Current Report Filing (8-k)

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)


001-11001		06-0619596
(Commission File Number)		(IRS Employer Identification No.)

3 High Ridge Park, Stamford, Connecticut		06905
(Address of principal executive offices)		(Zip Code)

(203) 614-5600

(Registrant’s 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))

ITEM 8.01

OTHER EVENTS

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&T’s 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


(d) Exhibits		The following exhibits are filed as part of this Current Report on Form 8-K:


Exhibit Number		Description of Exhibit

23.1		Consent of Ernst & Young LLP.

99.1		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.

99.2		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.

99.3		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.


FRONTIER COMMUNICATIONS CORPORATION

By:		/s/ David G. Schwartz
Name:		David G. Schwartz
Title:		Vice President, Corporate Counsel and Assistant Secretary

Date: September 3, 2014

Exhibits


Exhibit Number		Description of Exhibit

23.1		Consent of Ernst & Young LLP.

99.1		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.

99.2		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.

99.3		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


Report of Independent Auditors			1

Combined Financial Statements

Combined Statements of Income			3
Combined Balance Sheets			4
Combined Statements of Cash Flows			5
Combined Statements of Changes in Parent’s Equity			6
Notes to Combined Financial Statements			7

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 parent’s equity, and cash flows for each of the three years ended December 31, 2013, and the related notes to the combined financial statements.

Management’s 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.

Auditor’s 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 auditor’s 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 entity’s 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 entity’s 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.

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

AT&T Connecticut Wireline Operations

(A Business Unit of AT&T Inc.)

Combined Statements of Income

(In Thousands)


	Year Ended December 31
	2013			2012			2011
Operating revenues (including revenue from affiliates of $276,825, $255,422, and $260,641 in 2013, 2012, and 2011):
Voice	$	463,252		$	516,227		$	571,059
Data		806,474			748,161			710,031
Other		123,812			114,253			114,883

Total operating revenues		1,393,538			1,378,641			1,395,973
Operating expenses:
Cost of services and sales (including costs charged by affiliates of $219,843, $188,366, and $207,335 in 2013, 2012, and 2011, respectively)		516,802			586,808			612,068
Selling, general and administrative		332,508			589,826			539,739
Depreciation and amortization		166,200			187,008			208,717

Total operating expenses		1,015,510			1,363,642			1,360,524


Operating income		378,028			14,999			35,449

Other income (expense):
Interest expense		(439	)		(52	)		(2,623	)
Other income, net		965			1,162			1,713

Total other income (expense)		526			1,110			(910	)


Income before income taxes		378,554			16,109			34,539

Income tax expense (benefit)		140,918			(494	)		15,750

Net income	$	237,636		$	16,603		$	18,789

The accompanying notes are an integral part of these combined financial statements.

AT&T Connecticut Wireline Operations

(A Business Unit of AT&T Inc.)

Combined Balance Sheets

(In Thousands)


	December 31
	2013		2012
Assets
Current assets:
Accounts receivable, net of allowance for uncollectibles of $5,425 and $6,165	$	118,592	$	115,533
Accounts receivable from affiliates		37,035		67,610
Current deferred income taxes		29,254		22,323
Other current assets		5,120		4,544

Total current assets		190,001		210,010

Net property, plant, and equipment		1,318,568		1,354,400

Other assets:
Noncurrent deferred income taxes		18,525		—
Other assets		18,121		16,300

Total other assets		36,646		16,300

Total assets	$	1,545,215	$	1,580,710


Liabilities and parent’s equity
Current liabilities:
Accounts payable to affiliates	$	143,869	$	201,319
Accounts payable and accrued expenses		37,536		39,086
Advance billings and customer deposits		36,274		34,913
Accrued compensated absences		7,527		15,800
Other current liabilities		6,172		7,300

Total current liabilities		231,378		298,418

Deferred credits and other noncurrent liabilities:
Noncurrent deferred income taxes		—		584
Noncurrent unrecognized tax benefits		66,138		89,800
Unamortized investment tax credits		2,897		3,200
Other noncurrent liabilities and deferred credits		22,021		17,896

Total deferred credits and other noncurrent liabilities		91,056		111,480

Commitments and contingencies

Parent’s equity		1,222,781		1,170,812

Total liabilities and parent’s equity	$	1,545,215	$	1,580,710

The accompanying notes are an integral part of these combined financial statements.

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.

AT&T Connecticut Wireline Operations

(A Business Unit of AT&T Inc.)

Combined Statements of Changes in Parent’s 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.

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&T’s 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&T’s 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&T’s 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.

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 parent’s equity represents AT&T’s 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.

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&T’s 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 member’s 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.

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. Management’s 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 asset’s disposition.

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.

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.

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	35–45		534,999			538,533
Central office equipment	3–10		2,665,011			2,642,072
Cable, wiring, and conduit	10–50		2,590,898			2,630,583
Other equipment	5–15		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.

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 2003–2008 returns. At this time, management is not able to determine the impact the resolution may have on the Business’ unrecognized tax benefits.

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

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

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 subsidiary’s 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 management’s 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.

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.

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&T’s 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&T’s 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.

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 Parent’s 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.

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 parent’s 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

Parent’s equity		1,167,103		1,222,781

Total liabilities and parent’s equity	$	1,522,643	$	1,545,215

The accompanying notes are an integral part of these unaudited combined financial statements.

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.

AT&T Connecticut Wireline Operations

(A Business Unit of AT&T Inc.)

Combined Statements of Changes in Parent’s 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.

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

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&T’s 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&T’s 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

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&T’s 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 total parent’s equity represents AT&T’s interest in the Business’ recorded net assets.

2. Summary of Significant Accounting Policies

Principles of Combination

Use of Estimates

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

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.

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

Accounts Receivable and Allowance for Uncollectible Accounts

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 asset’s disposition.

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		35–45
Central office equipment		3–10
Cable, wiring, and conduit		10–50
Other equipment		5–15
Software		3–5

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.

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

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

Concentration of Credit Risk

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

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&T’s 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&T’s 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 subsidiary’s 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

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.

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 Business participates in AT&T’s 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.

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 Frontier’s 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
	Frontier		Connecticut Operations		Additional Transfer of Assets and Liabilities to/from AT&T (3a)			Connecticut Operations, as Adjusted		Incurrence of New Debt (3b)			Pro Forma Adjustments (3c)					Pro Forma Combined
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.

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.

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.

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&T’s 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&T’s 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 Frontier’s 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.

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.

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

Parent’s 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.

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 Frontier’s 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.

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 Frontier’s 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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