Current Report Filing (8-k)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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): June 2, 2015

Frontier Communications Corporation

(Exact Name of Registrant as Specified in Its Charter)

Delaware

001-11001

06-0619596

(State or Other Jurisdiction

Of Incorporation)

(Commission

File Number)

(I.R.S. Employer

Identification No.)


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

Registrant’s telephone number, including area code: (203) 614-5600

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:

¨	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 February 5, 2015, Frontier Communications Corporation (“Frontier”) entered into a Securities Purchase Agreement to acquire the wireline properties of Verizon Communications Inc. (“Verizon”) in California, Florida and Texas (the “Transaction”). Prior to the closing of the Transaction, Verizon will contribute, to a newly formed entity, the three Verizon subsidiaries that own Verizon’s wireline properties in the three states and conduct its Separate Telephone Operations there; Frontier will acquire that newly formed entity at the closing. Frontier is filing this Current Report on Form 8-K to present the unaudited interim condensed combined statements of assets, liabilities and parent funding of Verizon Communications Inc.’s Separate Telephone Operations in California, Florida and Texas (the “Group”) as of March 31, 2015 and the related unaudited interim condensed combined statements of income and comprehensive income, and cash flows for the three month periods ended March 31, 2015 and 2014, which are filed as Exhibit 99.1 hereto.

Frontier is also filing on this Current Report on Form 8-K the Group’s (i) Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the three month periods ended March 31, 2015 and 2014, filed as Exhibit 99.2 hereto, which should be read in conjunction with the financial statements referenced above, and (ii) Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the three years ended December 31, 2014, filed as Exhibit 99.3 hereto, which should be read in conjunction with the Group’s financial statements as of and for the three years ended December 31, 2014, previously filed on Frontier’s Current Report on Form 8-K on May 4, 2015.

As part of the Transaction, certain assets and liabilities that are included in the Group’s financial statements will not be acquired by Frontier and will be retained by Verizon, and certain other assets and liabilities that are not included in the Group’s financial statements will be acquired by Frontier. This Current Report on Form 8-K also presents the unaudited pro forma condensed combined financial statements of Frontier, after giving effect to the Transaction, as of and for the three month period ended March 31, 2015 and the unaudited pro forma condensed combined financial statements of Frontier, after giving effect to the Transaction and the Connecticut Acquisition (as defined below), for the year ended December 31, 2014, which are filed as Exhibit 99.4 hereto. These pro forma financial statements assume that the cash consideration for the Transaction will be financed with the proceeds of Frontier’s anticipated equity and equity-linked offerings in an aggregate amount of approximately $2.5 billion, with the remainder of the cash consideration to be financed with approximately $8.350 billion in borrowings under Frontier’s currently existing bridge financing commitments at the interest rates contained in those bridge commitments. Frontier does not currently intend to complete the Transaction with any borrowings under its currently existing bridge financing, but instead currently intends to raise the approximately $8.350 billion by completing certain debt offerings prior to the closing of the Transaction. At this time, however, Frontier can give no assurance that the debt offerings will be successfully completed in a timely fashion or at all, or on terms deemed acceptable by us. Failure to complete one or more such offerings would require Frontier to draw on its existing bridge financing for the applicable amount.

On October 24, 2014, Frontier completed the acquisition of the wireline properties of AT&T Inc. (“AT&T”) in Connecticut, by acquiring all of the issued and outstanding capital stock of The Southern New England Telephone Company and SNET America, Inc. (the “Transferred Companies”) (the “Connecticut Acquisition”). Prior to the closing of the Connecticut Acquisition, (i) AT&T transferred to the Transferred Companies certain assets and caused the Transferred Companies to assume certain liabilities relating to the business to be acquired and (ii) the Transferred Companies transferred to AT&T certain assets, and AT&T assumed 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”).

Item 9.01

Financial Statements and Exhibits

(d)

Exhibits


99.1		Unaudited interim condensed combined statements of assets, liabilities and parent funding of Verizon Communications Inc.’s Separate Telephone Operations in California, Florida and Texas as of March 31, 2015 and the related unaudited interim condensed combined statements of income and comprehensive income, and cash flows for the three month periods ended March 31, 2015 and 2014.


99.2		Management’s Discussion and Analysis of Financial Condition and Results of Operations of Verizon Communications Inc.’s Separate Telephone Operations in California, Florida and Texas relating to the unaudited interim condensed combined statements of assets, liabilities and parent funding of Verizon Communications Inc.’s Separate Telephone Operations in California, Florida and Texas as of March 31, 2015 and the related unaudited interim condensed combined statements of income and comprehensive income, and cash flows for the three month periods ended March 31, 2015 and 2014.

99.3		Management’s Discussion and Analysis of Financial Condition and Results of Operations of Verizon Communications Inc.’s Separate Telephone Operations in California, Florida and Texas relating to the audited combined statements of assets, liabilities and parent funding of the Group as of December 31, 2014 and 2013 and the related combined statements of operations and comprehensive income (loss), parent funding, and cash flows for each of the three years in the period ended December 31, 2014.

99.4		Unaudited pro forma condensed combined financial information of Frontier, after giving effect to the Transaction, as of and for the three month period ended March 31, 2015 and, after giving effect to the Transaction and the Connecticut Transaction, for the year ended December 31, 2014.

SIGNATURES

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

Date: June 2, 2015	By:	/s/ Mark D. Nielsen
		Mark D. Nielsen
		Executive Vice President,
		General Counsel and Secretary

EXHIBIT INDEX


99.1		Unaudited interim condensed combined statements of assets, liabilities and parent funding of Verizon Communications Inc.’s Separate Telephone Operations in California, Florida and Texas as of March 31, 2015 and the related unaudited interim condensed combined statements of income and comprehensive income, and cash flows for the three month periods ended March 31, 2015 and 2014.

99.2		Management’s Discussion and Analysis of Financial Condition and Results of Operations of Verizon Communications Inc.’s Separate Telephone Operations in California, Florida and Texas relating to the unaudited interim condensed combined statements of assets, liabilities and parent funding of Verizon Communications Inc.’s Separate Telephone Operations in California, Florida and Texas as of March 31, 2015 and the related unaudited interim condensed combined statements of income and comprehensive income, and cash flows for the three month periods ended March 31, 2015 and 2014.

99.3		Management’s Discussion and Analysis of Financial Condition and Results of Operations of Verizon Communications Inc.’s Separate Telephone Operations in California, Florida and Texas relating to the audited combined statements of assets, liabilities and parent funding of the Group as of December 31, 2014 and 2013 and the related combined statements of operations and comprehensive income (loss), parent funding, and cash flows for each of the three years in the period ended December 31, 2014.

99.4		Unaudited pro forma condensed combined financial information of Frontier, after giving effect to the Transaction, as of and for the three month period ended March 31, 2015 and, after giving effect to the Transaction and the Connecticut Transaction, for the year ended December 31, 2014.

Exhibit 99.1

Verizon’s Separate Telephone Operations

in California, Florida and Texas

Condensed Combined Financial Statements

As of and for the three month periods ended March 31, 2015 and 2014

Index to Condensed Combined Financial Statements


	Page

Condensed Combined Statements of Income and Comprehensive Income Three months ended March 31, 2015 and 2014		2

Condensed Combined Statements of Assets, Liabilities and Parent Funding At March 31, 2015 and December 31, 2014		3

Condensed Combined Statements of Cash Flows Three months ended March 31, 2015 and 2014		4

Notes to Condensed Combined Financial Statements		5

VERIZON’S SEPARATE TELEPHONE OPERATIONS IN CALIFORNIA, FLORIDA AND TEXAS

CONDENSED COMBINED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


	Three Months Ended March 31,
(dollars in millions)(unaudited)	2015			2014
Operating Revenues (including $153 and $140 from affiliates, respectively)	$	1,448		$	1,469
Operating Expenses (including $597 and $555 allocated from affiliates, respectively)
Cost of services and sales (exclusive of items shown below)		721			693
Selling, general and administrative expense		325			311
Depreciation and amortization expense		250			300

Total Operating Expenses		1,296			1,304
Operating Income		152			165
Interest expense, net (including nil and $12 allocated from affiliates, respectively)		(8	)		(19	)

Income Before Income Taxes		144			146
Income tax provision		(56	)		(55	)

Net Income and Comprehensive income	$	88		$	91

See Notes to Condensed Combined Financial Statements

VERIZON’S SEPARATE TELEPHONE OPERATIONS IN CALIFORNIA, FLORIDA AND TEXAS CONDENSED COMBINED STATEMENTS OF ASSETS, LIABILITIES AND PARENT FUNDING


(dollars in millions)(unaudited)	At March 31, 2015			At December 31, 2014
Assets
Current assets
Accounts receivable:
Trade and other, net of allowances for uncollectibles of $46 and $42, respectively	$	437		$	505
Affiliates		331			246
Deferred income taxes		161			231
Prepaid expense and other		87			81

Total current assets		1,016			1,063

Plant, property and equipment		23,547			23,388
Less accumulated depreciation		(15,310	)		(15,092	)

		8,237			8,296

Prepaid pension asset		2,781			2,781
Intangible assets, net		7			7
Other assets		75			75

Total assets	$	12,116		$	12,222


Liabilities and Parent Funding
Current liabilities
Debt maturing within one year	$	11		$	9
Accounts payable and accrued liabilities:
Trade and other		599			593
Affiliates		675			778
Advanced billings and customer deposits		115			178
Other current liabilities		96			114

Total current liabilities		1,496			1,672

Long-term debt		642			627
Employee benefit obligations		2,142			2,155
Deferred income taxes		2,468			2,483
Other long-term liabilities		180			172

Total liabilities		6,928			7,109


Parent funding		5,188			5,113

Total liabilities and parent funding	$	12,116		$	12,222

See Notes to Condensed Combined Financial Statements

VERIZON SEPARATE TELEPHONE OPERATIONS IN CALIFORNIA, FLORIDA AND TEXAS CONDENSED COMBINED STATEMENTS OF CASH FLOWS


	Three Months Ended March 31,
(dollars in millions)(unaudited)	2015			2014
Cash Flows From Operating Activities
Net Income	$	88		$	91
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		250			300
Deferred income taxes		54			40
Loss on fixed asset transactions		5			26
Employee retirement benefits		17			24
Bad debt expense		19			18
Changes in current assets and liabilities:
Accounts receivable non-affiliates		49			7
Other current assets		(5	)		(42	)
Accounts payable non-affiliates and accrued liabilities		6			(25	)
Accounts receivables/payable affiliates, net		(198	)		177
Advanced billings and customer deposits and other current liabilities		(80	)		50
Other, net		(17	)		(92	)

Net cash provided by operating activities		188			574


Cash Flows From Investing Activities
Capital expenditures (including capitalized software)		(174	)		(177	)
Other, net		1			—

Net cash used in investing activities		(173	)		(177	)


Cash Flows From Financing Activities
Repayments of capital lease obligations		(2	)		—
Net change in parent funding, allocations and intercompany reimbursement		(13	)		(397	)

Net cash used in financing activities		(15	)		(397	)


Net change in cash		—			—
Cash, beginning of period		—			—

Cash, end of period	$	—		$	—

See Notes to Condensed Combined Financial Statements

VERIZON’S SEPARATE TELEPHONE OPERATIONS IN CALIFORNIA, FLORIDA AND TEXAS

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

(UNAUDITED)

1.	BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosure for interim periods. For a more complete discussion of significant accounting policies and certain other information, you should refer to the financial statements included in the Frontier Communications Corporation (“Frontier”) Current Report on Form 8-K filed with the SEC on May 4th, 2015.

Verizon’s Separate Telephone Operations in California, Florida and Texas (“the Group” or “we”) are comprised of the local exchange business and related landline activities of Verizon Communications Inc. (“Verizon” or “the Parent”) in the states of California, Florida and Texas, including Internet access, long distance services and broadband video provided to certain customers in those states.

The condensed combined financial statements include the financial position, results of operations and cash flows of the Group, which consists of all or a portion of the following entities:

•

Verizon California Inc., Verizon Florida LLC and GTE Southwest Inc. (doing business as Verizon Southwest), referred to as Incumbent Local Exchange Carriers (“ILECs”),

•

Verizon Long Distance LLC (“VLD”),

•

Verizon Online LLC (“VOL”),

•

Verizon Select Services, Inc. (“VSSI”), and

•

Verizon Network Integration Corp. (“VNIC”).

The condensed combined financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). These financial statements have been derived from the consolidated financial statements and accounting records of Verizon, principally from statements and records represented in the entities described above, and represent carve-out stand-alone condensed combined financial statements. The Group includes regulated carriers and unregulated businesses in all three states, consisting principally of:

•

Local wireline customers and related operations and assets used to deliver:

•

Local exchange service,

•

IntraLATA toll service,

•

Network access service,

•

Enhanced voice and data services, and

•

Products at retail stores;

•

Consumer and small business switched long distance customers (excluding any customers of Verizon Business Global LLC);

•

Dial-up, high speed Internet (or Digital Subscriber Line) and fiber-to-the-premises Internet service provider customers; and,

•

Broadband video in certain areas within California, Florida and Texas.

Communications Commission (“FCC”) with respect to interstate services and other matters. The FCC and state commissions also regulate some of the rates, terms and conditions that carriers pay each other for the exchange voice traffic (particularly traditional wireline traffic) over different networks and other aspects of interconnection for some services. All of the broadband video services the Group provides, including the payment of franchise fees, are subject to regulation by state or local governmental authorities. The Federal Cable Act generally requires companies to obtain a local cable franchise, and the FCC has adopted rules that interpret and implement this requirement. Also, the FCC has a body of rules that apply to cable operators.

Financial statements have not historically been prepared for the Group as it did not operate as a separate business and did not constitute a separate legal entity. The accompanying condensed combined financial statements have been prepared using state-specific information, where available, and allocations where data is not maintained on a state-specific basis within the Group’s books and records. The allocations impacted substantially all of the statements of income and comprehensive income items other than operating revenues and all balance sheet items with the exception of plant, property and equipment and accumulated depreciation which are maintained at the state level. All significant intercompany transactions within the Group have been eliminated. These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year.

The businesses that comprise the condensed combined financial statements do not maintain cash balances independent of the Verizon consolidated group. Accordingly the Verizon consolidated group provides the cash management functions for the businesses in the condensed combined financial statements and the condensed combined statements of cash flows reflect the activities of the businesses in the condensed combined financial statements.

The methodology for preparing the financial statements included in the accompanying condensed combined financial statements is based on the following:

ILECs: All operations of the ILECs’ business in California, Florida and Texas are allocated entirely to the Group, and accordingly, are included in the condensed combined statements of assets, liabilities and parent funding and statements of income and comprehensive income except for affiliate notes payable, notes receivable, and related interest balances.

All other: For the condensed combined statements of assets, liabilities and parent funding, Verizon management evaluated the possible methodologies for allocation and determined that, in the absence of a more specific methodology, an allocation based on percentage of revenue best reflected the group’s share of the respective balances for most of the accounts, with the exception of the following: accounts receivable were calculated based on an applicable days sales outstanding ratio; accounts payable were calculated based on an applicable days payables outstanding ratio; plant, property and equipment were allocated based on the location of assets in state-specific records, except for construction in progress which was computed based on the respective percentage of the Group’s plant, property and equipment within California, Florida and Texas as compared to the total entity plant, property and equipment; and income tax-related accounts were computed based on specific tax calculations. Except for the ILEC’s discussed above, and as further discussed below, none of the employee benefit-related assets and liabilities nor general operating tax-related assets and liabilities were allocated. For the condensed combined statements of income and comprehensive income, operating revenues were determined using applicable billing system data and depreciation expense was determined based upon state-specific records. The remaining operating expenses were allocated based on the respective percentage of the Group’s revenue within California, Florida and Texas, to the total entity revenues. The tax provision was calculated as if the Group was a separate tax payer.

Management believes the assumptions and allocations are reasonable and reflect all costs of doing business in accordance with SAB Topic 1.B.1; however, they may not be indicative of the actual results of the Group had it been operating as an independent entity for the periods presented or the amounts that may be incurred by the Group in the future. Actual amounts that may have been incurred if the Group had been a stand-alone entity for the periods presented would depend on a number of factors, including the Group’s chosen organizational structure, what functions were outsourced or performed by the Group’s employees and strategic decisions made in areas such as information technology systems and infrastructure.

On February 5, 2015, Verizon entered into a definitive agreement with Frontier pursuant to which Verizon agreed to contribute the Group to a newly formed legal entity and that entity will then be acquired by Frontier for approximately $10.5 billion, subject to certain adjustments and the assumption of debt. The transaction is subject to the satisfaction of certain closing conditions including, among others, receipt of state and federal telecommunications regulatory approvals. The transaction is expected to close during the first half of 2016.

Upon closing of the transaction, pursuant to the Employee Matters Agreement (“EMA”), any Verizon pension benefits under a tax qualified pension plan (other than the Verizon Wireless Retirement Plan and Western Union International, Inc. Pension Plan) relating to a Group employee as of closing will be transferred to a successor pension plan(s) maintained by Frontier or an affiliate thereof. The EMA describes the assets to be transferred from the Verizon pension plans to the Frontier pension plans, and a special funding provision that may provide additional Verizon company assets for pension funding purposes. The EMA also provides, with limited exception, that active post-retirement health, dental and life insurance benefits relating to Group employees as of closing will cease to be liabilities of the Verizon Welfare Plans or of Verizon and such liabilities will be assumed by the applicable transferred company and the applicable Frontier welfare plans. Accordingly, these EMA related plan assets or obligations will likely not be transferred to Frontier or its affiliates upon closing at the amounts reflected in these financial statements.

We have evaluated subsequent events through May 8, 2015, the date these condensed combined financial statements were available to be issued.

Summary of Significant Accounting Policies

Use of Estimates—The accompanying condensed combined financial statements have been prepared using US GAAP, which requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.

Examples of significant estimates include the allowance for doubtful accounts; the recoverability of plant, property and equipment; the recoverability of intangible assets and other long lived assets; unbilled revenue; accrued expenses; pension and postretirement benefit assumptions; and income taxes. In addition, estimates were made to determine the allocations in preparing the condensed combined financial statements as described in the Basis of Presentation.

Fair Value Measurements—Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the valuation methodologies in measuring fair value, is as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities

Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities

Level 3—No observable pricing inputs in the market

Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.

Recently Issued Accounting Standards

In January 2015, the accounting standard update related to the reporting of extraordinary and unusual items was issued. This standard update eliminates the concept of extraordinary items from US GAAP as part of an initiative to reduce complexity in accounting standards while maintaining or improving the usefulness of the information provided to the users of the financial statements. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and expanded to include items that are both unusual in nature and infrequent in occurrence. This standard update is effective as of the first quarter of 2016; however, earlier adoption is permitted. The adoption of this standard update is not expected to have a significant impact on the condensed combined financial statements.

In April 2015, the accounting standard update related to the simplification of the presentation of debt issuances costs was issued. This standard update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This standard update is effective as of the first quarter of 2016; however, earlier adoption is permitted. The adoption of this standard update is not expected to have a significant impact on the condensed combined financial statements.

In May 2014, the accounting standard update related to the recognition of revenue from contracts with customers was issued. This standard update clarifies the principles for recognizing revenue and develops a common revenue standard for US GAAP and International Financial Reporting Standards. The standard update intends to provide a more robust framework for addressing revenue issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; and provide more useful information to users of financial statements through improved disclosure requirements. Upon adoption of this standard update, we expect that the allocation and timing of revenue recognition will be impacted. Although we currently expect to adopt this standard update during the first quarter of 2017, the Financial Accounting Standards Board, in April 2015, issued an exposure draft of a proposed accounting standard update that would delay by one year the effective date of its new revenue recognition standard. Although the proposed accounting standard update allows for early adoption as of the original public entity effective date, if the accounting standard update is issued as proposed, we would defer the adoption of this standard update until the first quarter of 2018.

There are two adoption methods available for implementation of the standard update related to the recognition of revenue from contracts with customers. Under one method, the guidance is applied retrospectively to contracts for each reporting period presented, subject to allowable practical expedients. Under the other method, the guidance is applied to contracts not completed as of the date of initial application, recognizing the cumulative effect of the change as an adjustment to the beginning balance of retained earnings, and also requires additional disclosures comparing the results to the previous guidance. We are currently evaluating these adoption methods and the impact that this standard update will have on our condensed combined financial statements.

2.	PARENT FUNDING

Changes in Parent Funding were as follows:


	(dollars in millions)
Balance at January 1, 2015	$	5,113
Net income		88
Net change due to parent funding, allocations and intercompany reimbursements		(13	)

Balance at March 31, 2015	$	5,188

The Parent Company funding in the condensed combined statements of assets, liabilities and parent funding represents Verizon’s historical funding of the Group. For purposes of these combined financial statements, funding requirements have been summarized as “Parent funding” without regard to whether the funding represents debt or equity. No separate equity accounts are maintained for the Group.

DEBT

Changes to debt during the three months ended March 31, 2015 are as follows:


(dollars in millions)	Debt maturing within One Year			Long-term Debt			Total
Balance at January 1, 2015	$	9		$	627		$	636
Increase in capital lease obligations		—			19			19
Repayments of capital lease obligations		(2	)		—			(2	)
Reclassifications		4			(4	)		—

Balance at March 31, 2015	$	11		$	642		$	653

The fair value of debt is determined using various methods, including quoted prices for identical terms and maturities, which is a Level 1 measurement, as well as quoted prices for similar terms and maturities in inactive markets and future cash flows discounted at current rates. The fair value of debt, excluding capital leases, was $656 million and $741 million at March 31, 2015 and December 31, 2014, respectively, as compared to the carrying value of $593 million at both March 31, 2015 and December 31, 2014.

The Group’s third party debt is guaranteed by Verizon. Each guarantee will remain in place for the life of the obligation unless terminated pursuant to its terms, including the ILECs no longer being wholly-owned subsidiaries of Verizon.

Additional Financing Activities (Non-Cash Transaction)

During the three months ended March 31, 2015, we financed, primarily through vendor financing arrangements, the purchase of approximately $19 million of long-lived assets, consisting primarily of network equipment. At March 31, 2015, $60 million of these financing arrangements, including those entered into in the prior year, remained outstanding. These purchases are non-cash financing activities and therefore not reflected within Capital expenditures on our condensed combined statements of cash flows.

4.	EMPLOYEE BENEFITS

The Group participates in Verizon’s benefit plans. Verizon maintains non-contributory defined pension plans for many of its employees. The postretirement health care and life insurance plans for the retirees and their dependents are both contributory and non-contributory, and include a limit on the share of cost for recent and future retirees. Verizon also sponsors defined contribution savings plans to provide opportunities for eligible employees to save for retirement on a tax-deferred basis. A measurement date of December 31 is used for the pension and postretirement health care and life insurance plans.

The periodic income and expense related to Verizon’s benefit plans as well as the assets and obligations have been allocated by the Parent to ILECs on the basis of headcount and other factors deemed appropriate by management and with the assets and liabilities reflected as prepaid pension assets and employee benefit obligations in the condensed combined statements of assets, liabilities and parent funding. For all other entities, the assets and obligation have not been allocated. In all cases, benefit plan income and expense has been allocated to the entity based on headcount.

The structure of Verizon’s benefit plans does not provide for the separate determination of certain disclosures for the Group. The required information is provided on a consolidated basis in Verizon’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015.

Benefit Cost

The following table summarizes the allocated benefit costs related to the pension and postretirement health care and life insurance plans associated with the Groups’ operations.


(dollars in millions)	Pension				Health Care and Life
Three Months Ended March 31,	2015		2014		2015		2014
Net periodic benefit cost	$	2	$	8	$	15	$	16

Severance Benefits

During the three months ended March 31, 2015 and 2014, we paid $13 million and $2 million, respectively, in severance benefits. At March 31, 2015, we had a remaining severance liability of $49 million, a portion of which includes future contractual payments to employees separated as of March 31, 2015.

5.	TRANSACTIONS WITH AFFILIATES

Operating revenue includes transactions with Verizon for the rendering of local telephone services, network access, billing and collection services, interconnection agreements and the rental of facilities and equipment. These services were reimbursed by Verizon based on tariffed rates, market prices, negotiated contract terms or actual costs incurred by the Group.

The Group reimbursed Verizon for specific goods and services it provided to, or arranged for, based on tariffed rates or negotiated terms. These goods and services included items such as communications and data processing services, office space, professional fees and insurance coverage.

The Group was allocated Verizon’s share of costs incurred to provide services on a common basis to all of its subsidiaries. These costs included allocations for marketing, sales, accounting, finance, materials management, procurement, labor relations, legal, security, treasury, human resources, tax and audit services. Based on pools of costs and the entities they relate to, the allocations were determined based on a three-part factor which is computed based on the average of relative revenue, plant, property and equipment and salaries and wages. The allocation factors are calculated by department and updated annually to reflect changes to business operations.

As it relates to the ILECs, the affiliate operating revenue and expense amounts represent all transactions with Verizon that are allocated entirely to the Group. As it relates to VLD, VOL, VSSI and VNIC, affiliate operating revenue and expense amounts with Verizon were allocated to the Group consistent with the methodology for determining operating revenues and operating expenses as described in Note 1, “Basis of Presentation.” Affiliate operating revenue and expense amounts within the Group have been eliminated.

6.	COMMITMENTS AND CONTINGENCIES

In the ordinary course of business the Group is involved in various commercial litigation and regulatory proceedings at the state and federal level. Where it is determined, in consultation with counsel based on litigation and settlement risks, that a loss is probable and estimable in a given matter, the Group establishes an accrual. An estimate of a reasonably possible loss or range of loss in excess of the amounts already accrued cannot be made at this time due to various factors typical in contested proceedings, including (1) uncertain damage theories and demands; (2) a less than complete factual record; (3) uncertainty concerning legal theories and their resolution by courts or regulators; and (4) the unpredictable nature of the opposing party and its demands. The Group continuously monitors these proceedings as they develop and adjusts any accrual or disclosure as needed. The Group does not expect that the ultimate resolution of pending regulatory or legal matters in future periods will have a material effect on its financial condition, but it could have a material effect on its results of operations.

From time to time, state regulatory decisions require us to assure customers that we will provide a level of service performance that falls within prescribed parameters. There are penalties associated with failing to meet those service parameters and the Group, from time to time, pays such penalties. The Group does not expect these penalties to have a material effect on its financial condition, but they could have a material effect on its results of operations.

Exhibit 99.2

Verizon’s Separate Telephone Operations

in California, Florida and Texas

Management’s Discussion and Analysis of Financial Condition and Results of Operations

As of and for the three month periods ended March 31, 2015 and 2014

The following discussion should be read in conjunction with the financial statements of Verizon’s Separate Telephone Operations in California, Florida and Texas (“the Group”) and the notes thereto for the three month periods ended March 31, 2015 and 2014, included as Exhibit 99.1 to this Current Report on Form 8-K. This financial information reflects the operations that will constitute the Group’s business in connection with the transaction.

Overview

Verizon Communications Inc.’s (“Verizon” or “the Parent”) wireline business provides customers with communications services that include voice, internet access, broadband video and data, next generation IP network services, network access, long distance and other services. Verizon’s Separate Telephone Operations in California, Florida and Texas (“the Group”) represent a portion of Verizon’s wireline business but have not been operated as a distinct business separate from Verizon’s wireline business and do not constitute a separate legal entity. Consequently, financial statements had not historically been prepared for the Group. The Group had approximately 11,000 employees as of March 31, 2015.

The Group is comprised of the local exchange business and related landline activities of Verizon in the states of California, Florida and Texas, including Internet access, long distance services and broadband video provided to certain customers in those states.

The Group is comprised of all or a portion of the following entities: Verizon California Inc., Verizon Florida LLC and GTE Southwest Inc. (doing business as Verizon Southwest), referred to as Incumbent Local Exchange Carriers (“ILECs”), Verizon Long Distance LLC (“VLD”), Verizon Online LLC (“VOL”), Verizon Select Services, Inc. (“VSSI”) and Verizon Network Integration Corp. (“VNIC”). The Group excludes all activities of Verizon Wireless.

The Group includes regulated carriers and unregulated businesses in all three states, consisting principally of:

•

Local wireline customers and related operations and assets used to deliver:

•

Local exchange service,

•

IntraLATA toll service,

•

Network access service,

•

Enhanced voice and data services, and

•

Products at retail stores;

•

Consumer and small business switched long distance customers (excluding any customers of Verizon Business Global LLC);

•

Dial-up, high speed Internet (or Digital Subscriber Line) and fiber-to-the-premises Internet service provider customers; and

•

Broadband video in certain areas within California, Florida and Texas.

Many of the communications services that the Group provides are subject to regulation by the state regulatory commissions of California, Florida or Texas with respect to intrastate services and other matters, and by the Federal Communications Commission (“FCC”) with respect to interstate services and other matters. The FCC and state commissions also regulate some of the rates, terms and conditions that carriers pay each other for the exchange voice traffic (particularly traditional wireline traffic) over different networks and other aspects of interconnection for some services. All of the broadband video services the Group provides, including the payment of franchise fees, are subject to regulation by state or local governmental authorities. The Federal Cable Act generally requires companies to obtain a local cable franchise, and the FCC has adopted rules that interpret and implement this requirement. Also, the FCC has a body of rules that apply to cable operators.

The sections that follow provide information about the important aspects of the Group and discuss their results of operations, financial position and sources and uses of cash and investments. Also highlighted are key trends and uncertainties related to the Group to the extent practicable.

Basis of presentation

Historically, financial statements have not been prepared for the Group as it did not operate as a distinct business and did not constitute a separate legal entity. The condensed combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) using state-specific information, where available, and allocations where data is not maintained on a state-specific basis within Verizon’s books and records. The allocations impacted substantially all of the statements of income and comprehensive income items other than operating revenues and all balance sheet items with the exception of plant, property and equipment and accumulated depreciation which are maintained at the state level. Verizon management believes the assumptions and allocations used to determine the amounts in the condensed combined financial statements are reasonable and reflect all costs of doing business. See Note 1 to the Group’s condensed combined financial statements for additional information regarding the allocation methodology. All significant intercompany transactions within the Group have been eliminated.

Transactions with affiliates

Operating revenue reported by the Group includes transactions with Verizon for the rendering of local telephone services, network access, billing and collection services, interconnection agreements and the rental of facilities and equipment. These services were reimbursed by Verizon based on tariffed rates, market prices, negotiated contract terms or actual costs incurred by the Group.

The Group was allocated Verizon’s share of costs incurred to provide services on a common basis to all of its subsidiaries. These costs included allocations for marketing, sales, accounting, finance, materials management, procurement, labor relations, legal, security, treasury, human resources, and tax and audit services. Based on pools of costs and the entities they relate to, the allocations were determined based on a three part factor which is computed based on the average of relative revenue, plant, property and equipment and salaries and wages. The allocation factors are calculated by department and updated annually to reflect changes to business operations.

As it relates to the ILECs, the affiliate operating revenue and expense amounts represent all transactions with Verizon that are allocated entirely to the Group. As it relates to VLD, VOL, VSSI, and VNIC, affiliate operating revenue and expense amounts with Verizon were allocated to the Group consistent with the methodology for determining operating revenues and operating expenses as described in Note 1 to the Group’s condensed combined financial statements.

Trends

There have been no significant changes to the information related to trends affecting the Group that were disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2014.

Results of operations

Operating Revenues and Selected Operating Statistics


	Three Months Ended March 31,
(dollars in millions)	2015		2014		Increase/(Decrease)
Operating revenues	$	1,448	$	1,469	$	(21	)	(1.4	)%
Connections (in thousands) ⁽¹⁾
Total Voice connections		3,578		3,855		(277	)	(7.2	)
Total Broadband connections		2,178		2,166		12		0.6
FiOS Internet Subscribers		1,571		1,465		106		7.2
FiOS Video subscribers		1,203		1,155		48		4.2
High-Speed Internet subscribers		607		701		(94	)	(13.4	)

(1)	As of the end of the period

Operating revenues for the three months ended March 31, 2015 of $1,448 million declined $21 million, or 1.4%, compared to the similar period in 2014 primarily due to the continued decline of local exchange revenues, partially offset by the expansion of FiOS services (Voice, Internet and Video) as well as changes in our pricing strategies. The decline in local exchange revenues related to a 7.2% decline in total voice connections as a result of continued competition and technology substitution with wireless, VoIP, broadband and cable services. Total voice connections include traditional switched access lines in service as well as FiOS digital voice connections. We grew our FiOS Internet and FiOS Video subscriber base by 7.2% and 4.2%, respectively, from April 1, 2014 to March 31, 2015 while also improving penetration rates within our FiOS service areas. As of March 31, 2015, we achieved penetration rates of 47.7% and 37.0% for FiOS Internet and FiOS Video, respectively, compared to penetration rates of 45.3% and 36.1% for FiOS Internet and FiOS Video, respectively, at March 31, 2014.

Operating expenses


	Three Months Ended March 31,
(dollars in millions)	2015		2014		Increase/(Decrease)
Costs of services and sales (exclusive of items shown below)	$	721	$	693	$	28		4.0	%
Selling, general and administrative expense		325		311		14		4.5
Depreciation and amortization expense		250		300		(50	)	(16.7	)

Total Operating Expenses	$	1,296	$	1,304	$	(8	)	(0.6	)

Cost of services and sales. Cost of services and sales during the three months ended March 31, 2015 of $721 million increased $28 million, or 4.0%, compared to the similar period in 2014, primarily due to an increase in content costs associated with continued FiOS subscriber growth and programming license fee increases, as well as an increase in access costs driven by increases in the number of circuits due to continued FiOS Internet subscriber growth. Partially offsetting the increase was a decrease in employee costs as a result of reduced headcount.

Selling, general and administrative expense. Selling, general and administrative expense during the three months ended March 31, 2015 of $325 million increased $14 million, or 4.5%, compared to the similar period in 2014 primarily due to an increase in contracted services, advertising and other administrative charges, partially offset by a decrease in compensation expense as a result of reduced headcount.

Depreciation and amortization. Depreciation and amortization expense during the three months ended March 31, 2015 of $250 million decreased $50 million, or 16.7%, compared to the similar period in 2014. The decrease was primarily driven by a decrease in net depreciable assets.

Operating Income and EBITDA

Earnings before interest, taxes, depreciation and amortization expenses (EBITDA), which is presented below, is a non-GAAP measure and does not purport to be an alternative to operating income as a measure of operating performance. Management believes that this measure is useful to investors and other users of our financial information in evaluating operating profitability on a more variable cost basis as it excludes the depreciation and amortization expense related primarily to capital expenditures, as well as in evaluating operating performance in relation to our competitors. EBITDA is calculated by adding back depreciation and amortization expense to operating income.

It is management’s intent to provide non-GAAP financial information to enhance the understanding of the Group’s GAAP financial information, and it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Each non-GAAP financial measure is presented along with the corresponding GAAP measure so as not to imply that more emphasis should be placed on the non-GAAP measure. The non-GAAP financial information presented may be determined or calculated differently by other companies.


	Three Months Ended March 31,
(dollars in millions)	2015			2014			Increase/(Decrease)
Operating income	$	152		$	165		$	(13	)	(7.9	)%
Add Depreciation and amortization expense		250			300			(50	)	(16.7	)

EBITDA	$	402		$	465		$	(63	)	(13.5	)

Operating income margin		10.5	%		11.2	%
EBITDA margin		27.8			31.7

The changes in Operating income and Operating income margin were primarily a result of the factors described in connection with the decline in operating revenues. The changes in EBITDA and EBITDA margin were primarily a result of the factors described in connection with the decline in operating revenues and increases in costs of services and sales and selling, general and administrative expense.

Other results


	Three Months Ended March 31,
(dollars in millions)	2015			2014			Increase/(Decrease)
Interest expense, net	$	8		$	19		$	(11	)		(57.9	)%
Income tax provision	$	56		$	55		$	1		$	1.8
Effective income tax rate		38.9	%		37.7	%

Interest expense. Interest expense during the three months ended March 31, 2015 of $8 million decreased $11 million, or 57.9%, compared to the similar period in 2014 due to the maturity and repayment of a $1 billion affiliate promissory note in April 2014.

Income taxes. The effective income tax rate is calculated by dividing the provision for income taxes by income before the provision for income taxes. The effective income tax rate for the Group during the three months ended March 31, 2015 was 38.9% on income before income taxes of $144 million compared to 37.7% during the similar period in 2014 on income before income taxes of $146 million. The increase in the effective income tax rate was generated by certain non-recurring permanent tax benefits recorded in the three months ended March 31, 2014.

Liquidity and capital resources


	Three Months Ended March 31,
(dollars in millions)	2015			2014			Change
Cash Flows Provided by (Used in)
Operating activities	$	188		$	574		$	(386	)
Investing activities		(173	)		(177	)		4
Financing activities		(15	)		(397	)		382

Net change in cash	$	—		$	—		$	—

Capital expenditures	$	174		$	177		$	(3	)

The Group uses net cash generated from operations to fund capital expenditures and repay affiliate debt.

Cash flows provided by operating activities. Net cash provided by operating activities was $188 million and $574 million during the three months ended March 31, 2015 and 2014, respectively. Historically, the Group’s principal source of funds has been cash generated from operations. During the three months ended March 31, 2015, cash from operating activities decreased $386 million compared to the similar period in 2014 primarily as a result of increased working capital requirements and lower earnings.

Cash flows used in investing activities. Net cash used in investing activities was $173 million and $177 million during the three months ended March 31, 2015 and 2014, respectively. Capital expenditures are the Group’s primary use of capital resources as they facilitate the introduction of new products and services, enhance responsiveness challenges and increase the operating efficiency and productivity of the Group’s networks. Capital expenditures decreased during the three months ended March 31, 2015 compared to the similar period in 2014 as a result of decreased FiOS and legacy spending requirements.

Cash flows used in financing activities. Net cash used in financing activities was $15 million and $397 million during the three months ended March 31, 2015 and 2014, respectively. The funding sources of the Group are included in parent funding in the condensed combined statements of assets, liabilities and parent funding without regard to whether the funding represents intercompany debt or equity. The Group participates in the centralized cash management services provided by Verizon. Verizon issues short-term debt, including commercial paper, to fund the working capital requirements of Verizon’s subsidiaries, including the Group, and invests funds in short-term investments on their behalf.

Exhibit 99.3

Verizon’s Separate Telephone Operations

in California, Florida and Texas

Management’s Discussion and Analysis of Financial Condition and Results of Operations

As of and for the three years ended December 31, 2014

The following discussion should be read in conjunction with the financial statements of Verizon’s Separate Telephone Operations in California, Florida and Texas (“the Group”) and the notes thereto, for the three years ended December 31, 2014, previously filed on our Current Report on Form 8-K on May 4, 2015. This financial information, together with the pro forma adjustments detailed separately reflects the operations that will constitute the Group’s business in connection with the transaction.

Overview

The Group is comprised of all or a portion of the following entities: Verizon California Inc., Verizon Florida LLC and GTE Southwest Inc. (doing business as Verizon Southwest), referred to as Incumbent Local Exchange Carriers (“ILECs”), Verizon Long Distance LLC and Verizon Enterprise Solutions LLC (“VLD”), Verizon Online LLC (“VOL”), Verizon Select Services, Inc. (“VSSI”) and Verizon Network Integration Corp. (“VNIC”). The Group excludes all activities of Verizon Wireless.

The Group includes regulated carriers and unregulated businesses in all three states, consisting principally of:

•

Local wireline customers and related operations and assets used to deliver:

•

Local exchange service,

•

IntraLATA toll service,

•

Network access service,

•

Enhanced voice and data services, and

•

Products at retail stores;

•

Consumer and small business switched long distance customers (excluding any customers of Verizon Business Global LLC);

•

Dial-up, high speed Internet (or Digital Subscriber Line) and fiber-to-the-premises Internet service provider customers; and

•

Broadband video in certain areas within California, Florida and Texas.

Basis of presentation

Historically, financial statements have not been prepared for the Group as it did not operate as a distinct business and did not constitute a separate legal entity. The accompanying combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) using state-specific information, where available, and allocations where data is not maintained on a state-specific basis within Verizon’s books and records. The allocations impacted substantially all of the statements of operations and comprehensive income (loss) items other than operating revenues and all balance sheet items with the exception of plant, property and equipment and accumulated depreciation which are maintained at the state level. Verizon management believes the assumptions and allocations used to determine the amounts in the combined financial statements are reasonable and reflect all costs of doing business. See Note 1 to the Group’s combined financial statements for additional information regarding the allocation methodology. All significant intercompany transactions within the Group have been eliminated.

Transactions with affiliates

The Group was allocated Verizon’s share of costs incurred to provide services on a common basis to all of its subsidiaries. These costs included allocations for marketing, sales, accounting, finance, materials management, procurement, labor relations, legal, security, treasury, human resources, and tax and audit services. Based on pools of costs and the entities they relate to, the allocations were determined based on a three part factor which is computed based on the average of relative revenue, plant, property and equipment and salaries and wages. The allocation factors are calculated by department and updated annually to reflect changes to business operations.

As it relates to the ILECs, the affiliate operating revenue and expense amounts represent all transactions with Verizon that are allocated entirely to the Group. As it relates to VLD, VOL, VSSI, and VNIC, affiliate operating revenue and expense amounts with Verizon were allocated to the Group consistent with the methodology for determining operating revenues and operating expenses as described in Note 1 to the Group’s combined financial statements.

Trends

The industries that we operate in are highly competitive, which we expect to continue particularly as traditional, non-traditional and emerging service providers seek increased market share. We believe that our high-quality customer base and superior networks differentiate us from our competitors and enable us to provide enhanced communications experiences to our customers. We believe our focus on the fundamentals of running a good business, including operating excellence and financial discipline, gives us the ability to plan and manage through changing economic and competitive conditions.

We have experienced continuing access line losses and declines in related revenues as customers have disconnected both primary and secondary lines and switched to alternative technologies such as wireless, voice over Internet protocol (VoIP) and cable for voice and data services. We expect to continue to experience access line losses as customers continue to switch to alternate technologies. We expect FiOS broadband and video penetration to positively impact our revenue and subscriber base.

Despite this challenging environment, we expect that we will be able to grow by providing network reliability and offering product bundles that include broadband Internet access, digital television and local and long distance voice services. We will also continue to focus on cost efficiencies to attempt to offset adverse impacts from unfavorable economic conditions and competitive pressures. We expect content costs for our FiOS video service to continue to increase. However, we expect to achieve certain cost efficiencies in 2015 as we continue to streamline our business processes with a focus on improving productivity and increasing profitability.

Results of operations

Operating Revenues and Selected Operating Statistics


							(dollars in millions) Increase/(Decrease)
Years Ended December 31,	2014		2013		2012		2014 vs. 2013					2013 vs. 2012
Operating revenues	$	5,791	$	5,824	$	5,908	$	(33	)	(0.6	)%	$	(84	)	(1.4	)%
Connections (in thousands) ⁽¹⁾
Total Voice connections		3,654		3,937		4,216		(283	)	(7.2	)%		(279	)	(6.6	)%
Total Broadband connections		2,180		2,171		2,146		9		0.4	%		25		1.2	%
FiOS Internet subscribers		1,548		1,448		1,323		100		6.9	%		125		9.4	%
FiOS Video subscribers		1,196		1,150		1,061		46		4.0	%		89		8.4	%
High-Speed Internet subscribers		632		723		823		(91	)	(12.6	)%		(100	)	(12.2	)%

(1)	As of the end of period

2014 Compared to 2013

Operating revenues in 2014 of $5,791 million declined $33 million, or 0.6%, compared to 2013 primarily due to the continued decline of local exchange revenues, partially offset by the expansion of FiOS services (Voice, Internet and Video) as well as changes in our pricing strategies. The decline in local exchange revenues related to a 7.2% decline in total voice connections as a result of continued competition and technology substitution with wireless, VoIP, broadband and cable services. Total voice connections include traditional switched access lines in service as well as FiOS digital voice connections. We grew our FiOS Internet and FiOS Video subscriber base by 6.9% and 4.0%, respectively, from December 31, 2013 to December 31, 2014 while also improving penetration rates within our FiOS service areas. As of December 31, 2014, we achieved penetration rates of 47.1% and 36.9% for FiOS Internet and FiOS Video, respectively, compared to penetration rates of 45.0% and 36.2% for FiOS Internet and FiOS Video, respectively, at December 31, 2013.

2013 Compared to 2012

Operating revenues during 2013 of $5,824 million declined $84 million, or 1.4%, compared to 2012 primarily due to the continued decline of local exchange revenue, partially offset by the expansion of FiOS services as well as changes in our pricing strategies. The decline in local exchange revenues related to a 6.6% decline in total voice connections as a result of continued competition and technology substitution with wireless, VoIP, broadband and

cable services. Total voice connections include traditional switched access lines in service as well as FiOS digital voice connections. We grew our FiOS Internet and FiOS Video subscriber base by 9.4% and 8.4%, respectively, from December 31, 2012 to December 31, 2013 while also improving penetration rates within our FiOS service area. As of December 31, 2013, we achieved penetration rates of 45.0% and 36.2% for FiOS Internet and FiOS Video, respectively, compared to penetration rates of 42.1% and 34.2% for FiOS Internet and FiOS Video, respectively, at December 31, 2012.

Operating expenses


							(dollars in millions) Increase/(Decrease)
Years Ended December 31,	2014		2013		2012		2014 vs. 2013					2013 vs. 2012
Cost of services and sales (exclusive of items shown below)	$	3,309	$	2,598	$	3,400	$	711		27.4	%	$	(802	)	(23.6	)%
Selling, general and administrative expenses		1,466		1,130		1,561		336		29.7	%		(431	)	(27.6	)%
Depreciation and amortization expense		1,026		1,191		1,208		(165	)	(13.9	)%		(17	)	(1.4	)%

Total Operating Expenses	$	5,801	$	4,919	$	6,169	$	882		17.9	%	$	(1,250	)	(20.3	)%

2014 Compared to 2013

Cost of services and sales. Cost of services and sales in 2014 of $3,309 million increased $711 million, or 27.4%, compared to 2013, primarily due to pension and benefit charges of approximately $394 million that were recorded during 2014 as compared to pension and benefit credits of approximately $321 million that were recorded in 2013, as well as an increase in content costs associated with continued FiOS subscriber growth and programming license fee increases. Partially offsetting the increase was a decrease in employee costs as a result of reduced headcount and a decline in access costs driven by declines in overall wholesale long distance volumes.

Selling, general and administrative expense. Selling, general and administrative expense in 2014 of $1,466 million increased $336 million, or 29.7%, compared to 2013 primarily due to pension and benefit charges of approximately $174 million that were recorded during 2014 as compared to pension and benefit credits of approximately $138 million that were recorded in 2013, partially offset by decreases in advertising and rent expense.

Depreciation and amortization. Depreciation and amortization expense in 2014 of $1,026 million decreased $165 million, or 13.9%, compared to 2013. The decrease was primarily driven by a decrease in net depreciable assets.

2013 Compared to 2012

Cost of services and sales. Cost of services and sales in 2013 of $2,598 million declined $802 million, or 23.6%, compared to 2012 primarily due to pension and benefit credits of approximately $321 million that were recorded during 2013 as compared to pension and benefit charges of approximately $502 million that were recorded in 2012, as well as a decline in access costs resulting primarily from declines in overall wholesale long distance volumes. This decrease was partially offset by higher content costs associated with continued FiOS subscriber growth and programming license fee increases.

Selling, general and administrative expense. Selling, general and administrative expense in 2013 of $1,130 million decreased $431 million, or 27.6%, compared to 2012 primarily due to pension and benefit credits of approximately $138 million that were recorded during 2013 as compared to pension and benefit charges of approximately $226 million that were recorded in 2012, as well as a decline in employee costs, primarily as a result of headcount reductions, and a decrease in advertising expense.

Depreciation and amortization. Depreciation and amortization expense in 2013 of $1,191 million decreased $17 million, or 1.4%, compared to 2012 primarily driven by a decrease in net depreciable assets.

Operating Income and EBITDA

Earnings before interest, taxes, depreciation and amortization expenses (EBITDA) and Adjusted EBITDA, which are presented below, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. Management believes that these measures are useful to investors and other users of our financial information in evaluating operating profitability on a more variable cost basis as they exclude the depreciation and amortization expense related primarily to capital expenditures, as well as in evaluating operating performance in relation to our competitors. EBITDA is calculated by adding back interest, taxes, and depreciation and amortization expense to net income.

Adjusted EBITDA is calculated by excluding the effect of actuarial gains or losses from the calculation of EBITDA. Management believes that excluding actuarial gains or losses as a result of a remeasurement provides additional relevant and useful information to investors and other users of our financial data in evaluating the effectiveness of our operations and underlying business trends in a manner that is consistent with management’s evaluation of business performance.

Operating expenses include pension and benefit related credits and/or charges based on actuarial assumptions, including projected discount rates and an estimated return on plan assets. These estimates are updated in the fourth quarter to reflect actual return on plan assets and updated actuarial assumptions. The adjustment has been recognized in the income statement during the fourth quarter or upon a remeasurement event pursuant to our accounting policy for the recognition of actuarial gains/losses.


				(dollars in millions)
Years Ended December 31,	2014			2013			2012
Operating Income (Loss)	$	(10	)	$	905		$	(261	)
Add Depreciation and amortization expense		1,026			1,191			1,208

EBITDA		1,016			2,096			947
Add (Less) Non-operating charges (credits) included in operating expenses:
Pension and benefit charges (credits)		568			(459	)		728

Adjusted EBITDA	$	1,584		$	1,637		$	1,675

Operating income (loss) margin		(0.2	)%		15.5	%		(4.4	)%
EBITDA margin		17.5	%		36.0	%		16.0	%
Adjusted EBITDA margin		27.4	%		28.1	%		28.4	%

The changes in Operating income (loss), EBITDA and Adjusted EBITDA and their respective margins in the table above were primarily a result of the factors described in connection with operating revenues and operating expenses.

Other results


										(dollars in millions) Increase/(Decrease)
Years Ended December 31,	2014			2013			2012			2014 vs. 2013					2013 vs. 2012
Interest expense, net	$	43		$	85		$	86		$	(42	)	(49.4	)%	$	(1	)	(1.2	)%
Income tax provision (benefit)	$	(21	)	$	318		$	(130	)	$	(339	)	nm		$	448		nm
Effective income tax rate		40	%		39	%		37	%

nm- not meaningful

2014 Compared to 2013

Interest expense. Interest expense in 2014 of $43 million decreased $42 million, or 49.4%, compared to 2013 due to the maturity and repayment of a $1 billion affiliate promissory note in April 2014.

Income taxes. The effective income tax rate is calculated by dividing the provision for income taxes by income before the provision for income taxes. The effective income tax rate for the Group during 2014 was 40% on a loss before income taxes of $53 million compared to 39% during 2013 on income before income taxes of $820 million. The change in the effective income tax rate is not meaningful given the variance in income (loss) before income taxes driven by significant pension and other postretirement changes.

2013 Compared to 2012

Interest expense. Interest expense in 2013 of $85 million declined $1 million, or 1.2%, compared to 2012 as the carrying value of debt balance remained consistent during 2013 compared to 2012.

Income taxes. The effective income tax rate for the Group during 2013 was 39% on income before income taxes of $820 million compared to 37% during 2012 on a loss before income taxes of $347 million. The change in the effective income tax rate is not meaningful given the variance in income (loss) before income taxes driven by significant pension and other postretirement changes.

Liquidity and capital resources


				(dollars in millions)
Years Ended December 31,	2014			2013			2012
Cash Flows Provided by (Used in)
Operating activities	$	1,909		$	1,618		$	1,293
Investing activities		(809	)		(841	)		(780	)
Financing activities		(1,100	)		(777	)		(513	)

Net change in cash	$	—		$	—		$	—

Capital expenditures	$	810		$	842		$	807

The Group uses net cash generated from operations to fund capital expenditures and repay affiliate debt.

Cash flows provided by operating activities. Net cash provided by operating activities was $1,909 million, $1,618 million and $1,293 million for the years ended December 31, 2014, 2013 and 2012, respectively. Historically, the Group’s principal source of funds has been cash generated from operations.

In 2014, cash from operating activities increased $291 million compared to 2013 primarily as a result of improved working capital levels, partially offset by lower earnings.

In 2013, cash from operating activities increased $325 million compared to 2012 primarily as a result of higher earnings and improved working capital levels.

Cash flows used in investing activities. Net cash used in investing activities was $809 million, $841 million and $780 million for the years ended December 31, 2014, 2013 and 2012, respectively. Capital expenditures are the Group’s primary use of capital resources as they facilitate the introduction of new products and services, enhance responsiveness challenges and increase the operating efficiency and productivity of the Group’s networks. Capital expenditures declined in 2014 compared to 2013 as a result of decreased legacy spending requirements. Capital expenditures increased in 2013 compared to 2012 as a result of increased spending on our FiOS network.

Cash flows used in financing activities. Net cash used in financing activities was $1,100 million, $777 million and $513 million for the years ended December 31, 2014, 2013 and 2012, respectively. The funding sources of the Group are included in parent funding in the combined statements of assets, liabilities and parent funding without regard to whether the funding represents intercompany debt or equity. The Group participates in the centralized cash management services provided by Verizon. Verizon issues short-term debt, including commercial paper, to fund the working capital requirements of Verizon’s subsidiaries, including the Group, and invests funds in short-term investments on their behalf.

On April 15, 2009, Verizon California Inc. entered into a fixed promissory note with Verizon Financial Services, LLC, to borrow $1 billion, with a maturity date of April 2014 (“Five-Year Note”). The Five-Year Note was settled fully in cash on April 15, 2014. See Note 6 to the Group’s combined financial statements for additional information.

Distribution date indebtedness

The parties anticipate that distribution date indebtedness will consist of the debentures described below.

Verizon California Inc. $200,000,000 6.75% Debentures, Series F, due 2027

In May 1998, Verizon California Inc., a subsidiary of Verizon included in the Group, issued $200,000,000 in aggregate principal amount of 6.75% Series F Debentures due May 15, 2027 in a transaction registered under the Securities Act. The Verizon California Inc. debentures are the obligor’s senior, unsecured obligation that rank equally in right of payment with all of the obligor’s existing and future senior indebtedness and rank senior in right of payment to all of the obligor’s existing and future subordinated indebtedness.

Verizon Florida LLC $300,000,000 6.86% Debentures, Series E, due 2028

In February 1998, Verizon Florida LLC, a subsidiary of Verizon included in the Group, issued $300,000,000 in aggregate principal amount of 6.86% Debentures, Series E, due February 1, 2028 in a transaction registered under the Securities Act. The Verizon Florida LLC debentures are the obligor’s senior, unsecured obligation that rank equally in right of payment with all of the obligor’s existing and future senior indebtedness and rank senior in right of payment to all of the obligor’s existing and future subordinated indebtedness.

Verizon Southwest Inc. $100,000,000 First Mortgage Bonds, 8 ¹/₂ % Series due 2031

In November 1991, GTE Southwest Inc., a subsidiary of Verizon included in the Group, issued $100,000,000 in aggregate principal amount of 8.50% first mortgage bonds due November 15, 2031, in a transaction registered under the Securities Act. The GTE Southwest Inc. bonds are the obligor’s senior, secured obligations that rank equally in right of payment with all of the obligor’s existing and future senior indebtedness and rank senior in right of payment to all of the obligor’s existing and future subordinated indebtedness.

Off-Balance Sheet Arrangements

The Group does not have any off-balance sheet arrangements.

Summary of contractual obligations

The following table discloses aggregate information about the Group’s contractual obligations as of December 31, 2014, and the periods in which payments are due:


	(dollars in millions)
	Payments Due By Period
Contractual Obligations	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Long-term debt, including current maturities	$	636	$	9	$	18	$	16	$	593
Interest on long-term debt		593		44		86		85		378
Operating leases, excluding with affiliate companies		86		19		28		18		21

Total contractual obligations	$	1,315	$	72	$	132	$	119	$	992

Verizon management is not able to make a reliable estimate of when the unrecognized tax benefits balance of $14 million and related interest and penalties that exist at December 31, 2014, will be settled with the respective taxing authorities until issues or examinations are further developed. Consequently, no amounts related to these tax benefits were included in the table above.

Critical Accounting Policies

The Group’s critical accounting policies are as follows:

•

accounting for income taxes; and

•

depreciation of plant, property and equipment.

Accounting for Income Taxes. The Group’s current and deferred income taxes, and any associated valuation allowances, are impacted by events and transactions arising in the normal course of business as well as in connection with the adoption of new accounting standards, changes in tax laws and rates, acquisitions and dispositions of business and non-recurring items. Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets and the timing and amount of income tax payments. The Group accounts for tax benefits taken or expected to be taken in Verizon’s tax returns in accordance with the accounting standard relating to uncertainty in income taxes, which requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return. The Group reviews and adjusts their liability for unrecognized tax benefits based on their best judgment given the facts, circumstances and information available at each reporting date. To the extent that the final outcome of these tax positions is different than the amounts recorded, such differences may impact income tax expense and actual tax payments. The Group recognizes any interest and penalties accrued related to unrecognized tax benefits in income tax expense. Actual tax payments may materially differ from estimated liabilities as a result of changes in tax laws as well as unanticipated transactions impacting related income tax balances.

Depreciation of Plant, Property and Equipment. The Group records Plant, property and equipment at cost and depreciates the Plant, property and equipment on a straight-line basis over the estimated useful life of the assets. We expect that a one-year increase in estimated useful lives of our Plant, property and equipment in the ILEC’s operations would result in a decrease to our 2014 depreciation expense of $117 million and that a one-year decrease would result in an increase of approximately $357 million in our 2014 depreciation expense.

All of the Group’s significant accounting policies are described in Note 1 to the Group’s combined financial statements for the years ended December 31, 2014, 2013 and 2012.

Exhibit 99.4

Unaudited Pro Forma Condensed Combined Financial Information

The unaudited pro forma condensed combined balance sheet information as of March 31, 2015 is based upon (i) the historical consolidated financial information of Frontier Communications Corporation (“Frontier”) and (ii) the historical combined financial information of Verizon Communications Inc.’s (“Verizon”) Separate Telephone Operations in California, Florida and Texas (the “VSTO”), and has been prepared to reflect the Verizon Transaction based on the acquisition method of accounting. The unaudited pro forma condensed combined statement of operations information for the three months ended March 31, 2015 is based upon (i) the historical consolidated financial information of Frontier and (ii) the historical combined financial information of the VSTO, and has been prepared to reflect the pending acquisition by Frontier of the wireline properties of Verizon in California, Florida and Texas (the “Verizon Transaction”) pursuant to a securities purchase agreement (the “Verizon Purchase Agreement”) based on the acquisition method of accounting. The unaudited pro forma condensed combined statement of operations information for the year ended December 31, 2014 includes the results of the wireline properties of AT&T Inc. (“AT&T”) in Connecticut (the “Transferred Companies”) acquired by Frontier on October 24, 2014 (the “Connecticut Acquisition”) pursuant to a stock purchase agreement (the “AT&T Purchase Agreement”) and the transfer of certain assets and assumption of certain liabilities between AT&T and the Transferred Companies prior to closing of the acquisition contemplated thereby (the Transferred Companies, after giving effect to such transactions, the “Connecticut Operations”) for the period of January 1, 2014 through October 24, 2014. The unaudited pro forma condensed combined statement of operations information for the year ended December 31, 2014 is based upon (i) the historical consolidated financial information of Frontier, (ii) the historical combined financial information of the VSTO and (iii) the historical combined financial information of the Connecticut Operations for the period of January 1, 2014 through October 24, 2014, and has been prepared to reflect the Verizon Transaction and the Connecticut Operations 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 VSTO, adjusted to give effect to (1) the transfer of specified assets and liabilities from Verizon to the VSTO that are not included in the VSTO historical balance sheet as of March 31, 2015, and the retention of specified assets and liabilities by Verizon that are included in the VSTO historical balance sheet as of March 31, 2015, as more fully described in note 3(a) below, (2) this offering, the concurrent offering and bridge financing to fund the cash payment to Verizon for the purchase price, as more fully described in note 3(b) below, (3) the payment by Frontier to Verizon of $10.54 billion in cash and assumed debt (excluding any potential working capital purchase price adjustment as set forth in the Verizon Purchase Agreement) as more fully described in note 3(c) below and (4) the consummation of the transactions contemplated by the Verizon 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 Verizon Transaction and factually supportable and, in the case of the statement of operations information, that are expected to have a continuing impact.

On October 24, 2014, we acquired the wireline properties of AT&T in Connecticut by acquiring all of the issued and outstanding capital stock of Transferred AT&T Companies for a purchase price of $2.0 billion in cash, excluding adjustments for working capital, pursuant to the AT&T Purchase Agreement. Prior to the closing of the Connecticut Acquisition, (i) AT&T transferred to the Transferred AT&T Companies certain assets and caused the Transferred AT&T Companies to assume certain liabilities relating to the business to be acquired and (ii) the Transferred AT&T Companies transferred to AT&T certain assets, and AT&T assumed certain liabilities of the Transferred AT&T Companies, to be retained by AT&T following the closing. The Company financed the Connecticut Acquisition using the net proceeds of an offering of $1.55 billion aggregate principal amount of senior unsecured notes, borrowings of $350 million under a term loan credit agreement and cash on hand.

The unaudited pro forma condensed combined balance sheet information has been prepared as of March 31, 2015, and gives effect to the Verizon Transaction and other events described above as if they had occurred on that date. The unaudited pro forma condensed combined statement of operations information, which has been prepared for the three months ended March 31, 2015 and the year ended December 31, 2014, gives effect to the Verizon Transaction and other events described above as if they had occurred on January 1, 2014. The summary unaudited pro forma condensed combined statement of operations information for the year ended December 31, 2014 gives effect to the Connecticut Acquisition as if it had occurred on January 1, 2014.

The unaudited pro forma condensed combined financial information was prepared using, and should be read in conjunction with, (1) the audited combined financial statements of the VSTO for the year ended December 31, 2014 (available as Exhibit 99.1 to Frontier’s Current Report on Form 8-K, filed on May 4, 2015), (2) the unaudited interim condensed combined financial statements of the VSTO as of and for the three months ended March 31, 2015 (available as Exhibit 99.1 to this Current Report on Form 8-K), (3) the unaudited interim condensed combined financial statements of the Connecticut Operations for the nine months ended September 30, 2014 (available as Exhibit 99.2 to Frontier’s Current Report on Form 8-K, filed on January 7, 2015), (4) the audited consolidated financial statements of Frontier for the year ended December 31, 2014 (available in Frontier’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed on February 25, 2015), and (5) the unaudited interim condensed consolidated financial statements of Frontier as of and for the three months ended March 31, 2015 (available in Frontier’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015, filed on May 7, 2015).

The unaudited pro forma condensed combined financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the Verizon Transaction and other events described above been completed at the dates indicated above. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future results of operations of Frontier after completion of the Verizon Transaction and the other events described above. 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 Verizon Transaction, or from the Connecticut Acquisition for the period of January 1, 2014 through October 24, 2014. In addition, the fair value of the assets acquired and liabilities assumed are based upon estimates. The final purchase price allocation is dependent upon valuations and other studies that have not yet been completed. 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 MARCH 31, 2015


			VSTO
($ in millions)	Frontier		VSTO		Additional Transfer of Assets and Liabilities to/from Verizon(3a)			VSTO, as Adjusted		Equity Offering and Incurrence of Bridge Financing (3b)			Pro Forma Adjustments (3c)			Pro Forma Combined
ASSETS:
Cash and cash equivalents	$	509	$	—	$	—		$	—	$	10,580		$	(9,946	)(i)	$	1,143
Accounts receivable, net		526		768		(299	)		469		—			—			995
Other current assets		373		248		(19	)		229		(143	)		(161	)(ii)		298

Total current assets		1,408		1,016		(318	)		698		10,437			(10,107	)		2,436
Property, plant and equipment, net		8,478		8,237		(112	)		8,125		—			—			16,603
Goodwill		7,213		—		—			—		—			223	(iii)		7,436
Other intangibles, net		1,408		7		(7	)		—		—			2,410	(iv)		3,818
Other assets		214		2,856		(2,808	)		48		—			—			262

Total assets	$	18,721	$	12,116	$	(3,245	)	$	8,871	$	10,437		$	(7,474	)	$	30,555

LIABILITIES AND EQUITY:
Long-term debt due within one year	$	193	$	11	$	(11	)		—	$	—		$	—		$	193
Accounts payable and other current liabilities		1,247		1,485		(968	)		517		(201	)		27	(v)		1,590

Total current liabilities		1,440		1,496		(979	)		517		(201	)		27			1,783
Deferred income taxes		2,930		2,468		(375	)		2,093		—			(2,093	)(vi)		2,930
Other liabilities		1,380		2,322		(2,036	)		286		—			—			1,666
Long-term debt		9,464		642		(48	)		594		8,350			—			18,408
Equity		3,507		5,188		193			5,381		2,288			(5,408	)(vii)		5,768

Total liabilities and equity	$	18,721	$	12,116	$	(3,245	)	$	8,871	$	10,437		$	(7,474	)	$	30,555

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 THREE MONTHS ENDED MARCH 31, 2015


($ in millions, except per share amounts)	Frontier			VSTO		Pro Forma Adjustments			Pro Forma Combined
Revenue	$	1,371		$	1,448	$	(4	)(4a)	$	2,796
							(19	)(4b)
Cost and expenses (exclusive of depreciation and amortization)		810			1,046		(1	)(4a)		1,820
							(19	)(4b)
							(11	)(4c)
							(5	)(4f)
Depreciation and amortization		341			250		99	(4d)		689
							(1	)(4e)
Acquisition and integration costs		57			—		(57	)(4g)		—

Total operating expenses		1,208			1,296		5			2,509

Operating income		163			152		(28	)		287
Investment and other income, net		1			—		—			1
Interest expense		245			8		196	(4h)		449
Income tax expense (benefit)		(30	)		56		(85	)(4i)		(59	)

Net income (loss)	$	(51	)	$	88	$	(139	)	$	(102	)

Basic and diluted net income (loss) per common share	$	(0.05	)						$	(0.13	)(4j)

Weighted-average shares outstanding (in millions)		995								1,140	(4j)

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, 2014


			Connecticut Operations								VSTO
($ in millions, except per share amounts)	Frontier		Connecticut Operations(1)			Connecticut Operations Pro Forma Adjustments			Pro Forma Combined Frontier and Connecticut Operations		VSTO			VSTO Pro Forma Adjustments			Pro Forma Combined
Revenue	$	4,772	$	1,094		$	(3	)(5a)	$	5,775	$	5,791		$	(19	)(4a)	$	11,479

							(38	)(5b)							(68	)(4b)

							(46	)(5c)

							(4	)(5d)
Cost and expenses (exclusive of depreciation and amortization)		2,671		846			(7	)(5c)		3,456		4,775			(4	)(4a)		7,496

							(4	)(5d)							(68	)(4b)

							(12	)(5e)							(635	)(4c)

							10	(5f)							(28	)(4f)

							(15	)(5g)

							(33	)(5h)
Depreciation and amortization		1,139		119			12	(5e)		1,334		1,026			438	(4d)		2,795
							64	(5i)							(3	)(4e)
Acquisition and integration costs		142		—			(142	)(5k)		—		—			—			—

Total operating expenses		3,952		965			(127	)		4,790		5,801			(300	)		10,291

Operating income		820		129			36			985		(10	)		213			1,188
Investment and other income, net		39		2			—			41		—			—			41
Interest expense		695		(3	)		71	(5j)		763		43			708	(4h)		1,514
Income tax expense (benefit)		31		54			(13	)(5l)		72		(21	)		(188	)(4i)		(137	)

Net income (loss)	$	133	$	80		$	(22	)	$	191	$	(32	)	$	(307	)	$	(148	)

Basic and diluted net income (loss) per common share	$	0.13							$	0.19							$	(0.30	)(4j)

Weighted-average shares outstanding (in millions)		994								994								1,140	(4j)

(1)	Includes the results of the Connecticut Operations for the period of January 1, 2014 through October 24, 2014.

See notes to unaudited pro forma condensed combined financial information.

Notes to unaudited pro forma condensed

combined financial information

1. Description of the verizon transaction

On February 5, 2015, Frontier entered into an agreement with Verizon to acquire Verizon’s wireline operations that provide services to residential, commercial and wholesale customers in California, Florida and Texas for a purchase price of $10.54 billion in cash and assumed debt, excluding adjustments for working capital. As of the date of the announcement, these Verizon properties included 3.7 million voice connections, 2.2 million broadband connections, and 1.2 million FiOS^® video connections. The network being acquired is the product of substantial capital investments made by Verizon, with an estimated 54% of the residential households being enabled with FiOS^®. Subject to regulatory approvals, the Verizon Transaction is expected to close in the first half of 2016.

On October 24, 2014, pursuant to the AT&T Purchase Agreement, the Company acquired the wireline properties of AT&T in Connecticut for a purchase price of $2.0 billion in cash, excluding adjustments for working capital. Following the Connecticut Acquisition, Frontier now owns and operates the wireline business and fiber optic network servicing residential, commercial and wholesale customers in Connecticut. The Company also acquired the AT&T U-verse^® video and DISH^® satellite TV customers in Connecticut.

The unaudited pro forma condensed combined financial information was prepared for the purpose of developing the pro forma financial statements necessary to comply with the applicable disclosure and reporting requirements of the SEC. For purposes of the unaudited pro forma condensed combined financial information, the estimated aggregate transaction costs (other than debt incurrence fees in connection with the bridge financing, as set forth in note 3(b)), which are charged as an expense of Frontier as they are incurred, are expected to be approximately $27 million and include estimated costs associated primarily with investment banker advisory fees, legal fees, and regulatory and auditor services of Frontier. This balance is reflected as an accrual in the Pro Forma Adjustments column on the unaudited pro forma condensed combined balance sheet as of March 31, 2015. The combined company will also incur integration costs primarily related to information systems, network and process conversions (including hardware and software costs). Integration costs will be incurred in part in advance of the consummation of the Verizon Transaction, and are recorded based on the nature and timing of the specific action. For purposes of the unaudited pro forma condensed combined financial information, it was assumed that no amounts would be paid, payable or forgone by Verizon pursuant to orders or settlements issued or entered into in order to obtain governmental approvals from the Federal Communications Commission and in the States of California, Florida and Texas that will be required to complete the Verizon 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 a newly formed legal entity to which Verizon will contribute Verizon California Inc., Verizon Florida LLC and GTE Southwest Inc. (doing business as Verizon Southwest) pursuant to the Verizon Purchase Agreement.

2. Basis of purchase price allocation

The estimated purchase price ($10.54 billion less $594 million in assumed debt) 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:				$	9,946

Current assets	$	537
Property, plant & equipment		8,125
Goodwill		223
Other intangibles—Customer list		2,410
Other assets		48
Current liabilities		(517	)
Long-term debt		(594	)
Other liabilities		(286	)

Total net assets acquired	$	9,946

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 Verizon Transaction, as determined by third-party valuation for certain assets and liabilities. The valuation will be completed after the consummation of the Verizon Transaction. There can be no assurance that the actual allocation will not differ significantly from the preliminary allocation.

Frontier and Verizon 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.

3. Pro forma balance sheet adjustments:

(a)

VSTO is adjusted to (1) exclude assets and liabilities that will be retained by Verizon that are included in VSTO’s financial statements and (2) give effect to certain assets and liabilities relating to the business to be contributed by Verizon to these entities in connection with the Verizon Transaction. A brief description of these items follows (dollars in millions):


Balance	Amount			Reason
Accounts receivable, net	$	(298	)	Reclassification of affiliate balances to net presentation

		(1	)	Receivables related to businesses retained by Verizon


	$	(299	)

Other current assets	$	(19	)	Other current assets related to businesses retained by Verizon

Property, plant and equipment, net	$	(119	)	Property, plant and equipment related to businesses retained by Verizon

		7		Capital lease related assets to be transferred to VSTO by Verizon


	$	(112	)

Other intangibles, net	$	(7	)	Removal of non-network software to be retained by Verizon

Other assets	$	(1,748	)	Prepaid pension asset in excess of actuarial liability retained by Verizon

		(1,033	)	Reclassification of prepaid pension asset to offset the employee benefit obligation

		(27	)	Other assets related to businesses retained by Verizon


	$	(2,808	)

Long-term debt due within one year	$	(11	)	Current debt related to businesses retained by Verizon

Accounts payable and other current liabilities	$	(512	)	Payables related to businesses retained by Verizon

		(298	)	Reclassification of affiliate balances to net presentation

		(221	)	Intercompany payables retained by Verizon

		74		To establish liabilities for workers’ compensation claims

		(11	)	Accrued liabilities to be retained by Verizon


	$	(968	)

Deferred income taxes	$	(375	)	Reflects the impact of the pro forma adjustments on deferred income taxes

Other liabilities	$	(1,033	)	Reclassification of prepaid pension asset to offset the employee benefit obligation

		(935	)	Pension and postemployment benefits retained by Verizon

		(36	)	Accrued liabilities to be retained by Verizon

		(29	)	Liabilities related to businesses retained by Verizon

		(7	)	Removal of accrued uncertain tax position liabilities and credits retained by Verizon

		4		Capital lease related liabilities to be transferred to VSTO by Verizon


	$	(2,036	)

Long-term debt	$	(48	)	Long-term debt related to businesses retained by Verizon

Equity	$	193		Reflects the aggregate impact of the above noted entries

The pension and other postretirement employee benefits adjustments are based on amounts recorded by Verizon 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 Verizon Transaction. An actuarial evaluation will be completed subsequent to the completion of the Verizon Transaction and may be different from that reflected in the unaudited pro forma condensed combined financial information. This difference may be material.

(b)

Frontier has received a commitment for bridge financing from J.P. Morgan, Bank of America Merrill Lynch, Citibank and certain other parties to fund the cash consideration for the Verizon Transaction and to pay related fees and expenses. The Verizon Transaction is not subject to a financing condition. The pro forma adjustment to cash reflects an equity offering of approximately $2,500 million, less fees incurred of $69 million, as well as bridge financing of $8,350 million. As previously announced, the Company currently intends to complete a debt offering of approximately $8,350 million, prior to closing the Verizon Transaction, which would replace the need to utilize the bridge financing. The Company intends to use proceeds from the debt offering, together with the proceeds from the equity offering, to finance the Verizon Transaction and to pay related fees and expenses. At this time, however, no assurance can be given that these offerings will be successfully completed, on terms deemed acceptable by the Company.

The pro forma adjustment to cash reflects the proceeds of the equity offering and bridge financing, excluding the related fees.

The adjustment presented reflects the equity and debt incurrence of $10,850 in the aggregate, less assumed equity and debt incurrence fees and commissions of approximately $270 million (of which $58 million has been incurred). Additionally, an adjustment was made for $143 million to reflect the acceleration of deferred financing costs related to the bridge financing.

(c)

(i) This adjustment reflects the purchase price of $10,540 million less assumed debt of $594 million resulting in $9,946 million of cash that will be paid at closing of the Verizon Transaction (excluding any potential working capital purchase price adjustment as set forth in the Verizon Purchase Agreement).

(ii) This adjustment in the amount of $161 million eliminates the deferred tax assets of VSTO as of March 31, 2015.

(iii) This adjustment in the amount of $223 million reflects the goodwill associated with the excess of the Verizon Transaction consideration issued over the preliminary estimated fair value of the underlying identifiable net tangible and intangible assets at March 31, 2015.

(iv) This adjustment in the amount of $2,410 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 will be utilized to help determine the final fair value after the Verizon Transaction is completed, but this determination has not yet begun. 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.

(v) This adjustment in the amount of $27 million records the estimated unpaid non-recurring costs for acquisition related transaction costs, primarily bankers, lawyers and consulting advisory fees.

(vi) This adjustment in the amount of $2,093 million eliminates the deferred tax liabilities of VSTO as of March 31, 2015.

(vii) This adjustment in the amount of $5,408 million eliminates the “as adjusted” net equity of VSTO ($5,381 million) and recognizes unpaid estimated transaction costs of $27 million as of March 31, 2015.

4. Pro forma statement of operations adjustments—VSTO:

(a)	This adjustment reflects results of operations related to certain operations, assets and facilities that will not be transferred to Frontier in the Verizon Transaction.

(b)	This adjustment reflects the reclassification of bad debt expense from cost and expenses to revenue in order to conform to Frontier’s accounting policy.

(c)

This adjustment reflects pension, other postretirement employee benefits of retirees and postemployment benefits retained by Verizon based on the terms of the Verizon 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 Verizon Transaction. The adjustment includes $11 million and $64 million for pension and OPEB costs related to active employees and retirees to be retained by Verizon for the three months ended March 31, 2015 and the year ended December 31, 2014, respectively. This adjustment also reflects the reversal of $571 million in actuarial losses that were recorded by Verizon in order to conform to Frontier’s accounting policy for pension and other postretirement benefits for the year ended December 31, 2014.

(d)

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 $99 million and $438 million for the three months ended March 31, 2015 and the year ended December 31, 2014, respectively. Amortization expense, based on our current estimate of useful lives, is estimated to be approximately $394 million, $351 million, $307 million, $263 million and $219 million for the years ended December 31, 2015, 2016, 2017, 2018 and 2019, respectively. No adjustment has been reflected for depreciation expense based on the assumption that the straight line method is similar to the composite method.

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.

(e)	This adjustment primarily reflects depreciation expense for facilities that will not be transferred to Frontier in the Verizon Transaction.

(f)	This adjustment reflects the removal of losses on disposition of assets that were recorded by Verizon in cost and expenses in order to conform to Frontier’s accounting policy for fixed asset dispositions under the composite method of depreciation.

(g)	This adjustment reflects the removal of acquisition and integration expenses related to costs incurred by Frontier in connection with the Verizon Transaction and the Connecticut Acquisition.

(h)

This adjustment reflects additional interest expense on the $8,350 million bridge financing, based on an assumed weighted average interest rate determined based on appropriate current market rates as of March 31, 2015 of 12.17% and 8.65% for the three months ended March 31, 2015 and the year ended December 31, 2014, respectively, the elimination of interest expense related to a bridge loan facility, and the elimination of affiliate interest expense. As previously announced, it is our intention to raise debt

financing, which would replace the bridge financing, however, at present, in conformity with the SEC rules, the unaudited pro forma condensed combined financial statements only reflect the bridge financing. An increase or decrease to the interest rate of 25 basis points would result in a change of approximately $5 million and $20 million for the three months ended March 31, 2015 and the year ended December 31, 2014, respectively.

(i)	This adjustment reflects the income tax effect of the pro forma adjustments described in notes 4(a) through 4(h) above, using an estimated effective income tax rate of 38%.

(j)

In calculating basic and diluted net income (loss) per common share for the three months ended March 31, 2015 and the year ended December 31, 2014, net income (loss) was reduced by expected dividends on mandatory convertible preferred shares as a result of the offering of mandatory convertible preferred shares. Basic weighted average shares outstanding were 995 million and 994 million as of March 31, 2015 and December 31, 2014, respectively. Pro forma weighted average shares outstanding of 1,140 million for the three months ended March 31, 2015 and the year ended December 31, 2014 included an estimated 146 million common shares as a result of the common stock offering, based on the last reported sale price of our common stock on the NASDAQ on May 29, 2015 of $5.15 per share. In calculating pro forma diluted net loss per common share for the three months ended March 31, 2015 and the year ended December 31, 2014, the effect of the mandatory convertible preferred shares as a result of the offering of mandatory convertible preferred shares was excluded from the computation as the effect would be antidilutive.

5. Pro forma statement of operations adjustments—Connecticut Operations:

(a)	This adjustment reflects results of operations related to contracts, primarily with unaffiliated third parties that were not transferred to Frontier in the Connecticut Acquisition.

(b)	This adjustment reflects the incremental change related to contracts with AT&T affiliates that were transferred to Frontier under modified terms.

(c)	This adjustment reflects results of operations related to certain operations (substantially with AT&T affiliates) that did not continue after the closing of the Connecticut Acquisition.

(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 AT&T Purchase Agreement whereby the pension and OPEB obligations related to active employees only were transferred to Frontier and pension obligations were fully funded as of the October 24, 2014 closing date of the Connecticut Acquisition.

(g)	This adjustment reflects the removal of costs related to employee headcount that were not transferred to Frontier associated with the adjustment described in 5(c) above.

(h)	This adjustment reflects the removal of royalty expense charged by AT&T for the use of its name and trademark that did not continue after the Connecticut Acquisition.

(i)

This adjustment reflects additional amortization expense associated with the customer list asset acquired from AT&T assuming an accelerated method of amortization and an estimated useful life of ten years, which corresponds to an increase in depreciation and amortization expense of $64 million for the year ended December 31, 2014. Amortization expense, based on our current estimate of useful lives, is

estimated to be approximately $76 million, $67 million, $57 million, $48 million and $38 million for the years ended December 31, 2015, 2016, 2017, 2018 and 2019, respectively. No adjustment has been reflected for depreciation expense.

(j)

This adjustment reflects additional interest expense on the $1,550 million aggregate principal amount of senior notes related to the debt offering in September 2014 and the $350 million CoBank Connecticut Acquisition Facility ($71 million for the year ended December 31, 2014), based on an assumed weighted average interest rate of 6.68% for the year ended December 31, 2014 and the elimination of interest expense related to a bridge loan agreement.

(k)	This adjustment reflects the removal of acquisition and integration expenses related to costs incurred by Frontier in connection with the Connecticut Acquisition.

(l)	This adjustment reflects the income tax effect of the pro forma adjustments described in notes 5(a) through 5(k) above, using an estimated effective income tax rate of 38%.

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