cash flows used by finance leases	$	(11)
Financing cash flows used by finance leases	$	(26)

Right-of-use assets obtained in exchange for lease
liabilities:
Operating leases	$	26
Finance leases	$	28

Lessee

For lessee agreements, Frontier elected to apply the short-term lease recognition exemption for all leases that qualify and as such, does not recognize assets or liabilities for leases with terms of less than twelve months, including existing leases at transition. Frontier elected not to separate lease and non-lease components.

As of January 1, 2019, Frontier has operating and finance leases for administrative and network properties, vehicles, and certain equipment. Our leases have remaining lease terms of 1 year to 99 years, some of which include options to extend the leases, and some of which include options to terminate the leases within 1 year.

The following represents a maturity analysis for our operating and finance lease liabilities as of September 30, 2019:



		Operating		Finance
($ in millions)		Leases		Leases
Future maturities:
2019 (remaining three months)	$	12	$	11
2020		44		35
2021		38		31
2022		36		26
2023		33		22
Thereafter		106		104
Total lease payments		269		229
Less: imputed interest		(66)		(68)
Present value of lease liabilities	$	203	$	161

Upon adoption of ASC 842, we recorded the unamortized deferred gain balances for previous sale-leasebacks of real estate assets as a transition adjustment, which had the effect of decreasing our accumulated deficit by $15 million ($11 million net of tax).

Lessor

Frontier is the lessor for operating leases of towers, datacenters, corporate offices, and certain equipment. Our leases have remaining lease terms of 1 year to 99 years, some of which include options to extend the leases, and some of which include options to terminate the leases within 1 year. None of these leases include options for our lessees to purchase the underlying asset.

A significant number of Frontier’s telecom service contracts with its customers include equipment rentals. The Company has elected to apply the practical expedient to account for those associated equipment rentals and telecom services as a single, combined component. We have evaluated the service component to be ‘predominant’ in these contracts and have accounted for the combined component as a single performance obligation under ASC 606.

For the three and nine months ended September 30, 2019, Frontier, as a lessor, recognized revenue of $17 million and $52 million, respectively.

The following represents a maturity analysis for our future operating lease payments from customers as of September 30, 2019:



	Operating
($ in millions)	Lease Payments
Future maturities of lease payments from customers:
2019 (remaining three months)	$	3
2020		10
2021		10
2022		10
2023		10
Thereafter		8
Total lease payments from customers	$	51