UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): September 3, 2014
Frontier Communications Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation)
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001-11001 |
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06-0619596 |
(Commission
File Number) |
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(IRS Employer
Identification No.) |
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3 High Ridge Park, Stamford, Connecticut |
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06905 |
(Address of principal executive offices) |
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(Zip Code) |
(203) 614-5600
(Registrants telephone number, including area code)
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
¨ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
As previously announced, on December 16, 2013, Frontier
Communications Corporation (the Company) entered into an agreement (such agreement as amended on August 13, 2014 and as may be further amended, the Stock Purchase Agreement) to acquire the wireline properties of AT&T
Inc. (AT&T) in Connecticut for a purchase price of $2.0 billion in cash. Pursuant to the Stock Purchase Agreement, the Company agreed to acquire all of the issued and outstanding capital stock of The Southern New England Telephone
Company and SNET America, Inc. from AT&T. Prior to the closing of the AT&T Transaction (as defined below), (i) AT&T will transfer to the transferred companies certain assets and cause the transferred companies to assume certain
liabilities relating to the business to be acquired and (ii) the transferred companies will transfer to AT&T certain assets, and AT&T will assume certain liabilities of the transferred companies, to be retained by AT&T following the
closing (the transferred companies, after giving effect to such transactions, being referred to as the Connecticut Operations). References to the AT&T Transaction refer to our acquisition of the Connecticut Operations
from AT&T pursuant to the Stock Purchase Agreement, which the Company expects to close in the fourth quarter of 2014.
The Company is
filing this Current Report on Form 8-K with the U.S. Securities and Exchange Commission to present (i) the combined financial statements of the Connecticut Operations for each of the years ended December 31, 2013, 2012 and 2011 and as of
December 31, 2013 and 2012, and for the six months ended June 30, 2014 and 2013 and as of June 30, 2014, which are filed, respectively, as Exhibits 99.1 and 99.2 hereto, (ii) the unaudited pro forma condensed combined financial
statements of the Company, assuming consummation of and after giving effect to the AT&T Transaction, for the six months ended June 30, 2014 and as of June 30, 2014 and for the year ended December 31, 2013, which are filed as
Exhibit 99.3 hereto and (iii) certain information regarding the financial condition and results of operations of the Connecticut Operations, which is set forth below.
Historical Financial Condition and Operating Results of the Connecticut Operations
The following is an analysis of historical operating results of the Connecticut Operations. This analysis should be read in conjunction with
the historical combined financial statements of the Connecticut Operations filed herewith. The historical combined financial statements have been carved out from AT&Ts consolidated financial statements in accordance with U.S. generally
accepted accounting principles and reflect assumptions and allocations made by AT&T to separate the Connecticut Operations on a stand-alone basis. Accordingly, the historical combined financial statements, which do not contemplate the AT&T
Transaction, may not be indicative of the financial condition and operating results that would have existed had the Connecticut Operations been a stand-alone entity. The historical combined financial statements of the Connecticut Operations reflect
revenues and associated expenses relating to certain services provided to other affiliates of AT&T, which business relationship will be modified in connection with the AT&T Transaction. This analysis should be read in conjunction with the
unaudited pro forma condensed combined financial information filed herewith, which reflects, among other things, pro forma adjustments to reflect the expected impact of the modifications to the business relationship between AT&T and the
Connecticut Operations upon consummation of the AT&T Transaction, as well as assets and liabilities not included in the historical financial statements of the Connecticut Operations that will be transferred by AT&T to the Connecticut
Operations in connection with the AT&T Transaction and assets and liabilities included in the historical financial statements of the Connecticut Operations that will be retained by AT&T in connection with the AT&T Transaction.
Revenue
Revenue for the
Connecticut Operations is generated primarily through the provision of voice services, data services and other revenue generated from the provision of network, marketing and other services to other affiliated AT&T entities. Such revenues are
generated through either a monthly recurring fee or a fee based on usage, and revenue recognition is not dependent upon significant judgments by management, with the exception of a determination of a provision for uncollectible amounts.
Revenue in the six-month period ended June 30, 2014 decreased $17.1 million, or 2%, to $679.8 million as compared to the comparable period in
2013. The decline during the first six months of 2014 was primarily the result of decreases in voice revenue, partially offset by an increase in data revenue. Revenue for the year ended December 31, 2013 increased $14.9 million, or 1%, to $1,393.5
million as compared to the year ended December 31, 2012. The increase in 2013 was primarily the result of increases in data and other revenues, partially offset by a decrease in voice revenue. Revenue for the year ended December 31, 2012 decreased
$17.3 million, or 1%, to $1,378.6 million as compared to the year ended December 31, 2011. The decline in 2012 was primarily the result of decreases in voice revenue, partially offset by an increase in data revenue.
Total voice revenue for the six-month period ended June 30, 2014 decreased $25.7 million, or 11%, to $213.0 million as compared to the
comparable period in 2013. Total voice revenue for the year ended December 31, 2013 decreased $53.0 million, or 10%, to $463.3 million as compared to the year ended December 31, 2012. Total voice revenue for the year ended December 31, 2012
decreased $54.8 million, or 10%, to $516.2 million as compared to the year ended December 31, 2011. Voice revenue, which excludes revenue from VoIP connections, declined in all periods primarily due to reductions in local and long distance customers
as consumers have moved from landline services to IP-based technology and wireless forms of communication.
Total data revenue for the
six-month period ended June 30, 2014 increased $12.5 million, or 3%, to $410.8 million as compared to the comparable period in 2013. Total data revenue for the year ended December 31, 2013 increased $58.3 million, or 8%, to $806.5 million as
compared to the year ended December 31, 2012. Total data revenue for the year ended December 31, 2012 increased $38.1 million, or 5%, to $748.2 million as compared to the year ended December 31, 2011. Data revenue increases in all periods were
primarily driven by increases in broadband, video and VoIP revenues as the Connecticut Operations has increased customers for such services each period since 2011.
Total other revenue for the six-month period ended June 30, 2014 decreased $4.0 million, or 7%, to $55.9 million as compared to the comparable
period in 2013. The decline during the first six months of 2014 was primarily the result of decreases in revenue generated from network, marketing and customer service services provided to other affiliated AT&T entities, partially offset by an
increase in other ancillary revenues. Total other revenue for the year ended December 31, 2013 increased $9.6 million, or 8%, to $123.8 million as compared to the year ended December 31, 2012, primarily as a result of increases in revenue generated
from network, marketing, and customer service services provided to other affiliated AT&T entities. This was partially offset by a decrease in other ancillary revenues. Total other revenue for the year ended December 31, 2012 decreased $0.6
million, or 1%, to $114.3 million as compared to the year ended December 31, 2011.
The Connecticut Operations had approximately 514,000
total residential voice connections as of June 30, 2014 and approximately 538,000, 592,000 and 657,000 total residential voice connections as of December 31, 2013, 2012 and 2011, respectively. The Connecticut Operations lost approximately 24,000
residential voice connections, net, for six-month period ended June 30, 2014, and approximately 54,000 and 65,000, residential voice connections, net, for years ended December 31, 2013, and December 31, 2012, respectively, in each case versus the
previous year-end customer totals.
The Connecticut Operations had approximately 415,000 total broadband subscribers as of June 30, 2014
and approximately 416,000, 415,000 and 422,000 total broadband subscribers as of December 31, 2013, 2012 and 2011, respectively. The Connecticut Operations lost approximately 1,300 broadband customers, net, for six-month period ended June 30, 2014,
versus customer totals at December 31, 2013, gained approximately 1,000, broadband subscribers, net, for year ended December 31, 2013, and lost approximately 7,800 total broadband subscribers, net, during the year ended December 31, 2012, in each
case versus the prior year-end customer totals.
The Connecticut Operations had approximately 215,000 total video subscribers as of June
30, 2014 and approximately 206,000, 177,000 and 153,000 total video subscribers as of December 31, 2013, 2012 and 2011, respectively. The Connecticut Operations gained approximately 9,000 video subscribers, net, for six-month period ended June 30,
2014 versus customer totals at December 31, 2013 and gained 29,000, and 24,000 video subscribers, net, during the years ended December 31, 2013 and 2012, in each case versus the prior year-end customer totals.
Operating Expenses
Total
operating expenses for the six months ended June 30, 2014 increased $24.2 million, or 4%, to $591.4 million, as compared with the six months ended June 30, 2013, reflecting higher allocated charges and content costs, partially offset by
lower pension and postretirement expenses and a decrease in depreciation and amortization expense. Total operating expenses for the year ended December 31, 2013 decreased $348.1 million, or 26%, to $1,015.5 million as compared to the year ended
December 31, 2012 primarily due lower pension and postretirement expense and lower depreciation and amortization expenses, partially offset by higher allocated charges and content costs. Total operating expenses for the year ended December 31, 2012
increased $3.1 million, to $1,363.6 million as compared to the year ended December 31, 2011 primarily due to higher pension and postretirement expenses, allocated charges and content costs, partially offset by decreased depreciation and
amortization.
Pension and postretirement expenses (which are components of both cost of services and sales, and selling, general and
administrative expenses) for the six months ended June 30, 2014 and 2013 were $0.8 million and $8.2 million, respectively, reflecting higher amortization of prior service credits due to plan changes in the fourth quarter of 2013. Pension and
postretirement expenses (which are components of both cost of services and sales, and selling, general and administrative expenses) were $(113.4) million, $189.4 million and $146.2 million for the years ended December 31, 2013, 2012 and 2011,
respectively. The decrease in pension and postretirement expense in 2013 as compared to 2012 was primarily due to an actuarial gain of $131.9 million in 2013 and an actuarial loss of $173.7 million in 2012. The increase in pension and postretirement
expenses in 2012 as compared to 2011 was primarily due to a higher actuarial loss of $173.7 million in 2012 as compared to an actuarial loss of $123.5 million in 2011. Actuarial gains and losses are noncash and are measured and recorded annually.
Allocated charges are affiliate costs related to allocated functions including information technology, finance and accounting, human
resources, network support, advertising and marketing and other services. Allocated charges also include content costs and royalty expense for the use of trademarks owned by AT&T affiliates. Allocated charges (which are components of both cost
of services and sales, and selling, general and administrative expenses) for the six months ended June 30, 2014 and 2013 were $224.7 million and $193.2 million, respectively. Allocated charges (which are components of both cost of services and
sales, and selling, general and administrative expenses) were $393.4 million, $366.1 million and $357.3 million for the years ended December 31, 2013, 2012 and 2011, respectively. The increase in allocated charges reflected higher content costs
primarily driven by growth in video subscribers.
Depreciation and amortization expenses for the six months ended June 30, 2014 and 2013
were $78.7 million and $81.5 million, respectively. Depreciation and amortization expenses were $166.2 million, $187.0 million and $208.7 million for the years ended December 31, 2013, 2012 and 2011, respectively. The decreases in depreciation and
amortization expenses were primarily due to assets becoming fully depreciated.
Capital Expenditures
Capital expenditures for the Connecticut Operations for the six-month periods ended June 30, 2014 and 2013 were $75.2 million and $65.4
million, respectively, largely due to increased maintenance capital expenditures on our existing network as well as higher spend due to broadband expansion. Capital expenditures for the Connecticut Operations for the years ended December 31, 2013,
2012 and 2011 were $146.8 million, $126.1 million and $194.3 million, respectively. Capital expenditures increased from 2012 as compared to 2013 as a result of higher U-verse video infrastructure build out in 2013 and projects in 2013 to run fiber
to business locations. Capital expenditures declined from 2011 as compared to 2012 due to a reduction in U-verse video infrastructure build out in 2012, as well as a wireless site backhaul project that was completed in 2011.
ITEM 9.01 |
FINANCIAL STATEMENTS AND EXHIBITS |
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(d) Exhibits |
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The following exhibits are filed as part of this Current Report on Form 8-K: |
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Exhibit
Number |
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Description of Exhibit |
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23.1 |
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Consent of Ernst & Young LLP. |
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99.1 |
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Combined financial statements of the AT&T Connecticut Wireline Operations (A Business Unit of AT&T Inc.) for each of the years ended
December 31, 2013, 2012 and 2011 and as of December 31, 2013 and 2012. |
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99.2 |
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Combined financial statements of the AT&T Connecticut Wireline Operations (A Business Unit of AT&T Inc.) for the six months ended
June 30, 2014 and 2013 and as of June 30, 2014 and December 31, 2013. |
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99.3 |
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Unaudited pro forma condensed combined financial statements of the Company, assuming consummation of and after giving effect to the AT&T Transaction, for the six months ended June 30, 2014 and as of June 30, 2014 and
for the year ended December 31, 2013. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
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FRONTIER COMMUNICATIONS CORPORATION |
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By: |
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/s/ David G. Schwartz |
Name: |
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David G. Schwartz |
Title: |
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Vice President, Corporate Counsel and Assistant Secretary |
Date: September 3, 2014
Exhibits
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Exhibit
Number |
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Description of Exhibit |
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23.1 |
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Consent of Ernst & Young LLP. |
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99.1 |
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Combined financial statements of the AT&T Connecticut Wireline Operations (A Business Unit of AT&T Inc.) for each of the years ended
December 31, 2013, 2012 and 2011 and as of December 31, 2013 and 2012. |
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99.2 |
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Combined financial statements of the AT&T Connecticut Wireline Operations (A Business Unit of AT&T Inc.) for the six months ended June 30, 2014 and 2013 and as of June 30, 2014 and December 31, 2013. |
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99.3 |
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Unaudited pro forma condensed combined financial statements of the Company, assuming consummation of and after giving effect to the AT&T Transaction, for the six months ended June 30, 2014 and as of June 30, 2014 and
for the year ended December 31, 2013. |
Exhibit 23.1
Consent of Independent Auditors
We consent to
the incorporation by reference of our report dated April 3, 2014, with respect to the combined financial statements of AT&T Connecticut Wireline Operations, as of December 31, 2013 and 2012, and for each of the three years in the period ended
December 31, 2013, included in this Current Report on Form 8-K of Frontier Communications Corporation dated September 3, 2014, in the following Registration Statements of Frontier Communications Corporation:
(1) Registration Statement (Form S-3 No. 333-190613)
(2)
Registration Statement (Form S-3 No. 333-181299)
(3) Registration Statement (Form S-3 No. 333-158391)
(4) Registration Statement (Form S-3 No. 333-58044)
(5)
Registration Statement (Form S-8 No. 333-188440)
(6) Registration Statement (Form S-8 No. 333-167932)
(7) Registration Statement (Form S-8 No. 333-159508)
(8)
Registration Statement (Form S-8 No. 333-151248)
(9) Registration Statement (Form S-8 No. 333-151246)
(10) Registration Statement (Form S-8 No. 333-151245)
(11)
Registration Statement (Form S-8 No. 333-142636)
(12) Registration Statement (Form S-8 No. 333-91054)
(13) Registration Statement (Form S-8 No. 333-71821)
(14)
Registration Statement (Form S-8 No. 333-71597)
(15) Registration Statement (Form S-8 No. 333-71029)
(16) Registration Statement (Form S-8 No. 333-61432)
(17)
Registration Statement (Form S-8 No. 33-48683)
(18) Registration Statement (Form S-8 No. 33-42972)
/s/ Ernst & Young LLP
San Antonio, Texas
August 29, 2014
Exhibit 99.1
COMBINED FINANCIAL STATEMENTS
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Years Ended December 31, 2013, 2012, and 2011
With Report of Independent Auditors
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Combined Financial Statements
Years Ended December 31, 2013, 2012, and 2011
Contents
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Report of Independent Auditors |
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1 |
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Combined Financial Statements |
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Combined Statements of Income |
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3 |
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Combined Balance Sheets |
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4 |
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Combined Statements of Cash Flows |
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5 |
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Combined Statements of Changes in Parents Equity |
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6 |
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Notes to Combined Financial Statements |
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7 |
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Report of Independent Auditors
The Board of Directors
AT&T Inc.
We have audited the accompanying combined financial statements of AT&T Connecticut Wireline Operations (comprising the businesses described in
Note 1), which comprise the combined balance sheets as of December 31, 2013 and 2012, and the related combined statements of income, changes in parents equity, and cash flows for each of the three years ended December 31, 2013,
and the related notes to the combined financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting
principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud
or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
1
Opinion
In
our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of AT&T Connecticut Wireline Operations at December 31, 2013 and 2012, and the combined results of its
operations and its cash flows for each of the three years ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
San Antonio, Texas
April 3, 2014
2
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Combined Statements of Income
(In Thousands)
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Year Ended December 31 |
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2013 |
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2012 |
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2011 |
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Operating revenues (including revenue from affiliates of $276,825, $255,422, and $260,641 in 2013, 2012, and 2011): |
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Voice |
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$ |
463,252 |
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$ |
516,227 |
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$ |
571,059 |
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Data |
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806,474 |
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748,161 |
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710,031 |
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Other |
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123,812 |
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114,253 |
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114,883 |
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Total operating revenues |
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1,393,538 |
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1,378,641 |
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1,395,973 |
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Operating expenses: |
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Cost of services and sales (including costs charged by affiliates of $219,843, $188,366, and $207,335 in 2013, 2012, and 2011,
respectively) |
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516,802 |
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586,808 |
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612,068 |
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Selling, general and administrative |
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332,508 |
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589,826 |
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539,739 |
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Depreciation and amortization |
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166,200 |
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187,008 |
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208,717 |
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Total operating expenses |
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1,015,510 |
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1,363,642 |
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1,360,524 |
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Operating income |
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378,028 |
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14,999 |
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35,449 |
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Other income (expense): |
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Interest expense |
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(439 |
) |
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(52 |
) |
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(2,623 |
) |
Other income, net |
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965 |
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1,162 |
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1,713 |
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Total other income (expense) |
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526 |
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1,110 |
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(910 |
) |
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Income before income taxes |
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378,554 |
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16,109 |
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34,539 |
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Income tax expense (benefit) |
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140,918 |
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(494 |
) |
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15,750 |
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Net income |
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$ |
237,636 |
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$ |
16,603 |
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$ |
18,789 |
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The accompanying notes are an integral part of these combined financial statements.
3
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Combined Balance Sheets
(In Thousands)
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December 31 |
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2013 |
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2012 |
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Assets |
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Current assets: |
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Accounts receivable, net of allowance for uncollectibles of $5,425 and $6,165 |
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$ |
118,592 |
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$ |
115,533 |
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Accounts receivable from affiliates |
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37,035 |
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67,610 |
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Current deferred income taxes |
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29,254 |
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22,323 |
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Other current assets |
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5,120 |
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4,544 |
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Total current assets |
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190,001 |
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210,010 |
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Net property, plant, and equipment |
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1,318,568 |
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1,354,400 |
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Other assets: |
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Noncurrent deferred income taxes |
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18,525 |
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Other assets |
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18,121 |
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16,300 |
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Total other assets |
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36,646 |
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16,300 |
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Total assets |
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$ |
1,545,215 |
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$ |
1,580,710 |
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Liabilities and parents equity |
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Current liabilities: |
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Accounts payable to affiliates |
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$ |
143,869 |
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$ |
201,319 |
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Accounts payable and accrued expenses |
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37,536 |
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39,086 |
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Advance billings and customer deposits |
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36,274 |
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34,913 |
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Accrued compensated absences |
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7,527 |
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15,800 |
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Other current liabilities |
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6,172 |
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7,300 |
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Total current liabilities |
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231,378 |
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298,418 |
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Deferred credits and other noncurrent liabilities: |
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Noncurrent deferred income taxes |
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584 |
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Noncurrent unrecognized tax benefits |
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66,138 |
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89,800 |
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Unamortized investment tax credits |
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2,897 |
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3,200 |
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Other noncurrent liabilities and deferred credits |
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|
22,021 |
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17,896 |
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|
|
|
|
|
Total deferred credits and other noncurrent liabilities |
|
|
91,056 |
|
|
|
111,480 |
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
Parents equity |
|
|
1,222,781 |
|
|
|
1,170,812 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and parents equity |
|
$ |
1,545,215 |
|
|
$ |
1,580,710 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these combined financial statements.
4
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Combined Statements of Cash Flows
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
237,636 |
|
|
$ |
16,603 |
|
|
$ |
18,789 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
166,200 |
|
|
|
187,008 |
|
|
|
208,717 |
|
Provision for uncollectible accounts |
|
|
5,550 |
|
|
|
8,892 |
|
|
|
9,499 |
|
Pension (gain) costs funded by parent |
|
|
(113,405 |
) |
|
|
189,361 |
|
|
|
146,242 |
|
Deferred income taxes |
|
|
11,635 |
|
|
|
(43,513 |
) |
|
|
55,237 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(8,609 |
) |
|
|
(9,084 |
) |
|
|
12,027 |
|
Accounts receivable from affiliates |
|
|
30,575 |
|
|
|
(13,744 |
) |
|
|
48,494 |
|
Other current assets |
|
|
(576 |
) |
|
|
1,287 |
|
|
|
(178 |
) |
Accounts payable to affiliates |
|
|
(95,125 |
) |
|
|
(7,417 |
) |
|
|
2,166 |
|
Accounts payable and accrued expenses |
|
|
(9,590 |
) |
|
|
2,916 |
|
|
|
(114,444 |
) |
Other, net |
|
|
(21,413 |
) |
|
|
13,903 |
|
|
|
(16,932 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
202,878 |
|
|
|
346,212 |
|
|
|
369,617 |
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Construction and capital expenditures |
|
|
(146,842 |
) |
|
|
(126,050 |
) |
|
|
(194,345 |
) |
Proceeds from sales of assets to affiliates |
|
|
16,226 |
|
|
|
14,462 |
|
|
|
11,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(130,616 |
) |
|
|
(111,588 |
) |
|
|
(183,053 |
) |
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Contribution from (distribution to) parent, net |
|
|
(72,262 |
) |
|
|
(234,624 |
) |
|
|
(186,564 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(72,262 |
) |
|
|
(234,624 |
) |
|
|
(186,564 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year ended: |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax |
|
$ |
98,804 |
|
|
$ |
44,977 |
|
|
$ |
20,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
1,127 |
|
|
$ |
117 |
|
|
$ |
3,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these combined financial statements.
5
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Combined Statements of Changes in Parents Equity
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
|
|
|
|
Balance at beginning of the year |
|
$ |
1,170,812 |
|
|
$ |
1,199,472 |
|
|
$ |
1,221,005 |
|
Net income |
|
|
237,636 |
|
|
|
16,603 |
|
|
|
18,789 |
|
Pension costs (gains) funded by parent |
|
|
(113,405 |
) |
|
|
189,361 |
|
|
|
146,242 |
|
Other contribution from (distribution to) parent, net |
|
|
(72,262 |
) |
|
|
(234,624 |
) |
|
|
(186,564 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
1,222,781 |
|
|
$ |
1,170,812 |
|
|
$ |
1,199,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these combined financial statements.
6
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements
December 31, 2013
1. Business and Basis
of Presentation
AT&T Connecticut Wireline Operations (the Business) comprises the combined operations of The Southern New England Telephone
Company (SNET); SNET America, Inc.; and Direct Broadcast Satellite. Both SNET and SNET America, Inc. are wholly owned subsidiaries of AT&T Inc. (AT&T) and comprise AT&Ts wireline operations business unit in Connecticut. The
Business provides telecommunications services in Connecticut, including local telephone, long distance, data, and video services.
On December 16,
2013, AT&T announced entry into a stock purchase agreement with Frontier Communications Corporation, a Delaware corporation (Frontier Communications), to sell the Business for $2.0 billion in cash through the purchase of all the outstanding
shares in AT&Ts wholly owned subsidiaries SNET and SNET America, Inc. The transaction is subject to review by the U.S. Department of Justice, the Federal Communications Commission, and the Connecticut Public Utilities Regulatory Authority
and other state regulatory authorities. It is expected that the transaction contemplated by the stock purchase agreement will close in the second half of 2014, subject to customary closing conditions.
Basis of Presentation
The combined financial statements
have been prepared on a carve-out basis in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and reflect the historical financial position, results of operations, and cash flows of the Business for the periods presented. The
historical financial statements reflect the amounts from the Business combined financial statements, and the amounts that have been carved out from AT&Ts consolidated financial statements. They reflect assumptions and allocations
made by AT&T to separate the Business on a stand-alone basis. As a result, the combined financial statements may not be indicative of the financial position, results of operations, and cash flows that would have been presented if the Business
had been a stand-alone entity. Therefore, the historical financial information is not necessarily indicative of what the results of operations, financial position, and cash flows will be in the future.
The historical combined financial statements were prepared using AT&Ts historical basis in the assets and liabilities of the Business, and its
historical combined financial statements include all revenue, costs, assets, and liabilities directly attributable to the Business. Historically, AT&T provided certain corporate services to the Business and costs associated with these functions
have been allocated to the Business. See Note 8, Related-Party Transactions. Management
7
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (continued)
1. Business and Basis of Presentation (continued)
believes these expenses have been allocated using reasonable allocation methodologies to the services provided, primarily based on relative percentage of total net sales, relative percentage of
headcount, or specific identification.
The allocations may not reflect the expense the Business would have incurred as a stand-alone company for the
periods presented. Actual costs that may have been incurred if the Business had been a stand-alone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees,
and strategic decisions made in certain areas.
The total parents equity represents AT&Ts interest in the Business recorded net
assets.
2. Summary of Significant Accounting Policies
Principles of Combination
All significant intercompany
transactions within the Business have been eliminated. All significant transactions between the Business and AT&T and its subsidiaries are included in the combined financial statements.
Use of Estimates
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results
could differ from those estimates.
Comprehensive Income
Comprehensive income is the same as net income for all periods presented.
Operating Segments
The Business operates in one segment.
8
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Income Taxes
The Business is included in AT&Ts consolidated federal income tax return. Federal income taxes are provided for in accordance with the provisions of
the Tax Allocation Agreement (the Agreement) between the Business and AT&T. In general, the Business income tax provision under the Agreement utilizes a method that allocates current and deferred taxes to the Business assuming the
financial consequences of income, deductions and credits which could be utilized on a separate return basis or in consolidation with AT&T and are assured of realization. Ultimate realization of these items will be through settlement with
AT&T following their inclusion in the consolidated tax return. The Business provides deferred income taxes for temporary differences between computed tax basis in assets and liabilities and the carrying amounts of assets and liabilities. The tax
basis of assets and liabilities are based on amounts that meet the recognition threshold and are measured pursuant to the enacted tax rates the Business expects will be in effect when the Business actually pays or recovers taxes. Deferred income tax
assets represent amounts available to reduce income taxes the Business will pay on taxable income in future years; however, in some cases these deferred tax benefits would remain with the AT&T consolidated group and its existing members upon any
members departure.
Investment tax credits earned prior to their repeal by the Tax Reform Act of 1986 are amortized as reductions in income tax
expense over the lives of the assets that gave rise to the credits.
The Business reports, on a net basis, taxes imposed by governmental authorities on
revenue-producing transactions between the Business and its customers in the combined statements of income.
Revenue Recognition
Revenues derived from local telephone, long distance, data, and video services are recognized when services are provided. This is based upon either usage
(e.g., minutes of traffic/bytes of data processed), period of time (e.g., monthly service fees), or other established fee schedules. The Business revenues are either billed in advance or arrears.
Revenues and associated expenses related to nonrefundable, up-front wireline service activation fees are deferred and recognized over the average customer
life of three or four years depending on the product sold. Expenses, when exceeding revenue, are only deferred to the extent of revenue.
9
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
For contracts that involve the bundling of services, revenue is allocated to the services based on their
relative selling price, subject to the requirement that revenue recognized is limited to the amounts already received from the customer that are not contingent upon the delivery of additional products or services to the customer in the future.
Accounts Receivable and Allowance for Uncollectible Accounts
Accounts receivable consist primarily of trade accounts receivable from customers and are generally unsecured and have monthly payment terms. The
Business bad debt allowance is estimated primarily based on an analysis of history and future expectations of the Business retail and wholesale customers. For retail customers, estimates are based on the Business actual historical
write-offs, net of recoveries, and the aging of accounts receivable balances. Managements assumptions are reviewed at least quarterly, and adjustments are made to the bad debt allowance as appropriate. For wholesale customers, the Business
uses a statistical model based on the aging of accounts receivable balances. The risk categories, risk percentages, and reserve balance assumptions built into the model are reviewed monthly, and the bad debt allowance is adjusted accordingly.
Property, Plant, and Equipment
Property, plant, and
equipment are stated at cost. The cost of additions and substantial improvements to property, plant, and equipment is capitalized. The cost of maintenance and repairs of property, plant, and equipment is charged to operating expenses as incurred.
Property, plant, and equipment are depreciated using straight-line methods over their estimated economic lives. Management follows composite group depreciation methodology for assets other than buildings and software; accordingly, when a portion of
the Business depreciable property, plant, and equipment is retired in the ordinary course of business, the gross book value is reclassified to accumulated depreciation, and no gain or loss is recognized on the assets disposition.
10
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Property, plant, and equipment are reviewed for recoverability whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. An impairment loss shall be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.
Software Costs
It is the Business policy to capitalize certain costs incurred in connection with developing or obtaining internal-use software. Capitalized
software costs are included in property, plant, and equipment and are primarily amortized over three years. In addition, there is certain network software that allows the equipment to provide the features and functions unique to the Business
network, which management includes in the cost of equipment categories for financial reporting purposes. Software costs that do not meet capitalization criteria are expensed immediately.
Advertising Costs
Advertising costs for advertising
products and services or promoting the Business corporate image are expensed as incurred. For the years ended December 31, 2013, 2012, and 2011, advertising expense was $20.9 million, $15.3 million, and $15.2 million,
respectively.
Employee Separations
The Business
established obligations for expected termination benefits provided under existing plans to former or inactive employees after employment but before retirement. The Business had severance accruals of $4.0 million and $0 million at
December 31, 2013 and 2012, respectively.
Materials and Supplies
New and reusable materials are carried principally at average original cost, except that specific cost is used in the case of large individual items.
Non-reusable materials are carried at estimated salvage value.
11
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Business to concentrations of credit risk consist primarily of trade receivables. Concentrations of credit
risk with respect to trade receivables are limited due to the large number of customers in the Business customer base.
Recent Accounting
Pronouncements
In July 2013, the FASB issued a clarification regarding the presentation of an unrecognized tax benefit related to a net operating
loss carryforward, a similar tax loss, or a tax credit carryforward. Under this new standard, the liability related to an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred
tax asset if available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position. Otherwise, the unrecognized tax benefit should be presented in the financial
statements as a separate liability. The assessment is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date. For nonpublic entities, the amendments in this update are effective for fiscal years, and interim
periods within those years, beginning after December 15, 2013. Early adoption is permitted. The Business has completed the study of what effect this guidance will have on its financial position and results of operations and has determined that
the adoption will not have a material effect on the combined financial statements.
12
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (continued)
3. Property, Plant, and Equipment
Property, plant, and equipment are summarized as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Lives (Years) |
|
2013 |
|
|
2012 |
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
Land |
|
|
|
$ |
14,876 |
|
|
$ |
14,950 |
|
Buildings |
|
3545 |
|
|
534,999 |
|
|
|
538,533 |
|
Central office equipment |
|
310 |
|
|
2,665,011 |
|
|
|
2,642,072 |
|
Cable, wiring, and conduit |
|
1050 |
|
|
2,590,898 |
|
|
|
2,630,583 |
|
Other equipment |
|
515 |
|
|
290,455 |
|
|
|
280,690 |
|
Software |
|
3 |
|
|
5,059 |
|
|
|
4,555 |
|
Plant under construction |
|
|
|
|
6,749 |
|
|
|
7,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,108,047 |
|
|
|
6,118,637 |
|
Accumulated depreciation and amortization |
|
|
|
|
(4,789,479 |
) |
|
|
(4,764,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net property, plant, and equipment |
|
|
|
$ |
1,318,568 |
|
|
$ |
1,354,400 |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $164.6 million in 2013, $184.7 million in 2012 and $202.5 million in 2011.
Amortization expense was $1.6 million in 2013, $2.3 million in 2012 and $6.2 million in 2011.
Certain facilities and equipment used in
operations are leased under operating leases. Rental expense under operating leases, excluding intercompany leases, were $6.4 million for 2013, $5.9 million for 2012, and $7.6 million for 2011. At December 31, 2013, the future
minimum rental payments under noncancelable operating leases, excluding intercompany leases, for the years 2014 through 2018 were $2.3 million, $1.2 million, $0.9 million, $0.3 million, and $0.06 million, respectively, with
$0.05 million due thereafter. Certain real estate operating leases contain renewal options that may be exercised.
13
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (continued)
4. Income Taxes
A reconciliation of the change in the Business unrecognized tax benefits balance from January 1 to December 31 for 2013 and 2012, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
2012 |
|
|
|
(In Thousands) |
|
|
|
|
Balance at beginning of year |
|
$ |
56,745 |
|
|
$ |
42,761 |
|
Increases for tax positions related to current year |
|
|
3,174 |
|
|
|
844 |
|
Increases for tax positions related to prior years |
|
|
11,066 |
|
|
|
22,961 |
|
Decreases for tax positions related to prior years |
|
|
(11,114 |
) |
|
|
(9,821 |
) |
Settlements |
|
|
(16,770 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
43,101 |
|
|
$ |
56,745 |
|
|
|
|
|
|
|
|
|
|
The Business records interest and penalties related to federal and state unrecognized tax benefits in income tax expense.
Accrued interest included in unrecognized tax benefits was $23.0 million and $33.1 million as of December 31, 2013 and 2012, respectively. The net interest and penalty expense (benefit) recorded in income tax expense (benefit)
included in the combined statements of income was $1.3 million for 2013, $9.8 million for 2012, and $(0.2) million for 2011.
The
Business unrecognized tax benefits balance, which included interest at December 31, 2013 and 2012, was $66.1 million and $89.8 million, respectively. The amount of unrecognized tax benefits included in the reconciliation at
December 31, 2013 and 2012, that, if recognized, would affect the effective tax rate was $16.3 million and $15.5 million, respectively.
The Business files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. The income tax returns are regularly audited
and reviewed by the Internal Revenue Service (IRS) as well as by state and local taxing authorities. All audit periods prior to 2003 are closed for federal purposes. The IRS has completed field examinations of the Business tax returns through
2008. AT&T is engaged with the IRS Appeals Division in resolving issues related to the Business 20032008 returns. At this time, management is not able to determine the impact the resolution may have on the Business unrecognized
tax benefits.
14
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (continued)
4. Income Taxes (continued)
Significant components of the Business net deferred tax assets (liabilities) are as follows at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
2012 |
|
|
|
(In Thousands) |
|
|
|
|
Depreciation and amortization |
|
$ |
(367,250 |
) |
|
$ |
(395,465 |
) |
Employee benefits |
|
|
398,439 |
|
|
|
429,020 |
|
State tax credit carryforwards |
|
|
|
|
|
|
9,700 |
|
Valuation allowances |
|
|
|
|
|
|
(9,700 |
) |
Other, net |
|
|
16,590 |
|
|
|
(11,816 |
) |
|
|
|
|
|
|
|
|
|
Net deferred income tax assets |
|
$ |
47,779 |
|
|
$ |
21,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets |
|
$ |
29,254 |
|
|
$ |
22,323 |
|
Net noncurrent deferred tax assets |
|
|
18,525 |
|
|
|
(584 |
) |
|
|
|
|
|
|
|
|
|
Net deferred income tax assets |
|
$ |
47,779 |
|
|
$ |
21,739 |
|
|
|
|
|
|
|
|
|
|
The components of income tax expense (benefit) are as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
|
|
(In Thousands) |
|
Federal |
|
|
|
|
Current |
|
$ |
117,350 |
|
|
$ |
35,059 |
|
|
$ |
(39,499 |
) |
Deferred |
|
|
8,999 |
|
|
|
(30,742 |
) |
|
|
47,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total federal |
|
|
126,349 |
|
|
|
4,317 |
|
|
|
8,129 |
|
|
|
|
|
State |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
11,933 |
|
|
|
7,960 |
|
|
|
12 |
|
Deferred |
|
|
2,636 |
|
|
|
(12,771 |
) |
|
|
7,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total state |
|
|
14,569 |
|
|
|
(4,811 |
) |
|
|
7,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) |
|
$ |
140,918 |
|
|
$ |
(494 |
) |
|
$ |
15,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (continued)
4. Income Taxes (continued)
Income taxes paid to AT&T for the years ended December 31, 2013, 2012, and 2011, were
$98.8 million, $45.0 million, and $20.0 million, respectively. Tax-related balances due from AT&T for the years ended December 31, 2013 and 2012, were $11.9 million and $39.4 million.
A reconciliation of income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate (35%) to income before income
taxes is as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
|
|
(In Thousands) |
|
Taxes computed at federal statutory rate |
|
$ |
132,494 |
|
|
$ |
5,638 |
|
|
$ |
12,089 |
|
Increases (decreases) in taxes resulting from the following: |
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes net of federal tax effect |
|
|
9,470 |
|
|
|
(3,127 |
) |
|
|
4,954 |
|
Interest on unrecognized tax benefits |
|
|
2,199 |
|
|
|
5,052 |
|
|
|
|
|
Employee stock option plan dividends |
|
|
(3,756 |
) |
|
|
(7,999 |
) |
|
|
|
|
Other net |
|
|
511 |
|
|
|
(58 |
) |
|
|
(1,293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
140,918 |
|
|
$ |
(494 |
) |
|
$ |
15,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
37 |
% |
|
|
(3 |
)% |
|
|
46 |
% |
5. Pension and Postretirement Benefits
AT&T sponsors numerous employee benefit plans, which substantially all employees of the Business participated in as discussed below.
Pension Benefits and Postretirement Benefits
Substantially all employees of the Business are covered by one of AT&Ts noncontributory pension and death benefit plans. Additionally, AT&T
provides certain medical, dental, and life insurance benefits to certain of the Business retired employees under various plans. The Business participation in AT&Ts defined pension and postretirement benefit plans is accounted
for as a multi-employer plan in the Business combined financial statements, in accordance with ASC 715-30, Defined Benefit Plans Pension and ASC 715-60, Defined Benefit Plans Other
16
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (continued)
5. Pension and Postretirement Benefits (continued)
Postretirement. ASC 715, Compensation Retirement Benefits, provides that an employer that participates in a multi-employer defined benefit plan is not required to
report a liability beyond the contributions currently due and unpaid to the plan. Therefore, no assets or liabilities related to these plans have been included in the combined balance sheets. Costs associated with these plans and benefits are
allocated by AT&T to their participating subsidiaries, including the Business, based on each subsidiarys proportionate share of the overall cost of the plans and benefits. Allocated (gains) costs of these plans and benefits included in the
combined statements of income were $(113.4) million, $189.4 million, and $146.2 million in 2013, 2012, and 2011, respectively.
Contributory Savings Plans
Substantially all employees
are eligible to participate in contributory savings plans sponsored by AT&T. Under the savings plans, AT&T matches a stated percentage of eligible employee contributions, subject to a specified ceiling that is charged to the Business. The
allocated amounts related to these savings plans were $8.3 million, $8.5 million, and $8.5 million in 2013, 2012, and 2011, respectively.
6. Commitments and Contingencies
In addition to issues
specifically discussed elsewhere, the Business is party to numerous lawsuits, regulatory proceedings, and other matters arising in the ordinary course of business. In managements opinion, although the outcomes of these proceedings are
uncertain, they should not have a material adverse effect on the Business financial position, results of operations, or cash flows.
7.
Additional Financial Information
No nonaffiliated customers accounted for more than 10% of revenues in 2013.
Approximately 85% of the Business employees are represented by the Communications Workers of America (CWA) as of December 31, 2013. In
May 2013 a new, four-year collective bargaining agreement was reached with the CWA that expires in April 2016.
17
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (continued)
8. Related-Party Transactions
The Business provides telecommunications services, including local and access services to AT&T and its subsidiaries, as well as non-telecommunications
services such as customer service. These services are recorded either as revenues or as a reduction of the cost incurred to provide such services, as appropriate. These revenues from affiliates totaled $276.8 million, $255.4 million and
$260.6 million in 2013, 2012 and 2011, respectively. In addition, AT&T and its subsidiaries provide the Business with direct and indirect services which it records as expenses. These costs totaled $483.3 million, $454.3 million
and $460.6 million, during 2013, 2012 and 2011 respectively.
These affiliate costs relate to allocated functions including information technology,
finance and accounting, human resources, network support, advertising and marketing, and other services which are allocated to the Business. The total amounts of allocated costs were $393.4 million, $366.1 million and $357.3 million
for the years ended December 31, 2013, 2012 and 2011, respectively. Affiliate costs also include $44.6 million, $44.4 million and $44.0 million of royalty expense in 2013, 2012 and 2011, respectively, for the use of trademarks
owned by AT&T affiliates (intercompany royalties), and $4.2 million, $3.8 million and $5.2 million of intercompany lease payments related to buildings and equipment in 2013, 2012 and 2011, respectively.
Allocated affiliate costs include overhead costs related to the support functions as well as costs associated with office facilities, corporate insurance
coverage and medical, pension, post retirement and other health plan costs for employees participating in the AT&T sponsored plans. These costs are allocated to the Business based on several factors, including number of employees, marketing
costs, and a composite based on our proportionate share of certain direct and allocated charges. In the opinion of management, the expense and cost allocations have been determined on a basis considered to be a reasonable reflection of the
utilization of services provided or the benefit received by the Business during the years presented.
The amounts that would have been or will be incurred
on a stand-alone basis could differ from the amounts allocated due to economies of scale, differences in management judgment, staffing levels or other factors. Certain costs at AT&T deemed to be redundant to the operations of the Business have
not been allocated to these financial statements. All affiliate charges have been deemed to have been incurred and settled by the Business in the year in which the costs were recorded.
18
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (continued)
8. Related-Party Transactions (continued)
The Business participates in AT&Ts pool of funds for borrowing and investing that are reflected as
contributions from or distributions to the parent in the combined financial statements. Accordingly, the Business receives or pays interest at AT&Ts prescribed rates (0.29%, 0.26%, and 0.29% at December 31, 2013, 2012, and 2011,
respectively).
9. Subsequent Events
Management has
evaluated subsequent events after the balance sheet date of December 31, 2013, through April 3, 2014, which is the date the combined financial statements were available to be issued.
19
Exhibit 99.2
COMBINED FINANCIAL STATEMENTS (UNAUDITED)
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Six Months Ended June 30, 2014 and 2013
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Combined Financial Statements (Unaudited)
Six Months Ended June 30, 2014 and 2013
Contents
|
|
|
|
|
|
|
Combined Financial Statements |
|
|
|
|
|
|
Combined Statements of Income (Unaudited) |
|
|
1 |
|
Combined Balance Sheets (Unaudited) |
|
|
2 |
|
Combined Statements of Cash Flows (Unaudited) |
|
|
3 |
|
Combined Statements of Changes in Parents Equity (Unaudited) |
|
|
4 |
|
Notes to Combined Financial Statements (Unaudited) |
|
|
5 |
|
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Combined Statements of Income (Unaudited)
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30 |
|
|
Three Months Ended
June 30 |
|
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
Operating revenues (including revenue from affiliates of $129,951 and $120,160 for the six months ended and $63,619 and $50,145 for the
three months ended June 30, 2014 and 2013, respectively): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice |
|
$ |
213,039 |
|
|
$ |
238,693 |
|
|
$ |
105,111 |
|
|
$ |
118,163 |
|
Data |
|
|
410,828 |
|
|
|
398,322 |
|
|
|
206,616 |
|
|
|
202,175 |
|
Other |
|
|
55,928 |
|
|
|
59,892 |
|
|
|
26,447 |
|
|
|
30,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
679,795 |
|
|
|
696,907 |
|
|
|
338,174 |
|
|
|
350,897 |
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and sales (including costs charged by affiliates of $129,259 and $106,411 for the six months ended and $67,955 and
$56,510 for the three months ended June 30, 2014 and 2013, respectively) |
|
|
290,265 |
|
|
|
271,217 |
|
|
|
148,472 |
|
|
|
140,478 |
|
Selling, general, and administrative |
|
|
222,379 |
|
|
|
214,524 |
|
|
|
105,874 |
|
|
|
103,228 |
|
Depreciation and amortization |
|
|
78,738 |
|
|
|
81,487 |
|
|
|
39,750 |
|
|
|
41,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
591,382 |
|
|
|
567,228 |
|
|
|
294,096 |
|
|
|
284,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
88,413 |
|
|
|
129,679 |
|
|
|
44,078 |
|
|
|
66,077 |
|
|
|
|
|
|
Other (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(439 |
) |
|
|
(414 |
) |
|
|
(184 |
) |
|
|
(268 |
) |
Other income, net |
|
|
496 |
|
|
|
1,099 |
|
|
|
270 |
|
|
|
905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
57 |
|
|
|
685 |
|
|
|
86 |
|
|
|
637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
88,470 |
|
|
|
130,364 |
|
|
|
44,164 |
|
|
|
66,714 |
|
|
|
|
|
|
Income tax expense |
|
|
33,983 |
|
|
|
50,255 |
|
|
|
18,305 |
|
|
|
26,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
54,487 |
|
|
$ |
80,109 |
|
|
$ |
25,859 |
|
|
$ |
39,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited combined financial statements.
1
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Combined Balance Sheets
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014 |
|
|
December 31, 2013 |
|
|
|
(Unaudited) |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance for uncollectibles of $5,833 and $5,425 |
|
$ |
113,655 |
|
|
$ |
118,592 |
|
Accounts receivable from affiliates |
|
|
14,985 |
|
|
|
37,035 |
|
Current deferred income taxes |
|
|
25,229 |
|
|
|
29,254 |
|
Other current assets |
|
|
4,374 |
|
|
|
5,120 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
158,243 |
|
|
|
190,001 |
|
|
|
|
Net property, plant, and equipment |
|
|
1,309,833 |
|
|
|
1,318,568 |
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
Noncurrent deferred income taxes |
|
|
35,884 |
|
|
|
18,525 |
|
Other assets |
|
|
18,683 |
|
|
|
18,121 |
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
|
54,567 |
|
|
|
36,646 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,522,643 |
|
|
$ |
1,545,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and parents equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable to affiliates |
|
$ |
175,995 |
|
|
$ |
143,869 |
|
Accounts payable and accrued expenses |
|
|
33,600 |
|
|
|
37,536 |
|
Advance billings and customer deposits |
|
|
36,526 |
|
|
|
36,274 |
|
Accrued compensated absences |
|
|
7,377 |
|
|
|
7,527 |
|
Other current liabilities |
|
|
5,292 |
|
|
|
6,172 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
258,790 |
|
|
|
231,378 |
|
|
|
|
Deferred credits and other noncurrent liabilities: |
|
|
|
|
|
|
|
|
Noncurrent unrecognized tax benefits |
|
|
68,879 |
|
|
|
66,138 |
|
Unamortized investment tax credits |
|
|
2,734 |
|
|
|
2,897 |
|
Other noncurrent liabilities and deferred credits |
|
|
25,137 |
|
|
|
22,021 |
|
|
|
|
|
|
|
|
|
|
Total deferred credits and other noncurrent liabilities |
|
|
96,750 |
|
|
|
91,056 |
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
Parents equity |
|
|
1,167,103 |
|
|
|
1,222,781 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and parents equity |
|
$ |
1,522,643 |
|
|
$ |
1,545,215 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited combined financial statements.
2
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Combined Statements of Cash Flows (Unaudited)
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30 |
|
|
|
2014 |
|
|
2013 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
54,487 |
|
|
$ |
80,109 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
78,738 |
|
|
|
81,487 |
|
Provision for uncollectible accounts |
|
|
2,828 |
|
|
|
2,062 |
|
Pension costs funded by parent |
|
|
836 |
|
|
|
8,200 |
|
Deferred income taxes |
|
|
(13,334 |
) |
|
|
(3,265 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
2,109 |
|
|
|
(16,454 |
) |
Accounts receivable from affiliates |
|
|
22,050 |
|
|
|
19,006 |
|
Other current assets |
|
|
746 |
|
|
|
(53 |
) |
Accounts payable to affiliates |
|
|
32,126 |
|
|
|
(44,417 |
) |
Accounts payable and accrued liabilities |
|
|
(4,714 |
) |
|
|
(15,717 |
) |
Other, net |
|
|
190 |
|
|
|
3,169 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
176,062 |
|
|
|
114,127 |
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Construction and capital expenditures |
|
|
(75,247 |
) |
|
|
(65,404 |
) |
Proceeds from sales of assets to affiliates |
|
|
10,186 |
|
|
|
7,858 |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(65,061 |
) |
|
|
(57,546 |
) |
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Distribution to parent, net |
|
|
(111,001 |
) |
|
|
(56,581 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(111,001 |
) |
|
|
(56,581 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the six months ended |
|
|
|
|
|
|
|
|
Income tax |
|
$ |
11 |
|
|
$ |
42 |
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
554 |
|
|
$ |
505 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited combined financial statements.
3
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Combined Statements of Changes in Parents Equity (Unaudited)
(In Thousands)
|
|
|
|
|
Balance at January 1, 2013 |
|
$ |
1,170,812 |
|
Net income |
|
|
237,636 |
|
Pension gains funded by parent |
|
|
(113,405 |
) |
Distribution to parent, net |
|
|
(72,262 |
) |
|
|
|
|
|
Balance at December 31, 2013 |
|
|
1,222,781 |
|
Net income |
|
|
54,487 |
|
Pension costs funded by parent |
|
|
836 |
|
Distribution to parent, net |
|
|
(111,001 |
) |
|
|
|
|
|
Balance at June 30, 2014 |
|
$ |
1,167,103 |
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited combined financial statements.
4
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (Unaudited)
June 30, 2014
1. Business and Basis of
Presentation
AT&T Connecticut Wireline Operations (the Business) comprises the combined operations of The Southern New England Telephone Company
(SNET); SNET America, Inc.; and Direct Broadcast Satellite. Both SNET and SNET America, Inc. are wholly owned subsidiaries of AT&T Inc. (AT&T) and comprise AT&Ts wireline operations business unit in Connecticut. The Business
provides telecommunications services in Connecticut, including local telephone, long distance, data, and video services.
On December 16, 2013,
AT&T announced entry into a stock purchase agreement with Frontier Communications Corporation (Frontier Communications), a Delaware corporation, to sell the Business for $2.0 billion in cash through the purchase of all the outstanding
shares in AT&Ts wholly owned subsidiaries SNET and SNET America, Inc. The transaction is subject to review by the U.S. Department of Justice, the Federal Communications Commission, and the Connecticut Public Utilities Regulatory Authority
and other state regulatory authorities. It is expected that the transaction contemplated by the stock purchase agreement will close in the second half of 2014, subject to customary closing conditions. The Company was notified on July 25, 2014
that the Federal Communications Commission had approved the transaction.
Basis of Presentation
The unaudited combined financial statements have been prepared on the same basis as the audited combined financial statements for the year ended
December 31, 2013. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted. The
results for the three and six months ended June 30, 2014 and 2013, are not necessarily indicative of those for the full year. These combined financial statements should be read in conjunction with the audited combined financial statements and
accompanying notes for the year ended December 31, 2013.
The unaudited combined financial statements have been prepared on a carve-out basis in
accordance with U.S. GAAP and reflect the historical financial position, results of operations, and cash flows of the Business for the periods presented. The historical financial statements reflect the amounts from the Business combined
financial statements, and the amounts that have been carved out from AT&Ts consolidated financial statements. They reflect assumptions and allocations made by AT&T to separate the Business on a stand-alone basis. As a result, the
combined financial statements may not be indicative of the financial position, results of
5
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (Unaudited) (continued)
1. Business and Basis of Presentation (continued)
operations, and cash flows that would have been presented if the Business had been a stand-alone entity. Therefore, the historical financial information is
not necessarily indicative of what the results of operations, financial position, and cash flows will be in the future.
The historical combined financial
statements were prepared using AT&Ts historical basis in the assets and liabilities of the Business, and its historical combined financial statements include all revenue, costs, assets, and liabilities directly attributable to the
Business. Historically, AT&T provided certain corporate services to the Business and costs associated with these functions have been allocated to the Business. See Note 6, Related-Party Transactions. Management believes these
expenses have been allocated using reasonable allocation methodologies to the services provided, primarily based on relative percentage of total net sales, relative percentage of headcount, or specific identification.
The allocations may not reflect the expense the Business would have incurred as a stand-alone company for the periods presented. Actual costs that may have
been incurred if the Business had been a stand-alone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees, and strategic decisions made in certain areas.
The total parents equity represents AT&Ts interest in the Business recorded net assets.
2. Summary of Significant Accounting Policies
Principles of Combination
All significant intercompany
transactions within the Business have been eliminated. All significant transactions between the Business and AT&T and its subsidiaries are included in the combined financial statements.
Use of Estimates
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and accompanying notes, including estimates of probable losses and expenses. Actual results
could differ from those estimates.
6
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (Unaudited) (continued)
2. Summary of Significant Accounting Policies (continued)
Comprehensive Income
Comprehensive income is the same as net income for all periods presented.
Operating Segments
The Business operates as one segment.
Income Taxes
The Business is included in
AT&Ts consolidated federal income tax return. Federal income taxes are provided for in accordance with the provisions of the Tax Allocation Agreement (the Agreement) between the Business and AT&T. In general, the Business
income tax provision under the Agreement utilizes a method that allocates current and deferred taxes to the Business assuming the financial consequences of income, deductions and credits which could be utilized on a separate return basis or in
consolidation with AT&T and are assured of realization. Ultimate realization of these items will be through settlement with AT&T following their inclusion in the consolidated tax return. The Business provides deferred income taxes for
temporary differences between computed tax basis in assets and liabilities and the carrying amounts of assets and liabilities. The tax basis of assets and liabilities are based on amounts that meet the recognition threshold and are measured pursuant
to the enacted tax rates the Business expects will be in effect when the Business actually pays or recovers taxes. Deferred income tax assets represent amounts available to reduce income taxes the Business will pay on taxable income in future years;
however, in some cases these deferred tax benefits would remain with the AT&T consolidated group and its existing members upon any members departure.
Investment tax credits earned prior to their repeal by the Tax Reform Act of 1986 are amortized as reductions in income tax expense over the lives of the
assets that gave rise to the credits.
The Business reports, on a net basis, taxes imposed by governmental authorities on revenue-producing transactions between the Business and its customers in the combined statements of income.
7
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (Unaudited) (continued)
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition
Revenues derived from local telephone, long distance, data, and video services are recognized when services are provided. This is based upon either usage
(e.g., minutes of traffic/bytes of data processed), period of time (e.g., monthly service fees), or other established fee schedules. The Business revenues are either billed in advance or arrears.
Revenues and associated expenses related to nonrefundable, up-front wireline service activation fees are deferred and recognized over the average customer
life of three or four years depending on the product sold. Expenses, when exceeding revenue, are only deferred to the extent of revenue.
For
contracts that involve the bundling of services, revenue is allocated to the services based on their relative selling price, subject to the requirement that revenue recognized is limited to the amounts already received from the customer that are not
contingent upon the delivery of additional products or services to the customer in the future.
Accounts Receivable and Allowance for Uncollectible
Accounts
Accounts receivable consist primarily of trade accounts receivable from customers and are generally unsecured and have monthly payment terms.
The Business bad debt allowance is estimated primarily based on an analysis of history and future expectations of the Business retail and wholesale customers. For retail customers, estimates are based on the Business actual
historical write-offs, net of recoveries, and the aging of accounts receivable balances. Managements assumptions are reviewed at least quarterly, and adjustments are made to the bad debt allowance as appropriate. For wholesale customers, the
Business uses a statistical model based on the aging of accounts receivable balances. The risk categories, risk percentages, and reserve balance assumptions built into the model are reviewed monthly, and the bad debt allowance is adjusted
accordingly.
8
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (Unaudited) (continued)
2. Summary of Significant Accounting Policies (continued)
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. The cost of additions and substantial improvements to property, plant, and equipment is capitalized. The
cost of maintenance and repairs of property, plant, and equipment is charged to operating expenses as incurred. Management follows composite group depreciation methodology for assets other than buildings and software; accordingly, when a portion of
the Business depreciable property, plant, and equipment is retired in the ordinary course of business, the gross book value is reclassified to accumulated depreciation, and no gain or loss is recognized on the assets disposition.
Property, plant, and equipment are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment loss shall be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value.
The
carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.
Property, plant, and equipment are depreciated using the straight-line method over the estimated useful life of the assets as follows:
|
|
|
|
|
Useful Lives (Years) |
|
|
Buildings |
|
3545 |
Central office equipment |
|
310 |
Cable, wiring, and conduit |
|
1050 |
Other equipment |
|
515 |
Software |
|
35 |
Depreciation expense for the three months ended June 30, 2014 and 2013, was $39.4 million and $40.7 million,
respectively, and $78.1 million and $80.7 million for the six months ended June 30, 2014 and 2013, respectively. Amortization expense for the three months ended June 30, 2014 and 2013, was $0.3 million and $0.4 million,
respectively, and $0.6 million and $0.8 million for the six months ended June 30, 2014 and 2013, respectively.
9
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (Unaudited) (continued)
2. Summary of Significant Accounting Policies (continued)
Software Costs
It is the Business policy to capitalize certain costs incurred in connection with developing or obtaining internal-use software. Capitalized software
costs are included in property, plant, and equipment and are primarily amortized over three years. In addition, there is certain network software that allows the equipment to provide the features and functions unique to the Business network, which
management includes in the cost of equipment categories for financial reporting purposes. Software costs that do not meet capitalization criteria are expensed immediately.
Advertising Costs
Advertising costs for advertising
products and services or promoting the Business corporate image are expensed as incurred. The Business had advertising expense of $9.7 million and $10.8 million for the six months ended June 30, 2014 and 2013, respectively.
Employee Separations
The Business established
obligations for expected termination benefits provided under existing plans to former or inactive employees after employment but before retirement. The Business had severance accruals of $3.9 million and $4.0 million at June 30, 2014
and December 31, 2013, respectively.
Materials and Supplies
New and reusable materials are carried principally at average original cost, except that specific cost is used in the case of large individual items.
Non-reusable materials are carried at estimated salvage value.
Concentration of Credit Risk
Financial instruments that potentially subject the Business to concentrations of credit risk consist primarily of trade receivables. Concentrations of credit
risk with respect to trade receivables are limited due to the large number of customers in the Business customer base.
10
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (Unaudited) (continued)
2. Summary of Significant Accounting Policies (continued)
New Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with
Customers (Topic 606) (ASU 2014-09), which replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. The FASB will allow two adoption methods under ASU
2014-09. Under one method, a company will apply the rules to contracts in all reporting periods presented, subject to certain allowable exceptions. Under the other method, a company will apply the rules to all contracts existing as of
January 1, 2017, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and provide additional disclosures comparing results to previous rules. The Business continues to evaluate the impact of the new
standard and available adoption methods.
3. Income Tax
For each interim period, the Business estimates the effective tax rate expected to be applicable for the full year and applies that rate to the operating
income before income taxes for the period. Income tax expense was recorded at an effective rate of 38.4% and 38.6% in the six months ended June 30, 2014 and 2013, respectively.
The components of income tax expense (benefit) are as follows for the six months ended June 30, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30 |
|
|
|
2014 |
|
|
2013 |
|
|
|
(In Thousands) |
|
Federal |
|
|
|
|
|
|
|
|
Current |
|
$ |
38,692 |
|
|
$ |
43,755 |
|
Deferred |
|
|
(10,734 |
) |
|
|
(2,740 |
) |
|
|
|
|
|
|
|
|
|
Total federal |
|
|
27,958 |
|
|
|
41,015 |
|
|
|
|
State |
|
|
|
|
|
|
|
|
Current |
|
|
8,626 |
|
|
|
9,765 |
|
Deferred |
|
|
(2,601 |
) |
|
|
(525 |
) |
|
|
|
|
|
|
|
|
|
Total state |
|
|
6,025 |
|
|
|
9,240 |
|
|
|
|
|
|
|
|
|
|
Total income tax expense |
|
$ |
33,983 |
|
|
$ |
50,255 |
|
|
|
|
|
|
|
|
|
|
11
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (Unaudited) (continued)
4. Pension and Postretirement Benefits
AT&T sponsors numerous employee benefit plans, which substantially all employees of the Business participated in as discussed below.
Pension Benefits and Postretirement Benefits
Substantially all employees of the Business are covered by one of AT&Ts noncontributory pension and death benefit plans. Additionally,
AT&T provides certain medical, dental, and life insurance benefits to certain of the Business retired employees under various plans. The Business participation in AT&Ts defined pension and postretirement benefit plans is
accounted for as a multi-employer plan in the Business combined financial statements, in accordance with ASC 715-30, Defined Benefit Plans Pension and ASC 715-60, Defined Benefit Plans Other
Postretirement. ASC 715, Compensation Retirement Benefits, provides that an employer that participates in a multi-employer defined benefit plan is not required to report a liability beyond the contributions currently due and
unpaid to the plan. Therefore, no assets or liabilities related to these plans have been included in the combined balance sheets. Costs associated with these plans and benefits are allocated by AT&T to their participating subsidiaries, including
the Business, based on each subsidiarys proportionate share of the overall cost of the plans and benefits. Allocated costs of these plans and benefits included in the combined statements of income were $0.4 million and $4.1 million
for the three months ended June 30, 2014 and 2013, respectively, and $0.8 million and $8.2 million for the six months ended June 30, 2014 and 2013, respectively.
5. Commitments and Contingencies
In addition to issues
specifically discussed elsewhere, the Business is party to numerous lawsuits, regulatory proceedings, and other matters arising in the ordinary course of business. In managements opinion, although the outcomes of these proceedings
are uncertain, they should not have a material adverse effect on the Business financial position, results of operations, or cash flows.
12
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (Unaudited) (continued)
6. Related-Party Transactions
The Business provides telecommunications services, including local and access services to AT&T and its subsidiaries, as well as non-telecommunications
services such as customer service. These services are recorded either as revenues or as a reduction of the cost incurred to provide such services, as appropriate. These revenues from affiliates totaled $63.6 million and $50.1 million for
the three months ended June 30, 2014 and 2013, respectively, and $130.0 million and $120.2 million for the six months ended June 30, 2014 and 2013, respectively. In addition, AT&T and its subsidiaries provide the Business with
direct and indirect services which it records as expenses. These costs totaled $134.2 million and $123.5 million for the three months ended June 30, 2014 and 2013, respectively, and $267.8 million and $237.7 million for the six
months ended June 30, 2014 and 2013, respectively.
These affiliate costs relate to allocated functions including information technology, finance and
accounting, human resources, network support, advertising and marketing, and other services. The total amounts of allocated costs were $114.0 million and $99.7 million for the three months ended June 30, 2014 and 2013,
respectively, and $224.7 million and $193.2 million for the six months ended June 30, 2014 and 2013, respectively. Affiliate costs also include $11.0 million and $11.1 million of royalty expense for the three months ended
June 30, 2014 and 2013, respectively, and $21.8 million and $22.3 million for the six months ended June 30, 2014 and 2013, respectively, for the use of trademarks owned by AT&T affiliates (intercompany royalties), and $1.1 million
and $0.9 million of intercompany lease payments related to buildings and equipment for the three months ended June 30, 2014 and 2013, respectively, and $2.2 million and $1.9 million for six months ended June 30, 2014 and 2013,
respectively.
Allocated affiliate costs include overhead costs related to the support functions as well as costs associated with office facilities,
corporate insurance coverage and medical, pension, post retirement and other health plan costs for employees participating in the AT&T sponsored plans. These costs are allocated to the Business based on several factors, including number of
employees, marketing costs, and a composite based on our proportionate share of certain direct and allocated charges. In the opinion of management, the expense and cost allocations have been determined on a basis considered to be a reasonable
reflection of the utilization of services provided or the benefit received by the Business during the years presented.
13
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (Unaudited) (continued)
6. Related-Party Transactions (continued)
The amounts that would have been or will be incurred on a stand-alone basis could differ from the amounts
allocated due to economies of scale, differences in management judgment, staffing levels or other factors. Certain costs at AT&T deemed to be redundant to the operations of the Business have not been allocated to these financial statements. All
affiliate charges have been deemed to have been incurred and settled by the Business in the year in which the costs were recorded.
The Business
participates in AT&Ts pool of funds for borrowing and investing that are reflected as contributions from or distributions to the parent in the combined financial statements.
7. Subsequent Events
We have evaluated subsequent events
after the balance sheet date of June 30, 2014 through August 8, 2014, which is the date the unaudited combined financial statements were available to be issued.
14
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information is based upon the historical consolidated financial information of
Frontier and the historical combined financial information of the Connecticut Operations and has been prepared to reflect the AT&T Transaction based on the acquisition method of accounting. The unaudited pro forma condensed combined financial
information presents the combination of the historical financial statements of Frontier and the historical financial statements of the Connecticut Operations, adjusted to give effect to (1) the transfer of specified assets and liabilities from
AT&T to the Connecticut Operations that are not included in the Connecticut Operations historical balance sheet as of June 30, 2014, and the retention of specified assets and liabilities by AT&T that are included in the
Connecticut Operations historical balance sheet as of June 30, 2014, as more fully described in note 3(a) below, (2) the completion of Frontiers offering of $1.55 billion of senior notes and the drawdown of the CoBank AT&T
Transaction Facility, as more fully described in note 3(b) below, (3) the payment by Frontier to AT&T of $2.0 billion in cash (excluding any potential working capital purchase price adjustment as set forth in the Stock Purchase Agreement)
as more fully described in note 3(c) below and (4) the consummation of the transactions contemplated by the Stock Purchase Agreement, with Frontier considered the accounting acquirer, based on the assumptions and adjustments described in the
accompanying notes to the unaudited pro forma condensed combined financial information. The historical financial information has been adjusted to give effect to events that are directly attributable to the AT&T Transaction and factually
supportable and, in the case of the statements of operations information, that are expected to have a continuing impact.
The unaudited
pro forma condensed combined balance sheet information has been prepared as of June 30, 2014, and gives effect to the AT&T Transaction and other events described above as if they had occurred on that date. The unaudited pro forma condensed
combined statements of operations information, which have been prepared for the six months ended June 30, 2014 and for the year ended December 31, 2013, give effect to the AT&T Transaction and other events described above as if they
had occurred on January 1, 2013.
The unaudited pro forma condensed combined financial information was prepared using, and should be
read in conjunction with, (1) the unaudited interim condensed combined financial statements of the Connecticut Operations as of and for the six months ended June 30, 2014, (2) the audited combined financial statements of the
Connecticut Operations as of and for the year ended December 31, 2013, (3) the unaudited interim condensed consolidated financial statements of Frontier as of and for the six months ended June 30, 2014, and (4) the audited
consolidated financial statements of Frontier as of and for the year ended December 31, 2013.
The unaudited pro forma condensed
combined financial information is presented for informational purposes only and is not necessarily indicative of the financial position or results of operations that would have been achieved had the AT&T Transaction and other events described
above been completed at the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future financial position or results of operations of Frontier after completion of the
AT&T Transaction. In the opinion of Frontiers management, all adjustments considered necessary for a fair presentation have been included.
The unaudited pro forma condensed combined financial information does not give effect to any potential cost savings or other operating
efficiencies that could result from the AT&T Transaction. In addition, the fair value of the assets acquired and liabilities assumed are based upon estimates. The final allocation is dependent upon valuations and other studies that will not be
completed until after the AT&T Transaction has been consummated. Accordingly, the purchase price allocation pro forma adjustments are preliminary and are subject to further adjustments as additional information becomes available and additional
analyses are performed, and each further adjustment may be material. Such adjustments have been made solely for the purpose of providing unaudited pro forma condensed combined financial information.
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET INFORMATION
AS OF JUNE 30, 2014
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frontier |
|
|
Connecticut Operations |
|
|
|
|
|
Pro Forma Adjustments (3c) |
|
|
|
|
|
Pro Forma Combined |
|
|
|
|
Connecticut Operations |
|
|
Additional Transfer of Assets and Liabilities to/from AT&T (3a) |
|
|
Connecticut Operations, as Adjusted |
|
|
Incurrence of New Debt (3b) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
802 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,867 |
|
|
$ |
(2,000 |
) |
|
|
(i |
) |
|
$ |
669 |
|
Accounts receivable, net |
|
|
464 |
|
|
|
129 |
|
|
|
(27 |
) |
|
|
102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
566 |
|
Other current assets |
|
|
145 |
|
|
|
29 |
|
|
|
(20 |
) |
|
|
9 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,411 |
|
|
|
158 |
|
|
|
(47 |
) |
|
|
111 |
|
|
|
1,859 |
|
|
|
(2,000 |
) |
|
|
|
|
|
|
1,381 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
7,163 |
|
|
|
1,310 |
|
|
|
|
|
|
|
1,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,473 |
|
Goodwill |
|
|
6,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
838 |
|
|
|
(ii |
) |
|
|
7,176 |
|
Other intangibles, net |
|
|
1,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
547 |
|
|
|
(iii |
) |
|
|
1,610 |
|
Other assets |
|
|
204 |
|
|
|
55 |
|
|
|
(45 |
) |
|
|
10 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
16,179 |
|
|
$ |
1,523 |
|
|
$ |
(92 |
) |
|
$ |
1,431 |
|
|
$ |
1,892 |
|
|
$ |
(615 |
) |
|
|
|
|
|
$ |
18,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt due within one year |
|
$ |
263 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
263 |
|
Accounts payable and other current liabilities |
|
|
1,019 |
|
|
|
259 |
|
|
|
(192 |
) |
|
|
67 |
|
|
|
|
|
|
|
28 |
|
|
|
(iv |
) |
|
|
1,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,282 |
|
|
|
259 |
|
|
|
(192 |
) |
|
|
67 |
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
1,377 |
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
2,355 |
|
|
|
|
|
|
|
308 |
|
|
|
308 |
|
|
|
|
|
|
|
217 |
|
|
|
(v |
) |
|
|
2,880 |
|
Other liabilities |
|
|
948 |
|
|
|
97 |
|
|
|
127 |
|
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,172 |
|
Long-term debt |
|
|
7,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,900 |
|
|
|
|
|
|
|
|
|
|
|
9,551 |
|
Equity |
|
|
3,943 |
|
|
|
1,167 |
|
|
|
(335 |
) |
|
|
832 |
|
|
|
(8 |
) |
|
|
(860 |
) |
|
|
(vi |
) |
|
|
3,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
16,179 |
|
|
$ |
1,523 |
|
|
$ |
(92 |
) |
|
$ |
1,431 |
|
|
$ |
1,892 |
|
|
$ |
(615 |
) |
|
|
|
|
|
$ |
18,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited pro forma condensed combined financial information.
2
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
INFORMATION
FOR THE SIX
MONTHS ENDED JUNE 30, 2014
($ in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frontier |
|
|
Connecticut Operations |
|
|
Pro Forma Adjustments |
|
|
|
|
|
Pro Forma Combined |
|
Revenue |
|
$ |
2,301 |
|
|
$ |
680 |
|
|
$ |
(3 |
) |
|
|
(4a) |
|
|
$ |
2,918 |
|
|
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
|
(4b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32 |
) |
|
|
(4c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
(4d) |
|
|
|
|
|
Cost and expenses (exclusive of depreciation and amortization) |
|
|
1,266 |
|
|
|
513 |
|
|
|
(6 |
) |
|
|
(4c) |
|
|
|
1,739 |
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
(4d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
(4e) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
(4f) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
(4g) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22 |
) |
|
|
(4h) |
|
|
|
|
|
Depreciation and amortization |
|
|
555 |
|
|
|
79 |
|
|
|
6 |
|
|
|
(4e) |
|
|
|
685 |
|
|
|
|
|
|
|
|
|
|
|
|
45 |
|
|
|
(4i) |
|
|
|
|
|
Acquisition and integration costs |
|
|
30 |
|
|
|
|
|
|
|
(30 |
) |
|
|
(4k) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,851 |
|
|
|
592 |
|
|
|
(19 |
) |
|
|
|
|
|
|
2,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
450 |
|
|
|
88 |
|
|
|
(44 |
) |
|
|
|
|
|
|
494 |
|
Investment and other income (expense), net |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Interest expense |
|
|
338 |
|
|
|
|
|
|
|
50 |
|
|
|
(4j) |
|
|
|
388 |
|
Income tax expense |
|
|
36 |
|
|
|
34 |
|
|
|
(36 |
) |
|
|
(4l) |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders of Frontier |
|
$ |
77 |
|
|
$ |
54 |
|
|
$ |
(58 |
) |
|
|
|
|
|
$ |
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income per common share |
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited pro forma condensed combined financial information.
3
FRONTIER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
INFORMATION
FOR THE YEAR
ENDED DECEMBER 31, 2013
($ in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frontier |
|
|
Connecticut Operations |
|
|
Pro Forma Adjustments |
|
|
|
|
|
Pro Forma Combined |
|
Revenue |
|
$ |
4,762 |
|
|
$ |
1,394 |
|
|
$ |
(6 |
) |
|
|
(4a |
) |
|
$ |
6,011 |
|
|
|
|
|
|
|
|
|
|
|
|
(52 |
) |
|
|
(4b |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(82 |
) |
|
|
(4c |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
(4d |
) |
|
|
|
|
Cost and expenses (exclusive of depreciation and amortization) |
|
|
2,616 |
|
|
|
850 |
|
|
|
(7 |
) |
|
|
(4c |
) |
|
|
3,529 |
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
(4d |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13 |
) |
|
|
(4e |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153 |
|
|
|
(4f |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
(4g |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45 |
) |
|
|
(4h |
) |
|
|
|
|
Depreciation and amortization |
|
|
1,170 |
|
|
|
166 |
|
|
|
13 |
|
|
|
(4e |
) |
|
|
1,448 |
|
|
|
|
|
|
|
|
|
|
|
|
99 |
|
|
|
(4i |
) |
|
|
|
|
Acquisition and integration costs |
|
|
10 |
|
|
|
|
|
|
|
(10 |
) |
|
|
(4k |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
3,796 |
|
|
|
1,016 |
|
|
|
165 |
|
|
|
|
|
|
|
4,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of Mohave partnership interest |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
981 |
|
|
|
378 |
|
|
|
(310 |
) |
|
|
|
|
|
|
1,049 |
|
Investment and other income (expense), net |
|
|
(151 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
(150 |
) |
Interest expense |
|
|
667 |
|
|
|
|
|
|
|
129 |
|
|
|
(4j |
) |
|
|
796 |
|
Income tax expense |
|
|
47 |
|
|
|
141 |
|
|
|
(171 |
) |
|
|
(4l |
) |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
116 |
|
|
|
238 |
|
|
|
(268 |
) |
|
|
|
|
|
|
86 |
|
Less: Income attributable to the noncontrolling interest in a partnership |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders of Frontier |
|
$ |
113 |
|
|
$ |
238 |
|
|
$ |
(268 |
) |
|
|
|
|
|
$ |
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income per common share |
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited pro forma condensed combined financial information.
4
Notes to Unaudited Pro Forma Condensed
Combined Financial Information
1. |
Description of the AT&T Transaction |
On December 16, 2013, Frontier and
AT&T entered into the Stock Purchase Agreement for Frontier to acquire the wireline properties of AT&T in Connecticut for a purchase price of $2.0 billion in cash (excluding any potential working capital purchase price adjustment as set
forth in the Stock Purchase Agreement). Upon completion of the AT&T Transaction, we will operate AT&Ts wireline business and statewide fiber network that provides services to residential, commercial and wholesale customers in
Connecticut, making Connecticut our largest market. We will also acquire AT&Ts U-verse® video and satellite TV customers in Connecticut. The consummation of the AT&T Transaction
is subject to the satisfaction of certain conditions, including review or approval by various federal and state regulatory agencies, and other customary closing conditions. Subject to these conditions, we expect the AT&T Transaction to close in
the fourth quarter of 2014.
The unaudited pro forma condensed combined financial information was prepared using the accounting standard
regarding business combinations. For purposes of the unaudited pro forma condensed combined financial information, the aggregate estimated transaction costs (other than debt incurrence fees in connection with our senior notes offering and the
drawdown of the CoBank AT&T Transaction Facility, as set forth in note 3(b)), which are charged as an expense of Frontier as they are incurred, are expected to be approximately $40 million and include estimated costs associated with investment
banker advisory fees, legal fees, and regulatory and auditor services of Frontier. Approximately $2 million and $10 million of transaction costs were recognized by Frontier for the six months ended June 30, 2014 and the year ended
December 31, 2013, respectively, and the balance of approximately $28 million is reflected as an accrual in the Pro Forma Adjustments column on the unaudited pro forma condensed combined balance sheet as of June 30, 2014. These costs,
along with integration costs, are eliminated as a pro forma adjustment in the unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2014 and the year ended December 31, 2013. In addition, the
combined company will incur integration costs primarily related to information systems, network and process conversions (including hardware and software costs). Integration costs are being incurred in part in advance of the consummation of the Stock
Purchase Agreement in the fourth quarter of 2014, and will be recorded based on the nature and timing of the specific action. Frontier currently expects to incur operating expenses and capital expenditures of approximately $225 million to $275
million in 2014 related to integration initiatives. For purposes of the unaudited pro forma condensed combined financial information, it is assumed that no amounts will be paid, payable or forgone by AT&T pursuant to orders or settlements issued
or entered into in order to obtain governmental approvals in the State of Connecticut that are required to complete the AT&T Transaction.
Frontier is considered the accounting acquirer for purposes of the preparation of the unaudited pro forma condensed combined financial
information. This conclusion is based upon Frontiers consideration of all relevant factors included in the accounting standard regarding business combinations, including the purchase of common stock of The Southern New England Telephone
Company and SNET America, Inc. pursuant to the Stock Purchase Agreement.
5
2. |
Basis of Purchase Price Allocation |
The estimated purchase price has been allocated to
the tangible and intangible assets acquired and liabilities assumed on a preliminary basis as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
Estimated transaction consideration: |
|
|
|
|
|
$ |
2,000 |
|
Current assets |
|
$ |
111 |
|
|
|
|
|
Property, plant & equipment |
|
|
1,310 |
|
|
|
|
|
Goodwill |
|
|
838 |
|
|
|
|
|
Customer list |
|
|
547 |
|
|
|
|
|
Other assets |
|
|
10 |
|
|
|
|
|
Current liabilities |
|
|
(67 |
) |
|
|
|
|
Deferred income taxes |
|
|
(525 |
) |
|
|
|
|
Other liabilities |
|
|
(224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets acquired |
|
$ |
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allocation of the purchase price to assets and liabilities is preliminary. The final allocation of the
purchase price will be based on the fair values of the assets acquired and liabilities assumed as of the date of the AT&T Transaction, as determined by third-party valuation for certain assets and liabilities. The valuation will be completed
after the consummation of the AT&T Transaction. There can be no assurance that the actual allocation will not differ significantly from the preliminary allocation.
The above noted preliminary allocation includes deferred taxes that are established at acquisition. Deferred taxes represent the tax effect at
41.75% of the non-deductible step-up in value portion of the customer list asset (($520 million x 41.75%) = $217 million). Frontier and AT&T have agreed to make a joint election under Section 338(h)(10) of the Internal Revenue Code, and
comparable state and local tax code provisions, with regard to $27 million of intangible assets that will retain their tax basis. The offsetting entry to establish the deferred tax liability is recorded as goodwill.
6
3. |
Pro Forma Balance Sheet Adjustments: |
(a) |
The Connecticut Operations are adjusted to (1) exclude assets and liabilities that will be retained by AT&T that are included in the Connecticut Operations financial statements and (2) give effect to
certain assets and liabilities relating to the business to be contributed by AT&T to these entities in connection with the AT&T Transaction. A brief description of these items follows (dollars in millions): |
|
|
|
|
|
|
|
Balance |
|
Amount |
|
|
Reason |
Accounts receivable, net |
|
$ |
(17 |
) |
|
Intercompany receivables retained by AT&T |
|
|
|
(10 |
) |
|
Receivables related to businesses retained by AT&T |
|
|
|
|
|
|
|
|
|
$ |
(27 |
) |
|
|
|
|
|
|
|
|
|
Other current assets |
|
$ |
(25 |
) |
|
Removal of intercompany tax balances retained by AT&T |
|
|
|
5 |
|
|
Record inventory to be transferred by AT&T prior to closing |
|
|
|
|
|
|
|
|
|
$ |
(20 |
) |
|
|
|
|
|
|
|
|
|
Other assets |
|
$ |
(36 |
) |
|
Removal of income tax balances |
|
|
|
(9 |
) |
|
Removal of intangible assets related to the AT&T sale of a business to a third party |
|
|
|
|
|
|
|
|
|
$ |
(45 |
) |
|
|
|
|
|
|
|
|
|
Accounts payable and other current liabilities |
|
$ |
(176 |
) |
|
Intercompany payables retained by AT&T |
|
|
|
(12 |
) |
|
Removal of accrued liabilities to be retained by AT&T |
|
|
|
(4 |
) |
|
Payables related to businesses retained by AT&T |
|
|
|
|
|
|
|
|
|
$ |
(192 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
$ |
308 |
|
|
Deferred income tax adjustments |
|
|
|
|
|
|
|
Other liabilities |
|
$ |
210 |
|
|
To establish liabilities for postemployment benefits |
|
|
|
20 |
|
|
To establish liabilities for workers compensation claims |
|
|
|
(31 |
) |
|
Liabilities to be retained by AT&T |
|
|
|
(72 |
) |
|
Removal of accrued uncertain tax position liabilities and credits retained by AT&T |
|
|
|
|
|
|
|
|
|
$ |
127 |
|
|
|
|
|
|
|
|
|
|
Parents equity |
|
$ |
(335 |
) |
|
Reflects the aggregate impact of the above noted entries |
|
|
|
|
|
|
|
The pension and other postretirement employee benefits adjustments are based on amounts recorded by AT&T whereby the
pension and OPEB obligations related to active employees only will be transferred to Frontier and pension obligations will be fully funded as of the closing date of the AT&T Transaction. An actuarial evaluation will be completed at the time of,
or subsequent to, the completion of the Stock Purchase Agreement and may be different from that reflected in the unaudited pro forma condensed combined financial information. This difference, including the related impact on deferred taxes, may be
material.
The deferred income tax adjustments reflect the impact on fixed assets, net of the pension and OPEB liabilities for active employees and
depreciation.
(b) |
On December 16, 2013, we signed a commitment letter for a bridge loan facility. On January 29, 2014, we entered into a bridge loan agreement (the Bridge Loan) among the Company, the lenders party
thereto and JPMorgan Chase Bank, N.A., as administrative agent, pursuant to which the Lenders have agreed at closing of the AT&T Transaction to provide to us an unsecured bridge loan facility for up to $1.9 billion for the purposes of funding
(i) substantially all of the purchase price for the AT&T Transaction and (ii) the fees and expenses incurred in connection with the transactions contemplated by the Stock Purchase Agreement. |
7
AT&T Connecticut Wireline Operations
(A Business Unit of AT&T Inc.)
Notes to Combined Financial Statements (Unaudited) (continued)
The pro forma adjustment to cash reflects our offering of $1,550 million of senior notes, as
well as the CoBank AT&T Transaction Facility.
The adjustment presented reflects the debt incurrence of $1.9 billion in the aggregate,
less assumed debt incurrence fees and commissions of approximately $36 million (of which $3 million has been incurred). Additionally, an adjustment was made for $8 million to reflect the acceleration of deferred financing costs related to the Bridge
Loan.
(c) |
(i) This adjustment in the amount of $2.0 billion reflects the cash that will be paid at closing of the AT&T Transaction (excluding any potential working capital purchase price adjustment as set forth in the Stock
Purchase Agreement), primarily funded through the incurrence of new debt as described in 3(b) above. |
(ii) This adjustment in
the amount of $838 million reflects the goodwill associated with the excess of the AT&T Transaction consideration issued over the preliminary estimated fair value of the underlying identifiable net tangible and intangible assets at June 30,
2014, and reflects the impact of the deferred taxes established in (v) below.
(iii) This adjustment in the amount of $547 million
reflects the preliminary fair value of the identifiable intangible asset (customer list) which was estimated by Frontiers management primarily based on the fair values assigned to similar assets in recently completed acquisitions (a market
approach). A third party valuation firm is being utilized to help determine the final fair value after the Stock Purchase Agreement is completed, but this determination is not yet final. There can be no assurance that the actual fair value
determination will not differ significantly from the preliminary fair value determination. For purposes of the preliminary fair value determination, the estimated useful life of the customer list asset was assumed to be ten years.
(iv) This adjustment in the amount of $28 million records the estimated unpaid non-recurring costs for acquisition related transaction costs,
primarily bankers, lawyers and consulting advisory fees.
(v) This adjustment in the amount of $217 million reflects the deferred taxes
associated with the nondeductible step-up in value portion of the customer list asset ($520 million x 41.75% = $217 million) based on an assumed tax rate of 41.75%.
(vi) This adjustment in the amount of $860 million eliminates the as adjusted net equity of the Connecticut Operations ($832
million) and recognizes unpaid estimated transaction costs of $28 million as of June 30, 2014.
4. |
Pro Forma Income Statement Adjustments: |
(a) |
This adjustment reflects results of operations related to contracts, primarily with unaffiliated third parties, that will not be transferred to Frontier in the AT&T Transaction. |
(b) |
This adjustment reflects the incremental change related to contracts with AT&T affiliates that will be transferred to Frontier under modified terms. |
(c) |
This adjustment reflects results of operations related to certain operations (substantially with AT&T affiliates) that will not continue after the closing of the AT&T Transaction. |
(d) |
This adjustment reflects the reclassification of bad debt expense from cost and expenses to revenue. |
(e) |
This adjustment reflects the reclassification of allocated depreciation and amortization from cost and expenses to depreciation and amortization. |
(f) |
This adjustment reflects pension, other postretirement employee benefits of retirees and postemployment benefits retained by AT&T based on the terms of the Stock Purchase Agreement whereby the pension and OPEB
obligations related to active employees only will be transferred to Frontier and pension obligations will be fully funded as of the closing date of the AT&T Transaction. |
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The adjustment for the year ended December 31, 2013 also reflects the reversal of $131
million in actuarial gains that were recorded in income by AT&T in order to conform to Frontiers accounting policy for pension and other post retirement benefits.
(g) |
This adjustment reflects the removal of costs related to employee headcount that will not be transferred to Frontier associated with the adjustment described in 4(c) above. |
(h) |
This adjustment reflects the removal of royalty expense charged by AT&T for the use of its name and trademark that will not continue after the AT&T Transaction. |
(i) |
This adjustment reflects amortization expense associated with the customer list asset estimated in note 3(c) above assuming an accelerated method of amortization and an estimated useful life of ten years which
corresponds to an increase in depreciation and amortization of $45 million and $99 million for the six months ended June 30, 2014 and the year ended December 31, 2013, respectively. No adjustment has been reflected for depreciation
expense. |
The actual depreciation and amortization expense will be based on the final fair value attributed to the
identifiable tangible and intangible assets based upon the results of the third-party valuation of the acquired assets. The depreciation and amortization rates may also change based on the results of this third-party valuation. There can be no
assurance that the actual depreciation and amortization expense will not differ significantly from the pro forma adjustment presented.
(j) |
This adjustment reflects additional interest expense on the $1,550 million aggregate principal amount of senior notes and the $350 million CoBank AT&T Transaction Facility ($50 million and $129 million for the six
months ended June 30, 2014 and the year ended December 31, 2013, respectively), based on an assumed weighted average interest rate of 6.69% for the six months ended June 30, 2014 and 6.73% for the year ended December 31, 2013 and
the elimination of interest expense related to the Bridge Loan, as described in 3(b) above. |
(k) |
This adjustment reflects the removal of acquisition and integration expenses related to costs incurred by Frontier in connection with the AT&T Transaction. |
(l) |
This adjustment reflects the income tax effect of the pro forma adjustments described in notes 4(a) through 4(k) above, using an estimated effective income tax rate of 38%. |
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