Fresh Start Accounting

12 Months Ended

Dec. 31, 2023

(4) Fresh Start Accounting:

In connection with our emergence from bankruptcy and in accordance with ASC 852, we qualified for and adopted fresh start accounting on the Effective Date. We were required to adopt fresh start accounting because (i) the holders of existing voting shares of the Predecessor received less than 50% of the voting shares of the Successor, and (ii) the reorganization value of our assets immediately prior to confirmation of the Plan was less than the post-petition liabilities and allowed claims.

The adoption of fresh start accounting resulted in a new reporting entity for financial reporting purposes with no beginning retained earnings or deficit. The cancellation of all outstanding shares of Old Frontier common stock on the Effective Date

and issuance of new shares of common stock of the Successor caused a related change of control of the Company under ASC 852.

Upon the application of fresh start accounting, we allocated the reorganization value to our individual assets based on their estimated fair values. Each asset and liability existing as of the Effective Date, other than deferred taxes, have been stated at the fair value, and determined at appropriate risk-adjusted interest rates. Deferred taxes were determined in conformity with applicable accounting standards.

Reorganization value represents the fair value of the Successor’s assets before considering liabilities. Our reorganization value is derived from an estimate of enterprise value. Enterprise value represents the estimated fair value of an entity’s long-term debt and shareholders’ equity. In support of the Plan, the enterprise value of the Successor was estimated to be approximately $12.5 billion. The valuation analysis was prepared using financial information and financial projections and applying standard valuation techniques, including a risked net asset value analysis.

The Effective Date estimated fair values of certain of our assets and liabilities differed materially from their recorded values as reflected on the historical balance sheets. As a result of the application of fresh start accounting and the effects of the implementation of the Plan, our consolidated financial statements after April 30, 2021 are not comparable to our consolidated financial statements as of or prior to that date.

Reorganization Value

As set forth in the Plan of Reorganization, the enterprise value of the Successor Company was estimated to be between $10.5 billion and $12.5 billion. Based on the estimates and assumptions discussed below, we estimated the enterprise value to be $12.5 billion as of the Effective Date. We based our enterprise value on projections which included higher capital expenditures to enhance the network and would result in higher revenue and Earnings before interest, taxes, depreciation, and amortization (“EBITDA”).

Management, with the assistance of our valuation advisors, estimated the enterprise value (“EV”) of the Successor Company, which was approved by the Bankruptcy Court, using various valuation methodologies, including a Discounted Cash Flow analysis (DCF), the Guideline Public Company Method (GPCM), and the Guideline Transaction Method (GTM). Under the DCF analysis, the enterprise value was estimated by discounting the projections’ unlevered free cash flow by the Weighted Average Cost of Capital (WACC), we estimated rate of return. A terminal value was estimated by applying a Gordon Growth Model to the normalized level of cash flows in the terminal period. The Gordon Growth Model was based on the WACC and the perpetual growth rate, and the terminal value was added back to the discounted cash flows.

Under the GPCM, our enterprise value was estimated by performing an analysis of publicly traded companies that operate in a similar industry. A range of Enterprise Value / EBITDA (EV/EBITDA) multiples were selected based on the financial and operating attributes of Frontier relative to the comparable publicly traded companies. The selected range of multiples were applied to our forecasted EBITDA to estimate the enterprise value of the Company.

The GTM approach is similar to the GPCM, in that it relies on EV/EBITDA multiples but rather than of publicly traded companies, the multiples are based on precedent transactions. A range of multiples was derived by analyzing the operating and financial attributes of the acquired companies and the implied EV/EBITDA multiples. This range of multiples were then applied to the forecasted EBITDA of the Company to arrive an enterprise value.

The following table reconciles the enterprise value to the estimated fair value of the Successor common stock as of the Effective Date:


($ in millions and shares in thousands, except per share data)

Enterprise value	$	12,500
Plus: Cash and cash equivalents and restricted cash		940
Less: Fair value of debt and other liabilities		(7,267)
Less: Pension and other postretirement benefits		(1,774)
Less: Deferred tax liability		(291)
Fair value of Successor stockholders’ equity	$	4,108
Shares issued upon emergence		244,401
Per share value	$	17

The reconciliation of our enterprise value to reorganization value as of the Effective Date is as follows:


($ in millions)

Enterprise value	$	12,500
Plus: Cash and cash equivalents and restricted cash		940
Plus: Current liabilities (excluding debt, finance leases, and non-operating liabilities)		1,179
Plus: Long term liabilities (excluding debt, finance leases, deferred tax liability)		307
Reorganization value	$	14,926

The adjustments set forth in the following Consolidated Balance Sheet reflect the consummation of the transactions contemplated by the Plan (reflected in the column “Reorganization Adjustments”) as well as fair value adjustments as a result of the adoption of fresh start accounting (reflected in the column “Fresh Start Adjustments”).

The following table reflects the reorganization and application of ASC 852 on our consolidated balance sheet as of April 30, 2021:




($ in millions)	Predecessor		Reorganization			Fresh Start			Successor
	April 30, 2021		Adjustments			Adjustments			April 30, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	2,059	$	(1,169)	⁽¹⁾	$	-		$	890
Accounts receivable, net		516		-			-			516
Contract acquisition costs		91		-			(91)	⁽⁸⁾		-
Prepaid expenses		92		-			-			92
Income taxes and other current assets		45		-			(3)	⁽⁸⁾		42
Total current assets		2,803		(1,169)			(94)			1,540

Property, plant and equipment, net		13,020		-			(4,473)	⁽⁹⁾		8,547
Other intangibles, net		578		-			3,863	⁽¹⁰⁾		4,441
Other assets		526		(8)	⁽¹⁾		(120)	^(8)(11)		398
Total assets	$	16,927	$	(1,177)		$	(824)		$	14,926

LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Long-term debt due within one year	$	5,782	$	(5,767)	⁽³⁾	$	-		$	15
Accounts payable		518		(6)	⁽²⁾		-			512
Advanced billings		208		-			-			208
Accrued other taxes		185		-			-			185
Accrued interest		81		(1)	⁽²⁾		-			80
Pension and other postretirement benefits		48		-			-			48
Other current liabilities		309		53	⁽²⁾		(36)	⁽¹¹⁾		326
Total current liabilities		7,131		(5,721)			(36)			1,374

Deferred income taxes		389		70	⁽¹⁴⁾		(168)	⁽¹⁴⁾		291
Pension and other postretirement benefits		2,163		-			(437)	⁽¹³⁾		1,726
Other liabilities		440		-			(28)	⁽¹¹⁾		412
Long-term debt		-		6,738	⁽³⁾		277	⁽¹²⁾		7,015
Total liabilities not subject to compromise		10,123		1,087			(392)			10,818
Liabilities subject to compromise		11,570		(11,570)	⁽⁷⁾		-			-
Total liabilities		21,693		(10,483)			(392)			10,818

Equity (Deficit):
Shareholders' equity of Frontier:
Successor common stock		-		2	⁽⁵⁾		-			2
Predecessor common stock		27		(27)	⁽⁴⁾		-			-
Successor additional paid-in capital		-		4,106	⁽⁵⁾		-			4,106
Predecessor additional paid-in capital		4,818		(4,818)	⁽⁴⁾		-			-
Retained earnings (deficit)		(8,855)		10,028	⁽⁶⁾		(1,173)	⁽¹⁵⁾		-
Accumulated other comprehensive income (loss), net of tax		(741)		-			741	⁽¹⁶⁾		-
Treasury common stock		(15)		15	⁽⁴⁾		-			-
Total equity (deficit)		(4,766)		9,306			(432)			4,108
Total liabilities and equity (deficit)	$	16,927	$	(1,177)		$	(824)		$	14,926

‎

Reorganization Adjustments

In accordance with the Plan of Reorganization, the following adjustments were made:

(1) Reflects net cash payments as of the Effective Date from implementation of the Plan as follows:


($ in millions)

Sources:
Net proceeds from Incremental Exit Term Loan Facility	$	220
Release of restricted cash from other assets to cash		8
Total sources		228

Uses:
Payments of Excess to Unsecured senior notes holders		(1,313)
Payments of pre-petition accounts payable and contract cure payments		(62)
Payments of professional fees and other bankruptcy related costs		(22)
Total uses		(1,397)
Net uses of cash	$	(1,169)

(2) Reflects the reinstatement of accounts payable and accrued liabilities upon emergence, as well as payments made on the Effective Date.

(3) Reflects the conversion of our DIP-to-Exit term loan facility, DIP-to-Exit First Lien Notes, and DIP-to-Exit Second Lien Notes. Also represent the reclassification of the debt from current liabilities during bankruptcy to non-current liabilities based on the maturity of the debt recorded by the Company.

(4) Reflects the cancellation of Predecessor common stock, additional paid in capital and treasury stock.

(5) Reflects the issuance of Successor common stock and additional paid in capital to the unsecured senior note holders.

(6) Reflects the cumulative impact of reorganization adjustments.


($ in millions)

Gain on settlement of Liabilities Subject to Compromise	$	5,274
Cancellation of Predecessor equity		4,754
Net impact on accumulated deficit	$	10,028

(7) As part of the Plan of Reorganization, the Bankruptcy Court approved the settlement of claims reported within Liabilities subject to compromise in our Consolidated balance sheet at our respective allowed claim amounts.

The table below indicates the disposition of Liabilities subject to compromise:


($ in millions)

Liabilities subject to compromise pre-emergence	$	11,570

Reinstated on the Effective Date:
Accounts payable		(66)
Other current liabilities		(59)
Less: total liabilities reinstated		(125)

Amounts settled per the Plan of Reorganization
Issuance of take back debt		(750)
Payment for settlement of unsecured senior noteholders		(1,313)
Equity issued at emergence to unsecured senior noteholders		(4,108)
Total amounts settled		(6,171)

Gain on settlement of Liabilities Subject to Compromise	$	5,274

‎

Fresh Start Adjustments

In accordance with the application of fresh start accounting, the following adjustments were made:

(8)Reflects unamortized deferred commissions paid to acquire new customers that are eliminated upon emergence as this is not a probable future benefit for the Successor. Costs to obtain customers have been reflected as part of intangible assets. Adjustment also reflects the elimination of certain contract assets and contract liabilities.

(9)Property Plant & Equipment – Reflects the decrease in net book value of property and equipment to the estimated fair value as of the Effective Date.

Personal property valued consisted of outside and inside plant network equipment, computers and software, vehicles, office furniture, fixtures and equipment, computers and software, and construction-in-progress. The fair value of our personal property was estimated using the cost approach, while the income approach was considered to assess economic sufficiency to support asset values. As a part of the valuation process, the third-party advisors’ diligence procedures included using internal data to identify and value assets.

Real property valued consisted of land, buildings, and leasehold improvements. The fair value was estimated using the cost approach and sales comparison (market) approach, with consideration of economic sufficiency to support certain asset values.

The following table summarizes the components of property and equipment, net as of April 30, 2021, and the fair value as of the Effective Date:


	Predecessor		Fair Value		Successor
($ in millions)	Historical Value		Adjustment		Fair Value

Land	$	209	$	40	$	249
Buildings and leasehold improvements		2,134		(958)		1,176
General support		1,635		(1,462)		173
Central office/electronic circuit equipment		8,333		(7,364)		969
Poles		1,359		(843)		516
Cable, fiber, and wire		11,824		(8,755)		3,069
Conduit		1,611		(282)		1,329
Construction work in progress		1,048		18		1,066
Property, plant, and equipment	$	28,153	$	(19,606)	$	8,547
Less: Accumulated depreciation		(15,133)		15,133		-
Property, plant, and equipment, net	$	13,020	$	(4,473)	$	8,547

(10)Reflects the fair value adjustment to recognize trademark, trade name and customer relationship.

For purposes of estimating the fair values of customer relationships, we utilized an Income Approach, specifically, the Multi-Period Excess Earnings method, or MPEEM. The MPEEM estimates fair value based on the present value of the incremental after-tax cash flows attributable only to the subject intangible assets after deducting contributory asset charges. The cash flows attributable to the customer relationships were adjusted for contributory asset charges related to the working capital, fixed assets, trade name/trademarks and assembled workforce. The discount rate utilized to present-value the after-tax cash flows was based on the overall weighted cost of capital of the Company as well as the asset specific risks of the intangible assets. Changes in these inputs could have a significant impact on the fair value of the customer relationships intangible assets.

For purposes of estimating the fair value of trademarks and tradenames, an Income approach was used, specifically, the Relief from Royalty Method. The estimated royalty rates were historical third-party transactions regarding the licensing of similar type of assets as well as a review of historical assumptions used in prior transactions. The selected royalty rates were applied to the revenue generated by the trademarks and tradenames to determine the amount of royalty payments saved as a result of owning these assets. The forecasted cash flows were based on our projected revenues and the resulting royalty savings were discounted using a rate based on the overall weighted cost of capital of the Company as well as the asset specific risks of the intangible assets.

(11)Reflects the fair value adjustment to the right of use assets and lease liabilities. Upon application of fresh start accounting, we revalued its right-of-use assets and lease liabilities using the incremental borrowing rate applicable to the Company after emergence from bankruptcy and commensurate with its new capital structure. In addition, we decreased the right-of-use assets to recognize $4 million related to the unfavorable lease contracts.

(12)Reflects the fair value adjustment to adjust Long-term debt as of the Effective Date. This adjustment is to state our debt at estimated fair values.

(13)Reflects a remeasurement of pension and Other Postretirement Benefits related accounts as part of fresh start accounting considerations at emergence.

(14)Reflects the impact of fresh start adjustments on deferred taxes. We purchased the assets, including the stock of subsidiaries, of Frontier Communications Corporation (“Predecessor’s Parent”) at the time of emergence. The Predecessor’s Parent’s federal and state net operating loss carryforwards are expected to have been utilized as a result of the taxable gain realized upon emergence. To the extent not utilized to offset taxable gain, such net operating loss carryforwards are expected to be reduced in accordance with Section 108 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”). As part of the taxable purchase, elections were made under Code section 338(h)(10) to step up the value of assets in certain subsidiaries to fair market value. All other subsidiaries carried over their deferred taxes. The adjustments reflect a $1.5 billion reduction in deferred tax assets for federal and state net operating loss carryforwards, a reduction in valuation allowance and a reduction in deferred tax liabilities.

(15)Reflects the cumulative impact of the fresh start adjustments as discussed above and the elimination of Predecessor accumulated earnings.

(16)Reflects the derecognition of accumulated other comprehensive loss.