Form 8-K FRONTIER COMMUNICATIONS For: Apr 18

Form 8-K FRONTIER COMMUNICATIONS For: Apr 18

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April 18, 2016 4:56 PM EDT

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (date of earliest event reported): April 18, 2016

Frontier Communications Corporation

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation)


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

401 Merritt 7, Norwalk, Connecticut		06851
(Address of principal executive offices)		(Zip Code)

(203) 614-5600

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 8.01

Other Events

As previously announced, on April 1, 2016, Frontier Communications Corporation (“Frontier”) closed its acquisition of the wireline properties of Verizon Communications Inc. (“Verizon”) in California, Florida and Texas (the “Transaction”).

Frontier is filing this Current Report on Form 8-K to present the audited 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 December 31, 2015 and 2014 and the related audited 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, 2015, which are filed as Exhibit 99.1 hereto.

Frontier is also filing with this Form 8-K the Group’s Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for each of the three years in the period ended December 31, 2015, filed as Exhibit 99.2 hereto, which should be read in conjunction with the financial statements referenced above.

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 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 year ended December 31, 2015, which are filed as Exhibit 99.3 hereto.

Item 9.01

Financial Statements and Exhibits

(d)

Exhibits

99.1

Audited combined statements of assets, liabilities and parent funding of Verizon Communications Inc.’s Separate Telephone Operations in California, Florida and Texas as of December 31, 2015 and 2014 and the related audited 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, 2015.

99.2

Management’s Discussion and Analysis of Financial Condition and Results of Operations relating to the audited combined statements of assets, liabilities and parent funding of Verizon Communications Inc.’s Separate Telephone Operations in California, Florida and Texas as of December 31, 2015 and 2014 and the related audited 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, 2015.

99.3

Unaudited pro forma condensed combined financial statements of Frontier, after giving effect to the Transaction, as of and for the year ended December 31, 2015.

99.4

Consent of Ernst & Young LLP

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.

Exhibit 99.1

Verizon’s Separate Telephone Operations in California,

Florida and Texas

At December 31, 2015 and 2014

And For the Years Ended

December 31, 2015, 2014 and 2013

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

INDEX TO COMBINED FINANCIAL STATEMENTS


	Page

Report of Independent Registered Public Accounting Firm		3

Combined Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2015, 2014 and 2013		4

Combined Statements of Assets, Liabilities and Parent Funding at December 31, 2015 and 2014		5

Combined Statements of Parent Funding for the Years Ended December 31, 2015, 2014 and 2013		6

Combined Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013		7

Notes to Combined Financial Statements		8

Report of Independent Registered Public Accounting Firm

The Board of Directors and Management

Verizon Communications Inc.

We have audited the accompanying combined statements of assets, liabilities and parent funding of Verizon Communications Inc.’s (“Verizon”) Separate Telephone Operations in California, Florida and Texas (the “Business”) as of December 31, 2015 and 2014 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, 2015. These financial statements are the responsibility of the management of the Business. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Business’ internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Business’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined assets, liabilities and parent funding of Verizon’s Separate Telephone Operations in California, Florida and Texas at December 31, 2015 and 2014, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

New York, New York

March 9, 2016

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

COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(DOLLARS IN MILLIONS)


Years Ended December 31,	2015			2014			2013

Operating Revenues (including $396, $344 and $401 from affiliates, respectively)	$	5,740		$	5,791		$	5,824

Operating Expenses (including $2,359, $2,210 and $1,869 allocated from affiliates, respectively)
Cost of services (exclusive of items shown below)		2,734			3,309			2,598
Selling, general and administrative expense		1,243			1,466			1,130
Depreciation and amortization expense		982			1,026			1,191

Total Operating Expenses		4,959			5,801			4,919


Income (Loss) From Operations		781			(10	)		905
Interest expense, net (including nil, $14 and $47 of affiliate interest, respectively)		(31	)		(43	)		(85	)

Income (Loss) Before Income Taxes		750			(53	)		820
Income tax (provision) benefit		(294	)		21			(318	)

Net Income (Loss) and Comprehensive Income (Loss)	$	456		$	(32	)	$	502

See Notes to Combined Financial Statements

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

COMBINED STATEMENTS OF ASSETS, LIABILITIES AND PARENT FUNDING

(DOLLARS IN MILLIONS)


At December 31,	2015			2014

Assets
Current assets
Accounts receivable:
Trade and other, net of allowances for uncollectibles of $27 and $42 at December 31, 2015 and 2014, respectively	$	415		$	505
Affiliates		174			246
Prepaid expense and other		73			81

Total current assets		662			832


Plant, property and equipment		24,034			23,388
Less accumulated depreciation		(15,957	)		(15,092	)

Plant, property and equipment, net		8,077			8,296


Prepaid pension asset		2,781			2,781
Intangible assets, net		7			7
Other assets		71			75

Total assets	$	11,598		$	11,991


Liabilities and parent funding
Current liabilities
Debt maturing within one year:
Capital lease obligations	$	30		$	9
Accounts payable and accrued liabilities:
Trade and other		610			593
Affiliates		372			778
Advanced billings and customer deposits		196			270
Other current liabilities		13			22

Total current liabilities		1,221			1,672


Long-term debt		677			627
Employee benefit obligations		2,014			2,155
Deferred income taxes		2,541			2,252
Other long-term liabilities		162			172

Total liabilities		6,615			6,878


Parent funding		4,983			5,113

Total liabilities and parent funding	$	11,598		$	11,991

See Notes to Combined Financial Statements

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

COMBINED STATEMENTS OF PARENT FUNDING

(DOLLARS IN MILLIONS)


Balance at January 1, 2013	$	5,518
Net income and comprehensive income		502
Net change due to parent funding, allocations, and intercompany reimbursements		(777	)

Balance at December 31, 2013		5,243

Net loss and comprehensive loss		(32	)
Net change due to parent funding, allocations, and intercompany reimbursements		(98	)

Balance at December 31, 2014		5,113

Net income and comprehensive income		456
Net change due to parent funding, allocations, and intercompany reimbursements		(586	)

Balance at December 31, 2015	$	4,983

See Notes to Combined Financial Statements

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

COMBINED STATEMENTS OF CASH FLOWS

(DOLLARS IN MILLIONS)


Years Ended December 31,	2015			2014			2013

Cash Flows from Operating Activities
Net income (loss)	$	456		$	(32	)	$	502
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		982			1,026			1,191
Deferred income taxes, net		288			(66	)		324
Employee retirement benefits		(104	)		665			(340	)
Bad debt expense		55			68			61
Changes in current asset and liabilities:
Accounts receivable non-affiliates		36			4			—
Other current assets		9			28			17
Accounts payable non-affiliates and accrued liabilities		17			1			(47	)
Accounts receivables/payable affiliates, net		(285	)		278			(7	)
Advanced billings and customer deposits and other current liabilities		(84	)		67			(85	)
Other, net
Pension and employee benefit obligations		(72	)		(70	)		2
Other, net		(7	)		(60	)		—

Net cash provided by operating activities		1,291			1,909			1,618


Cash Flows from Investing Activities
Capital expenditures (including capitalized software)		(694	)		(810	)		(842	)
Proceeds from sales of assets		6			1			1

Net cash used in investing activities		(688	)		(809	)		(841	)


Cash Flows from Financing Activities
Repayment of debt to affiliates		—			(1,000	)		—
Repayments of long-term debt and capital lease obligations		(17	)		(2	)		—
Net change in parent funding, allocations, and intercompany reimbursement		(586	)		(98	)		(777	)

Net cash used in financing activities		(603	)		(1,100	)		(777	)


Net change in cash and cash equivalents		—			—			—
Cash and cash equivalents, beginning of year		—			—			—

Cash and cash equivalents, end of year	$	—		$	—		$	—

See Notes to Combined Financial Statements

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

NOTES TO COMBINED FINANCIAL STATEMENTS

1.	BASIS OF PRESENTATION

Verizon’s Separate Telephone Operations in California, Florida and Texas (“the Group”) 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 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 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 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.

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.

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 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 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. All significant intercompany transactions within the Group have been eliminated.

The businesses that comprise the 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 combined financial statements and the combined statements of cash flows reflect the activities of the businesses in the combined financial statements.

The methodology for preparing the financial statements included in the accompanying 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 combined statements of assets, liabilities and parent funding and statements of operations and comprehensive income (loss) except for affiliate notes payable, notes receivable, and related interest balances.

All other: For the 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 assigned 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 combined statements of operations and comprehensive income (loss), 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) benefit 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 Communications Corporation (“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 federal approvals from the FCC and the antitrust authorities and state regulatory approvals. All federal and state regulatory approvals have been obtained. The transaction is expected to close at the end of the first quarter 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 March 9, 2016, the date these combined financial statements were available to be issued.

As a result of the early adoption of the accounting standard update related to the balance sheet classification of deferred taxes, we have reclassified certain amounts related to deferred taxes in the prior period to conform to the current period’s presentation. See Note 2 for additional information. We have also reclassified certain amounts from Other liabilities to Advanced billings and customer deposits on the combined statement of assets, liabilities and parent funding at December 31, 2014 to conform to the current period’s presentation. In conjunction with preparing the 2015 financial statements, we reclassified certain insignificant amounts within operating cash flows on the combined statements of cash flows for December 31, 2014 and 2013 from Loss on fixed asset sales and dispositions to Accounts receivables/payable affiliates, net.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Parent Company Funding – The Parent Company funding in the combined balance sheets represents Verizon’s historical funding of the Group. See Note 9, “Transactions with Affiliates,” for additional information. 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.

Use of Estimates – The accompanying 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; accrued expenses; pension and postretirement benefit assumptions; and income taxes. In addition, estimates were made to determine the allocations in preparing the combined financial statements as described in the Basis of Presentation.

Revenue Recognition – The Group earns revenue based upon usage of the network and facilities and contract fees. In general, fixed monthly fees for voice, video, data and certain other services are billed one month in advance and are presented as advanced billings on the combined statements of assets, liabilities and parent funding. Such services are recognized as revenue when earned. Revenue from services that are not fixed in amount and are based on usage are generally billed in arrears and recognized when the services are rendered. In addition to services, the Group sells customer premise equipment to connect to the Verizon network.

The Group may sell services in bundled arrangements (i.e., voice, video, data and equipment), as well as separately. Many of the products or services have a standalone selling price. For multiple element arrangements, revenue is allocated to each deliverable using the relative selling price method. Under this method, arrangement consideration is allocated to each separate deliverable based on the Group’s standalone selling price for each product or service.

Installation related fees, along with the associated costs up to but not exceeding these fees, are deferred and amortized over the estimated customer relationship period.

The Group reports taxes imposed by governmental authorities on revenue-producing transactions between the Group and the customers on a net basis.

Maintenance and Repairs – The cost of maintenance and repairs, including the cost of replacing minor items not constituting substantial betterments, is charged primarily to cost of services and sales as these costs are incurred.

Trade and Other Accounts Receivable – Trade and other accounts receivable are stated at the amount that the Group expects to collect. The Group maintains allowances for uncollectible accounts for estimated losses resulting from bad debt. In determining these estimates, the Group considers historical write-offs, the aging of the receivables and other factors, such as overall economic conditions.

Concentrations of Credit Risk – Financial instruments that subject us to concentrations of credit risk consist primarily of trade receivables. Concentrations of credit risk with respect to trade receivables, other than those from AT&T Inc. (“AT&T”) and Sprint Corporation (“Sprint”), are limited due to the large number of customers. The Group generated revenues from services provided to AT&T and Sprint, primarily network access and billing and collection, of $252 million and $47 million in 2015, $251 million and $41 million in 2014, $189 million and $78 million in 2013, respectively.

While the Group may be exposed to credit losses due to the nonperformance of counterparties, the Group considers this risk from the above customers as remote and does not expect the settlement of these transactions to have a material effect on the Group’s results of operations or financial position.

Plant, Property and Equipment – The Group records plant, property and equipment at cost. Plant, property and equipment are generally depreciated on a straight-line basis.

Leasehold improvements are amortized over the shorter of the estimated life of the improvement or the remaining term of the related lease, calculated from the time the asset was placed in service. For the ranges of asset lives used, see the corresponding table in Note 3.

When the Group replaces, retires or otherwise disposes of depreciable plant used in the Group’s local telephone network, the Group deducts the related cost and accumulated depreciation from the plant accounts, and gains or losses on disposition are recognized in selling, general and administrative expense.

The Group capitalizes and depreciates network software purchased or developed along with related plant assets. The Group also capitalizes interest associated with the acquisition or construction of network-related assets. Capitalized interest is reported as a reduction in interest expense and depreciated as part of the cost of network-related assets.

Intangible Assets – Intangible assets (primarily non-network internal use software) are amortized over the asset’s estimated useful life. For information related to intangible assets, including major components and range of asset lives used, see Note 4.

Impairment of Long-lived Assets and Intangible Assets – Plant, property and equipment and intangible assets, primarily consisting of non-network software, have finite lives and are amortized and depreciated over their useful lives. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indicators of impairment are present, we test for recoverability by comparing the carrying amount of the asset to the net undiscounted cash flows expected to be generated from the asset group. If those net undiscounted cash flows do not exceed the carrying amount (i.e., the asset is not recoverable), we perform the next step, which is to determine the fair value of the asset group and record an impairment, if any.

Advertising Costs – Costs for advertising products and services as well as other promotional sponsorship costs are charged to selling, general and administrative expense in the period in which they are incurred.

Employee Benefit Plans – The Group participates in certain Verizon benefit plans and the structure of those plans does not provide for the separate identification of the related pension and postretirement assets and obligations at an individual company level. Under these Verizon plans, pension and postretirement health care and life insurance benefits earned during the year as well as interest on projected benefit obligations are accrued currently. Actuarial gains and losses are recognized in operating results in the year in which they occur. Prior service costs and credits resulting from changes in plan benefits are amortized over the average remaining service period of the employees expected to receive benefits. Unrecognized prior service costs and credits that arise during the period are immediately recognized as a component of net change due to parent funding, net of applicable income taxes. Verizon allocates to the group a portion of the periodic activity and assets or liabilities on a basis determined by management.

The Group maintains ongoing severance plans for both management and associate employees who are terminated. The costs for these plans are accounted for under the accounting standard on employers’ accounting for postemployment benefits. Severance benefits are accrued based on the terms of the severance plan over the estimated service periods of the employees. The accruals are also based on the historical run-rate of actual severances and expectations for future severances. Severance costs are included in selling, general and administrative expense in the combined statements of operations and comprehensive income (loss) (See Note 7).

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.

Income Taxes – Verizon and its domestic subsidiaries file consolidated federal income tax returns. Additionally, the Group is included in consolidated state income tax returns, which are filed by Verizon. The Group participates in a tax sharing agreement with Verizon and remits tax payments to Verizon based on the respective tax liability determined as if on a separate company basis. Current and deferred tax expense is determined by applying the accounting standard for income taxes to the Group as if it were a separate taxpayer.

The Group’s effective tax rate is based on the Group’s pre-tax income, statutory tax rates, tax laws and regulations and tax planning strategies available to us in the various jurisdictions in which the Group operates.

Deferred income taxes are provided for temporary differences in the bases between financial statement and income tax assets and liabilities. Deferred income taxes are recalculated annually at rates then in effect. The Group records valuation allowances, if applicable, to reduce the Group’s deferred tax assets to the amount that is more likely than not to be realized.

Uncertain Tax Positions – A two-step approach is used for recognizing and measuring tax benefits taken or expected to be taken in a tax return. The first step is recognition: the Group determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the Group presumes that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one or more of the following: an increase in a liability for income taxes payable, a reduction of an income tax refund receivable, a reduction in a deferred tax asset or an increase in a deferred tax liability.

Recently Adopted Accounting Standards - During the fourth quarter of 2015, we early adopted the accounting standard update related to the balance sheet classification of deferred taxes. The standard update requires that deferred tax liabilities and assets be classified as noncurrent in the statement of financial position. We applied the amendments in this accounting standard retrospectively to all periods presented which resulted in the reclassification of $231 million from total current assets to Deferred income taxes within total liabilities on the combined statement of assets, liabilities and parent funding at December 31, 2014.

Recently Issued Accounting Standards – In February 2016, the accounting standard update related to leases was issued. This standard update intends to increase transparency and improve comparability by requiring entities to recognize assets and liabilities on the balance sheet for all leases, with certain exceptions. In addition, through improved disclosure requirements, the standard update will enable users of financial statements to further understand the amount, timing, and uncertainty of cash flows arising from leases. This standard update is effective as of the first quarter of 2019; however, early adoption is permitted. The Group is currently evaluating the impact that this standard update will have on the 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 may be impacted. In August 2015, an accounting standard update was issued that delays the effective date of this standard update until the first quarter of 2018. Companies are permitted to early adopt the standard update in the first quarter of 2017.

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. The Group is currently evaluating these adoption methods and the impact that this standard update will have on the combined financial statements.

In April 2015, the accounting standard update related to the simplification of the presentation of debt issuance 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 combined financial statements.

3.	PLANT, PROPERTY AND EQUIPMENT

The plant, property and equipment balance in the accompanying combined statements of assets, liabilities and parent funding is based on these specific amounts and does not include any allocations of common assets utilized in providing centralized services and otherwise not specifically associated with the Group.

The following table displays the details of plant, property and equipment, which are stated at historical cost:


At December 31, (Dollars in millions)	Useful Lives (in years)	2015			2014
Land	—	$	65		$	65
Buildings and equipment	15-45		1,525			1,472
Central office equipment	5-11		10,305			9,709
Cables, poles and conduits	11-50		11,595			11,461
Leasehold improvements	5-20		28			27
Furniture, vehicles and other	3-12		250			386
Work in progress	—		266			268

Total gross cost			24,034			23,388
Less accumulated depreciation			(15,957	)		(15,092	)

Total		$	8,077		$	8,296

For the years ended December 31, 2015, 2014 and 2013, depreciation expense was $979 million, $1,013 million and $1,161 million, respectively.

For the years ended December 31, 2015 and 2014, the Group had capital lease assets with historical cost of $146 million and $33 million, respectively, and accumulated depreciation of $29 million and $9 million, respectively. Depreciation expense related to the capital leases were $19 million, $7 million and nil, for 2015, 2014 and 2013, respectively.

4.	INTANGIBLE ASSETS

The following table displays the composition and useful lives of intangible assets, net:


								(dollars in millions)
		2015						2014
At December 31,	Useful Lives (in years)	Gross Amount		Accumulated Amortization		Net Amount		Gross Amount		Accumulated Amortization		Net Amount
Non-network software	3-7	$	616	$	614	$	2	$	616	$	614	$	2
Other intangible assets	5-15		22		17		5		20		15		5

Total		$	638	$	631	$	7	$	636	$	629	$	7

For the years ended December 31, 2015, 2014 and 2013, amortization expense was $3 million, $13 million and $30 million, respectively.

Estimated annual amortization expense for intangible assets, excluding allocated costs, is as follows:


Years (Dollars in millions)	Amortization Expense
2016	$	2
2017		2
2018		1
2019		1
2020 and thereafter		1

Total	$	7

5.	LEASES

The Group leases certain facilities and equipment for use in the Group’s operations principally under operating leases. Total rent expense under operating leases amounted to $29 million, $25 million and $36 million for the years ended December 31, 2015, 2014 and 2013, respectively. Of these amounts, $8 million, $7 million and $11 million during the years ended December 31, 2015, 2014 and 2013, respectively, were lease payments to affiliated companies.

The table below displays the aggregate minimum rental commitments under non-cancelable operating leases for the periods shown at December 31, 2015, excluding allocated costs and those with affiliated companies:


Years	Third-Party Operating Leases
2016	$	19
2017		17
2018		14
2019		11
2020		7
Thereafter		14

Total minimum rental commitments	$	82

DEBT

Debt maturing within one year

Debt maturing within one year is as follows:


At December 31,
(Dollars in millions)	2015		2014
Capital lease obligations	$	30	$	9

Total debt maturing within one year	$	30	$	9

Long-term debt

Long-term debt consists of debentures, a first mortgage bond and capital lease obligations that were issued by certain entities within the Group. Interest rates and maturities of the amounts outstanding are as follows at December 31:


Description
(Dollars in millions)	Interest Rate		Maturity	2015			2014
29-year debenture		6.75	2027	$	200		$	200
30-year debenture		6.86	2028		300			300
40-year first mortgage bond		8.50	2031		100			100

Total debt maturing within one year					600			600
Capital lease obligations					114			43
Unamortized discount					(7	)		(7	)

Total long-term debt, including current maturities					707			636
Less long-term debt maturing within one year					(30	)		(9	)

Total long-term debt				$	677		$	627

On April 15, 2009, Verizon California Inc. entered into a fixed rate promissory note with Verizon Financial Services LLC, to borrow $1 billion, with a maturity date of April 15, 2014 (“Five-Year Note”). The principal amount of the Five-Year Note bore an interest rate of 4.65% per annum, to be paid on October 15 and April 15 of each year during the term of the agreement. The Five-Year Note was settled fully in cash on April 15, 2014.

The terms of the debentures and bond shown above are subject to the restrictions and provisions of the indentures governing that debt. None of the debentures shown above were held in sinking or other special funds or pledged by the Group. Debt discounts on the outstanding long-term debt are amortized over the lives of the respective issues.

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, which are Level 2 measurements. The fair value of debt was $613 million and $741 million at December 31, 2015 and 2014, respectively, as compared to the carrying values of $593 million at both December 31, 2015 and 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. The Group is in compliance with all debt covenants.

Additional Financing Activities (Non-Cash Transaction)

During 2015, we financed, primarily through vendor financing arrangements, the purchase of approximately $88 million of long-lived assets, consisting primarily of network equipment. At December 31, 2015, $114 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 combined statements of cash flows.

7.	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 annual income and expense related to Verizon’s benefit plans as well as the assets and obligations have been allocated by the Parent to the ILECs on the basis of headcount and other factors deemed appropriate by management with the assets and liabilities reflected as prepaid pension assets and employee benefit obligations in the combined statements of assets, liabilities and parent funding. For all other entities in the Group, the assets and obligations 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 Annual Report on Form 10-K for the years ended December 31, 2015, 2014 and 2013.

Pension Plans and Other Postretirement Benefits

Pension and other postretirement benefits for the majority of the Group’s employees are subject to collective bargaining agreements. Approximately 88% of the employees (“associates”) of the ILECs’ operations are covered by collective bargaining agreements which expire at different times. Modifications in benefits have been bargained for from time to time, and Verizon may also periodically amend the benefits in the management plans.

Benefit Cost

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


Years Ended December 31,	Pension								Health Care and Life
(Dollars in millions)	2015			2014		2013			2015			2014		2013
Net periodic benefit (income) cost	$	(15	)	$	317	$	(163	)	$	(89	)	$	348	$	(177	)

The employee benefit assets and obligations as allocated by Verizon to the ILECs’ operations and recognized in the combined statements of assets, liabilities and parent funding consist of:


At December 31,	Pension				Health Care and Life
(Dollars in millions)	2015		2014		2015		2014
Prepaid pension asset	$	2,781	$	2,781	$	—	$	—
Employee benefit obligations		176		223		1,838		1,932

The changes in the allocated employee benefit asset and obligations from year to year were caused by a number of factors, including changes in actuarial assumptions, settlements and curtailments.

Assumptions

The weighted-average assumptions used in determining Verizon’s benefit obligations are as follows:


	Pension						Health Care and Life
At December 31,	2015			2014			2015			2014
Discount rate		4.60	%		4.20	%		4.60	%		4.20	%
Rate of compensation increases		3.00			3.00			N/A			N/A

The weighted-average assumptions used in determining Verizon’s net periodic cost are as follows:


	Pension									Health Care and Life
At December 31,	2015			2014			2013			2015			2014			2013
Discount rate		4.20	%		5.00	%		4.20	%		4.20	%		5.00	%		4.20	%
Expected return on plan assets		7.25			7.25			7.50			4.80			5.50			5.60
Rate of compensation increases		3.00			3.00			3.00			N/A			N/A			N/A

In order to project the long-term target investment return for the total Verizon portfolio, estimates are prepared for the total return of each major asset class over the subsequent 10-year period. Those estimates are based on a combination of factors including the current market interest rates and valuation levels, consensus earnings expectations, and historical long-term risk premiums. To determine the aggregate return for the Verizon pension trust, the projected return of each individual asset class is then weighted according to the allocation to that investment area in the trust’s long-term asset allocation policy.

Verizon’s assumed health care cost trend rates are as follows:


	Health Care and Life
At December 31,	2015			2014			2013
Health care cost trend rate assumed for next year		6.00	%		6.50	%		6.50	%
Rate to which cost trend rate gradually declines		4.50			4.75			4.75
Year the rate reaches level it is assumed to remain thereafter		2024			2022			2020

Savings Plans and Employee Stock Ownership Plans

Substantially all of the Group’s employees are eligible to participate in savings plans maintained by Verizon. Verizon maintains four leveraged employee stock ownership plans (“ESOP”) for its management employees. Under these plans, a certain percentage of eligible employee contributions are matched with shares of Verizon’s common stock. The Group recognizes savings plan costs based on these matching obligations. The Group recorded total savings plan costs of $26 million in 2015, $29 million in 2014 and $25 million in 2013.

Severance Benefits

The following table provides an analysis of the ILEC’s severance liability recorded in accordance with the accounting standard regarding employers’ accounting for postemployment benefits:


(Dollars in millions)	2015			2014			2013
Beginning of year	$	36		$	49		$	53
Charged to expense ^(a)		(3	)		3			4
Payments		(16	)		(16	)		(8	)

End of year	$	17		$	36		$	49

^(a)	Includes accruals for ongoing employee severance costs.

The severance liability at December 31, 2015, includes future contractual payments due to employees separated as of the end of the year.

During 2014, Verizon recorded severance costs under its existing separation plans, of which $23 million was allocated by the Parent to the Group on the basis of headcount.

8.	INCOME TAXES

The components of income tax provision (benefit) are presented in the following table:


Years Ended December 31, (Dollars in millions)	2015		2014			2013
Current:
Federal	$	—	$	20		$	(16	)
State and local		6		25			10

Total current		6		45			(6	)

Deferred:
Federal		241		(54	)		274
State and local		47		(12	)		50

Total deferred		288		(66	)		324

Total income tax provision (benefit)	$	294	$	(21	)	$	318

The following table shows the primary reasons for the difference between the effective income tax rate and the statutory federal income tax rate:


Years Ended December 31,	2015			2014			2013
Statutory federal income tax rate		35	%		35	%		35	%
State income taxes, net of federal tax benefits		4			(9	)		5
Unrecognized tax benefits		2			(16	)		(1	)
Prior period adjustment		—			9			—
Return to provision		(1	)		21			—
Other, net		(1	)		—			—

Effective income tax rate		39	%		40	%		39	%

Deferred taxes arise because of differences in the book and tax bases of certain assets and liabilities. Significant components of the Group’s deferred tax assets and liabilities are as follows:


At December 31, (Dollars in millions)	2015		2014
Deferred tax assets:
Federal net operating loss	$	117	$	182
Other assets		16		32

Total deferred tax assets		133		214


Deferred tax liabilities:
Employee benefits		258		191
Depreciation		2,405		2,254
Other		11		21

Total deferred tax liabilities		2,674		2,466

Net deferred tax liabilities	$	2,541	$	2,252

No valuation allowance has been recorded against deferred tax assets as of December 31, 2015 and 2014.

As of December 31, 2015, the Group has net pre-tax operating loss carryforwards on a hypothetical separate basis for federal and various state tax jurisdictions that expire between 2031 and 2035. Federal pre-tax net operating loss carryforwards are $335 million and $519 million as of December 31, 2015 and 2014, respectively. There were no state pre-tax net operating losses as of December 31, 2015 and 2014, respectively.

Unrecognized Tax Benefits

A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows:


(Dollars in millions)	2015			2014			2013
Balance at January 1,	$	14		$	40		$	57
Additions based on tax positions related to the current year		7			9			1
Additions for tax positions of prior years		9			—			—
Reductions for tax positions of prior years		—			—			(10	)
Settlements		(7	)		(35	)		(8	)

Balance at December 31,	$	23		$	14		$	40

Included in the total unrecognized tax benefits at December 31, 2015, 2014 and 2013, was $25 million, $9 million and zero, respectively that if recognized, would favorably affect the effective tax rate.

The Group recognizes any interest and penalties accrued related to unrecognized tax benefits in income tax expense. During 2015, 2014 and 2013, the Group recognized a net after-tax benefit in income statement related to interest and penalties of approximately $0.4 million, $0.6 million and $4.0 million, respectively. The Group had approximately $0.4 million (after-tax), $0.7 million (after-tax) and $1.3 million (after-tax) for the payment of interest and penalties accrued in the combined statements of assets, liabilities and parent funding at December 31, 2015, 2014 and 2013, respectively

Verizon files income tax returns in the U.S. federal jurisdiction, and various state and local jurisdictions. The Internal Revenue Service (“IRS”) is currently examining Verizon’s U.S. income tax returns for years 2010 through 2012. The amount of the liability for unrecognized tax benefits will change in the next twelve months due to the expiration of the statute of limitations in various jurisdictions and it is reasonably possible that various current examinations will conclude or require reevaluations of the Company’s tax positions during this period. An estimate of the range of the possible change cannot be made until these tax matters are further developed or resolved.

9.	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, net 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.

Verizon issues commercial paper and obtains bank loans to fund the working capital requirements of Verizon’s subsidiaries, including the Group, and invests funds in temporary investments on their behalf, all of which is reflected in parent funding as part of these combined financial statements. Average funding balances were $5,048 million, $5,178 million and $5,380 million for the years ended December 31, 2015, 2014 and 2013, respectively. The key transactions affecting these balances are outlined in the cash flow statement and the combined statements of operations and comprehensive income (loss) and happened evenly over the year.

10.

ADDITIONAL FINANCIAL INFORMATION

The tables below provide additional financial information related to the Group’s combined financial statements:

Cash flow supplemental disclosure:


Years Ended December 31, (Dollars in millions)	2015		2014		2013
Cash paid during the year for:
Income taxes, net of amount deferred	$	13	$	9	$	19
Interest paid		43		43		48
Capitalized interest costs		12		13		5

Accounts Payable and Accrued Liabilities- Trade and Other


At December 31, (Dollars in millions)	2015		2014

Accounts payable- non-affiliate	$	366	$	347
Accrued payroll related liability		122		134
Accrued expenses		14		13
Accrued interest payable		11		11
Accrued general taxes		97		88

Total	$	610	$	593

Advertising Expense:

Years Ended December 31,

(Dollars in millions)

2015

2014

2013

Advertising expense

105

11.

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.

On April 29, 2015, the FCC released its right of first refusal offer of support to price cap carriers under the Connect America Fund (CAF) Phase II program, which is intended to provide long-term support for broadband in high-cost unserved or underserved areas. In August 2015, we accepted the CAF Phase II offer in Texas and California on behalf of Frontier. We conditioned our acceptance of CAF Phase II support in Texas and California on the issuance and acceptance of regulatory approvals for Frontier’s proposed acquisition of all the ownership interests of certain Verizon subsidiaries, including Verizon California Inc. and GTE Southwest Inc. by December 31, 2015. Upon the closing of the transaction with Frontier, the deferred support payments will be disbursed to Frontier. The CAF Phase II offer provides for $49 million in annual support from 2015 through 2020 to deliver 10mbps/1mbps broadband service to approximately 115,000 households across California and Texas.

During 2015, Verizon and Frontier entered into a network transition agreement for the construction, installation and provisioning of inter-office facilities between the ILECs and Frontier. Under the terms of the agreement, Frontier made an upfront payment of $15.2 million to Verizon for the estimated costs of the project. The inter-office facilities will be owned by the ILECs and included in the transferred business. As of December 31, 2015, Verizon incurred project related expenditures of $11.3 million on behalf of the Group and the remaining balance of $3.9 million is held as restricted cash by Verizon. These purchases are non-cash financing activities in the combined financial statements of the Group and, therefore, not reflected within Capital expenditures on the Group’s combined statements of cash flows.

Exhibit 99.2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. 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 sale.

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 9,400 employees as of December 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.

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 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

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, net 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. At the same time, we expect content costs for our Fios video service to continue to increase.

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 expect Fios broadband penetration to positively impact our revenue and subscriber base. We will also continue to focus on cost efficiencies to attempt to offset adverse impacts from competitive pressures.

Results of operations

Operating Revenues and Selected Operating Statistics


							(dollars in millions)
							Increase/(Decrease)
Years Ended December 31,	2015		2014		2013		2015 vs. 2014					2014 vs. 2013
Operating revenues	$	5,740	$	5,791	$	5,824	$	(51	)	(0.9	)%	$	(33	)	(0.6	)%

Connections (in thousands)⁽¹⁾
Total Voice connections		3,351		3,654		3,937		(303	)	(8.3	)		(283	)	(7.2	)

Total Broadband connections		2,143		2,180		2,171		(37	)	(1.7	)		9		0.4
Fios Internet subscribers		1,616		1,548		1,448		68		4.4			100		6.9
Fios Video subscribers		1,192		1,196		1,150		(4	)	(0.3	)		46		4.0
High-Speed Internet subscribers		527		632		723		(105	)	(16.6	)		(91	)	(12.6	)

⁽¹⁾	As of the end of period

2015 Compared to 2014

Operating revenues in 2015 of $5,740 million declined $51 million, or 0.9%, compared to 2014 primarily due to the continued decline of traditional voice (local exchange and long distance) and data revenues, partially offset by the expansion of Fios services (Voice, Internet and Video) and Ethernet services. The decline in voice revenues related to an 8.3% decline in total voice connections as a result of continued competition and technology substitution with wireless, competing VoIP and cable telephony services. Total voice connections include traditional switched access lines in service as well as Fios digital voice connections. The decline in data revenues relates to declines in both High-Speed Internet subscribers and core data circuits. We grew our Fios Internet subscriber base by 68 thousand, or 4.4%, from December 31, 2014 to December 31, 2015 while also improving penetration rates within our Fios service areas for Fios Internet. As of December 31, 2015, we achieved a penetration rate of 48.4% for Fios Internet compared to a penetration rate of 47.1% at December 31, 2014.

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.

Operating expenses


							(dollars in millions)
							Increase/(Decrease)
Years Ended December 31,	2015		2014		2013		2015 vs. 2014					2014 vs. 2013
Cost of services (exclusive of items shown below)	$	2,734	$	3,309	$	2,598	$	(575	)	(17.4	)%	$	711		27.4	%
Selling, general and administrative expense		1,243		1,466		1,130		(223	)	(15.2	)		336		29.7
Depreciation and amortization expense		982		1,026		1,191		(44	)	(4.3	)		(165	)	(13.9	)

Total Operating Expenses	$	4,959	$	5,801	$	4,919	$	(842	)	(14.5	)	$	882		17.9

2015 Compared to 2014

Cost of services. Cost of services in 2015 of $2,734 million decreased $575 million, or 17.4%, compared to 2014, primarily due to pension and benefit credits of approximately $117 million that were recorded during 2015 as compared to pension and benefit charges of approximately $394 million that were recorded in 2014, as well as a decrease in employee costs as a result of reduced headcount. Partially offsetting the decrease was an increase in content costs associated with programming license fee increases, as well as an increase in internet line costs driven by an increase in the number of circuits due to continued Fios internet subscriber growth.

Selling, general and administrative expense. Selling, general and administrative expense in 2015 of $1,243 million decreased $223 million, or 15.2%, compared to 2014 primarily due to pension and benefit credits of approximately $53 million that were recorded during 2015 as compared to pension and benefit charges of approximately $174 million that were recorded in 2014 as well as a decrease in advertising expense.

Depreciation and amortization. Depreciation and amortization expense in 2015 of $982 million decreased $44 million, or 4.3%, compared to 2014. The decrease was primarily driven by a decrease in net depreciable assets.

2014 Compared to 2013

Cost of services. Cost of services 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.

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 depreciation and amortization expense to operating 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.

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.


	(dollars in millions)
Years Ended December 31,	2015			2014			2013
Operating Income (Loss)	$	781		$	(10	)	$	905
Add Depreciation and amortization expense		982			1,026			1,191

EBITDA		1,763			1,016			2,096

(Less) Add Non-operating (credits) charges included in operating expenses:
Pension and benefit (credits) charges		(170	)		568			(459	)

Adjusted EBITDA	$	1,593		$	1,584		$	1,637


Operating income (loss) margin		13.6	%		(0.2	)%		15.5	%
EBITDA margin		30.7			17.5			36.0
Adjusted EBITDA margin		27.8			27.4			28.1

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

Other results


										(dollars in millions)
										Increase/(Decrease)
Years Ended December 31,	2015			2014			2013			2015 vs. 2014					2014 vs. 2013
Interest expense, net	$	31		$	43		$	85		$	(12	)	27.9	%	$	(42	)	(49.4	)%
Income tax provision (benefit)		294			(21	)		318			315		nm			(339	)	nm

Effective income tax rate		39	%		40	%		39	%

nm- not meaningful

2015 Compared to 2014

Interest expense. Interest expense in 2015 of $31 million decreased $12 million, or 27.9%, compared to 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 2015 was 39% on income before income taxes of $750 million compared to 40% during 2014 on a loss before income taxes of $53 million. The change in the income tax provision (benefit) is not meaningful given the variance in income (loss) before income taxes driven by significant pension and other postretirement changes.

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 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 income tax provision (benefit) 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,	2015			2014			2013
Cash Flows Provided by (Used in)
Operating activities	$	1,291		$	1,909		$	1,618
Investing activities		(688	)		(809	)		(841	)
Financing activities		(603	)		(1,100	)		(777	)

Increase (Decrease) in Cash and Cash Equivalents	$	—		$	—		$	—


Capital expenditures	$	694		$	810		$	842

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 $1,291 million, $1,909 million and $1,618 million for the years ended December 31, 2015, 2014 and 2013, respectively. Historically, the Group’s principal source of funds has been cash generated from operations.

In 2015, cash from operating activities decreased $618 million compared to 2014 primarily as a result of decreased working capital levels, partially offset by higher earnings.

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.

Cash flows used in investing activities. Net cash used in investing activities was $688 million, $809 million and $841 million for the years ended December 31, 2015, 2014 and 2013, 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 2015 compared to 2014 as a result of decreased Fios and legacy spending requirements. Capital expenditures decreased in 2014 compared to 2013 as a result of decreased legacy spending requirements.

Cash flows used in financing activities. Net cash used in financing activities was $603 million, $1,100 million and $777 million for the years ended December 31, 2015, 2014 and 2013, 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 secured by substantially all of GTE Southwest Inc.’s property and rank senior in right of payment to all of the obligor’s existing and future unsecured 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, 2015, 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	$	707	$	30	$	61	$	23	$	593
Interest on long-term debt		554		45		88		85		336
Operating leases, excluding with affiliate companies		82		19		31		18		14

Total contractual obligation	$	1,343	$	94	$	180	$	126	$	943

Verizon management is not able to make a reliable estimate of when the unrecognized tax benefits balance of $23 million and related interest and penalties that exist at December 31, 2015, 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 2015 depreciation expense of $117 million and that a one-year decrease would result in an increase of approximately $174 million in our 2015 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, 2015, 2014 and 2013.

Exhibit 99.3

Unaudited pro forma condensed combined financial information

The unaudited pro forma condensed combined balance sheet information as of December 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 Verizon Transaction based on the acquisition method of accounting. The unaudited pro forma condensed combined statement of operations information for the year ended December 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 Verizon Transaction based on the acquisition method of accounting.

The unaudited pro forma condensed combined financial information presents the combination of the historical financial statements of Frontier and the historical financial statements of the 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 December 31, 2015, and the retention of specified assets and liabilities by Verizon that are included in the VSTO historical balance sheet as of December 31, 2015, as more fully described in note 3(a) below, (2) the adjustment of certain amounts to conform the VSTO financial information to Frontier accounting methodology (3) the drawdown of $1,625 million under the 2015 Credit Agreement to fund the cash payment to Verizon for the purchase price, as more fully described in note 3(b) below, (4) 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 (5) 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.

The unaudited pro forma condensed combined balance sheet information has been prepared as of December 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 year ended December 31, 2015, gives effect to the Verizon Transaction and other events described above as if they had occurred on January 1, 2015.

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 as of and for the year ended December 31, 2015 and (2) the audited consolidated financial statements of Frontier as of and for the year ended December 31, 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. In addition, the fair value of the assets acquired and liabilities assumed in the Verizon Transaction are based upon estimates. The final purchase price allocation for the Verizon Transaction 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 DECEMBER 31, 2015

($ in millions)


			VSTO
	Frontier		VSTO		Additional Transfer of Assets and Liabilities to/from Verizon (3a)			VSTO, as Adjusted		Additional Financing (3b)			Pro Forma Adjustments (3c)			Pro Forma Combined
ASSETS:
Cash and cash equivalents	$	936	$	—	$	—		$	—	$	1,416		$	(1,442	) ⁽ⁱ⁾	$	910
Accounts receivable, net		571		589		(168	)		421		—			—			992
Restricted cash		8,444		—		—			—		—			(8,444	) ⁽ⁱ⁾		—
Other current assets		180		73		(4	)		69		—			—			249

Total current assets		10,131		662		(172	)		490		1,416			(9,886	)		2,151

Property, plant and equipment, net		8,493		8,077		(73	)		8,004		—			—			16,497
Goodwill		7,166		—		—			—		—			510	⁽ⁱⁱ⁾		7,676
Other intangibles, net		1,143		7		(7	)		—		—			2,257	⁽ⁱⁱⁱ⁾		3,400
Other assets		151		2,852		(2,781	)		71		(31	)		—			191

Total assets	$	27,084	$	11,598	$	(3,033	)	$	8,565	$	1,385		$	(7,119	)	$	29,915


LIABILITIES AND EQUITY:
Long-term debt due within one year	$	384	$	30	$	(27	)	$	3	$	81		$	—		$	468
Accounts payable and other current liabilities		1,509		1,191		(707	)		484		(206	)		16	^(iv)		1,803

Total current liabilities		1,893		1,221		(734	)		487		(125	)		16			2,271

Deferred income taxes		2,666		2,541		(418	)		2,123		—			(2,123	) ^(v)		2,666
Other liabilities		1,403		2,176		(1,825	)		351		—			—			1,754
Long-term debt		15,508		677		(81	)		596		1,510			12	^(vi)		17,626
Equity		5,614		4,983		25			5,008		—			(5,024	) ^(vii)		5,598

Total liabilities and equity	$	27,084	$	11,598	$	(3,033	)	$	8,565	$	1,385		$	(7,119	)	$	29,915

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, 2015

($ in millions, except for per-share amounts)


	Frontier			VSTO		Pro Forma Adjustments			Pro Forma Combined

Revenue	$	5,576		$	5,740	$	(16	) ^(4a)	$	11,245
							(55	) ^(4b)
Cost and expenses (exclusive of depreciation and amortization)		3,275			3,977		2	^(4a)		7,331
							(55	) ^(4b)
							132	^(4c)
							—	^(4j)
Depreciation and amortization		1,320			982		410	^(4d)		2,703
							(9	) ^(4e)
Acquisition and integration costs		236			—		(196	) ^(4f)		40

Total operating expenses		4,831			4,959		284			10,074

Operating income		745			781		(355	)		1,171
Investment and other income, net		7			—		—			7
Interest expense		1,113			31		387	^(4g)		1,531
Income tax expense (benefit)		(165	)		294		(282	) ^(4h)		(153	)

Net income (loss)		(196	)		456		(460	)		(200	)

Less: Dividends on preferred stock		120			—		94			214

Net income (loss) attributable to Frontier common shareholders	$	(316	)	$	456	$	(554	) ⁽⁴ⁱ⁾	$	(414	)

Basic and diluted net income (loss) per common share	$	(0.29	)						$	(0.36	) ⁽⁴ⁱ⁾

Weighted-average shares outstanding (in millions)		1,085								1,161

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 April 1, 2016, pursuant to the Securities Purchase Agreement dated February 5, 2015, Frontier acquired 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 December 31, 2015, these Verizon properties included 3.3 million voice connections, 2.1 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 approximately 55% of the residential households being enabled with Fios.

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 2015 Credit Agreement, as set forth in note 3(b)), which are charged as an expense of Frontier as they are incurred, are expected to be approximately $16 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 December 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 were 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 $611 million in assumed debt and other net adjustments of $43 million) 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:				$	9,886

Current assets	$	490
Property, plant & equipment		8,004
Goodwill		510
Other intangibles - Customer list		2,257
Other assets		71
Long-term debt due within one year		(3	)
Other current liabilities		(484	)
Long-term debt		(608	)
Other liabilities		(351	)

Total net assets acquired	$	9,886

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 were retained by Verizon that are included in VSTO’s financial statements and (2) give effect to certain assets and liabilities relating to the businesses that were 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	$	(166	)	Reclassification of affiliate balances to net presentation
		(1	)	Receivables related to businesses retained by Verizon
		(1	)	Intercompany receivables retained by Verizon

	$	(168	)


Other current assets	$	(4	)	Other current assets related to businesses retained by Verizon


Property, plant and equipment, net	$	(73	)	Property, plant and equipment related to businesses retained by Verizon


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


Other assets	$	(1,882	)	Prepaid pension asset in excess of actuarial liability retained by Verizon
		(899	)	Reclassification of prepaid pension asset to offset the employee benefit obligation

	$	(2,781	)


Long-term debt due within one year	$	(27	)	Current debt related to businesses retained by Verizon


Accounts payable and other current liabilities	$	(427	)	Payables related to businesses retained by Verizon
		(166	)	Reclassification of affiliate balances to net presentation
		(117	)	Intercompany payables retained by Verizon
		12		To establish liabilities for workers’ compensation claims
		(9	)	Accrued liabilities to be retained by Verizon

	$	(707	)


Deferred income taxes	$	(418	)	Reflects the impact of the pro forma adjustments on deferred income taxes


Other liabilities	$	(899	)	Reclassification of prepaid pension asset to offset the employee benefit obligation
		(947	)	Pension and postemployment benefits retained by Verizon
		(7	)	Accrued liabilities to be retained by Verizon
		(24	)	Removal of accrued uncertain tax position liabilities and credits retained by Verizon
		52		To establish liabilities for workers’ compensation claims

	$	(1,825	)


Long-term debt	$	(81	)	Long-term debt related to businesses retained by Verizon


Equity	$	25		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 were transferred to Frontier and pension obligations were 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) The pro forma adjustment to cash reflects drawdown of $1,625 million under the 2015 Credit Agreement. The Company used proceeds from the September 2015 private notes offering, together with the net proceeds from the Verizon Equity Offering, loan proceeds under the 2015 Credit Agreement and cash on hand to finance the Verizon Transaction and to pay related fees and expenses.

The adjustment presented reflects the debt incurrence of $1,625 million (including $81 million of current maturities), less assumed debt incurrence fees. Additionally, an adjustment of $206 million was made to reflect the payment of bridge financing fees of $173 million and debt incurrence fees of $33 million.

(c) (i) This adjustment reflects the purchase price of $10,540 million less assumed debt of $611 million and other net adjustments of $43 million resulting in $9,886 million of cash and restricted cash that were paid at closing of the Verizon Transaction (excluding any final working capital purchase price adjustment as set forth in the Verizon Purchase Agreement).

(ii) This adjustment in the amount of $510 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 December 31, 2015.

(iii) This adjustment in the amount of $2,257 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.

(iv) This adjustment in the amount of $16 million records the estimated unpaid non-recurring costs for acquisition related transaction costs, primarily bankers, lawyers and consulting advisory fees.

(v) This adjustment in the amount of $2,123 million eliminates the deferred tax liabilities of VSTO as of December 31, 2015.

(vi) This adjustment in the amount of $12 million reflects the fair value of assumed debt.

(vii) This adjustment in the amount of $5,024 million eliminates the “as adjusted” net equity of VSTO ($5,008 million) and recognizes unpaid estimated transaction costs of $16 million as of December 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 were not 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 were transferred to Frontier and pension obligations were fully funded as of the closing date of the Verizon Transaction. The adjustment includes $38 million for pension and OPEB costs related to active employees and retirees to be retained by Verizon for the year ended December 31, 2015. This adjustment also reflects the reversal of $170 million in non-cash actuarial gains 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, 2015.

(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 $410 million for the year ended December 31, 2015. Amortization expense, based on our current estimate of useful lives, is estimated to be approximately $369 million, $328 million, $287 million, $246 million and $205 million for the years ended December 31, 2016, 2017, 2018, 2019 and 2020, 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, or estimated future expense amounts noted above.

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

(f) This adjustment reflects the removal of acquisition and integration expenses related to costs incurred by Frontier in connection with the Verizon Transaction of $196 million. The remaining expense of $40 million is related to the Connecticut Acquisition.

(g) This adjustment reflects additional interest expense on the $1,625 million drawdown under the 2015 Credit Agreement and $6,600 million of notes issued in the September 2015 private notes offering, based on the weighted average interest rate determined based on current rates of 9.04% for the year ended December 31, 2015 and the elimination of interest expense related to a bridge loan facility. An increase or decrease to the assumed weighted average interest rate of 25 basis points on the $1,625 million drawdown under the 2015 Credit Agreement would result in a change of approximately $4 million for the year ended December 31, 2015.

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

(i) This adjustment reflects the additional dividends on mandatory convertible preferred shares of $94 million as a result of the June 2015 public offering of mandatory convertible preferred shares. In calculating basic and diluted net income (loss) per common share for the year ended December 31, 2015, net income (loss) was reduced by expected dividends on mandatory convertible preferred shares of $214 million for the full year of 2015 on a pro forma basis. Pro forma weighted average shares outstanding of 1,161 million for the year ended December 31, 2015, included 165 million common shares as a result of our common stock offering in June 2015. In calculating pro forma diluted net loss per common share for the year ended December 31, 2015, the effect of the mandatory convertible preferred shares as a result of the June 2015 public offering of mandatory convertible preferred shares was excluded from the computation as the effect would be antidilutive.

(j) The unaudited pro forma statement of operations adjustments do not include an adjustment for losses on disposition of assets, unlike the pro forma financial information for previously disclosed periods. In previously disclosed periods, the adjustment was included in order to reflect the separate line item “Loss on fixed asset transactions” in the Statements of Cash Flows for the VSTO ($29 million for the six months ended June 30, 2014; $28 million for the year ended December 31, 2014; $5 million for the three months ended March 31, 2015; and $13 million for the six months ended June 30, 2015). Verizon has now reclassified “Loss on fixed asset transactions” to “Accounts receivable/payable affiliates, net” in the Statements of Cash Flows for the VSTO (see Exhibit 99.1 to this Current Report on Form 8-K). The elimination of the line item “Loss on fixed asset transactions” in the Statements of Cash Flows for the VSTO necessitated the elimination of the corresponding adjustment for losses on disposition of assets. If this reclassification had been reflected in previously disclosed periods, pro forma “Costs and expenses (exclusive of depreciation and amortization)” would have been higher by the above amounts for the periods indicated and thus would have reduced pro forma operating income as well as pro forma adjusted EBITDA, but would have had no effect on pro forma revenue nor on any amounts reported as Frontier.

Exhibit 99.4

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-203537, 333-190613, 333-181299, 333-158391 and 333-58044), and on Form S-8 (Nos. 333-151247, 333-203625, 333-188440, 333-159508, 333-151248, 333-151245, 333-142636, 333-91054, 333-71821, 333-71597, 333-71029, 333-61432, 33-48683 and 33-42972) of Frontier Communications Corporation of our report dated March 9, 2016, with respect to the combined financial statements of Verizon’s Separate Telephone Operations in California, Florida and Texas, as of December 31, 2015 and 2014, and for each of the three years in the period ended December 31, 2015 included in this Current Report (Form 8-K) of Frontier Communications Corporation.

/s/ Ernst & Young LLP

New York, New York

April 18, 2016

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FRONTIER COMMUNICATIONS CORPORATION

Date: April 18, 2016

/s/ John M. Jureller

John M. Jureller

Executive Vice President

and Chief Financial Officer