WINDSTREAM HOLDINGS, INC. - FORM 10-Q - November 5, 2015

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EX-31.B - SECTION 302 CFO CERTIFICATIONS - WINDSTREAM HOLDINGS, INC.a10qexhibit31b3q15.htm
EX-31.A - SECTION 302 CEO CERTIFICATIONS - WINDSTREAM HOLDINGS, INC.a10qexhibit31a3q15.htm
EX-32.A - SECTION 906 CEO CERTIFICATIONS - WINDSTREAM HOLDINGS, INC.a10qexhibit32a3q15.htm
EX-32.B - SECTION 906 CFO CERTIFICATIONS - WINDSTREAM HOLDINGS, INC.a10qexhibit32b3q15.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 



Exact name of registrant
as specified in its charter
 
State or other
jurisdiction of 
incorporation or organization
 
Commission
File Number
 
I.R.S. Employer Identification No.
 
 
 
Windstream Holdings, Inc.
 
Delaware
 
001-32422
 
46-2847717
Windstream Services, LLC
 
Delaware
 
001-36093
 
20-0792300


 
 
 
 
 
4001 Rodney Parham Road
 
 
 
Little Rock, Arkansas
 
72212
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
 
 
(501) 748-7000
 
 
 
(Registrants’ telephone number, including area code)
 
 
 
 
 
 
 
 
 
 
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
Windstream Holdings, Inc.
ý  YES   ¨ NO
 
 
 
Windstream Services, LLC
ý  YES   ¨ NO
 
 
 
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Windstream Holdings, Inc.
ý  YES   ¨ NO
 
 
 
Windstream Services, LLC
ý  YES   ¨ NO
 
 
 
 


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Windstream Holdings, Inc.
 
 
Large accelerated filer  ý
Accelerated filer  ¨ 
 
 
 
Non-accelerated filer  ¨
Smaller reporting company  ¨
Windstream Services, LLC
 
 
Large accelerated filer  ý
Accelerated filer  ¨ 
 
 
 
Non-accelerated filer  ¨
Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Windstream Holdings, Inc.
¨  YES  ý NO
 
 
 
Windstream Services, LLC
¨  YES  ý NO
 
 
 

As of October 30, 2015, 101,036,877 shares of common stock of Windstream Holdings, Inc.were outstanding. Windstream Holdings, Inc. holds a 100 percent interest in Windstream Services, LLC.

This Form 10-Q is a combined quarterly report being filed separately by two registrants: Windstream Holdings, Inc. and Windstream Services, LLC. Windstream Services, LLC is a direct, wholly-owned subsidiary of Windstream Holdings, Inc. Accordingly, Windstream Services, LLC meets the conditions set forth in general instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format. Unless the context indicates otherwise, the use of the terms “Windstream,” “we,” “us” or “our” shall refer to Windstream Holdings, Inc. and its subsidiaries, including Windstream Services, LLC, and the term “Windstream Services” shall refer to Windstream Services, LLC and its subsidiaries.
The Exhibit Index is located on page 78.
 
 


WINDSTREAM HOLDINGS, INC.
WINDSTREAM SERVICES, LLC
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
 
 
Page No.
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Defaults Upon Senior Securities
*
Item 4.
Mine Safety Disclosures
*
Item 5.
Other Information
*
Item 6.
 _____________
*
No reportable information under this item.





1




WINDSTREAM HOLDINGS, INC.
WINDSTREAM SERVICES, LLC
FORM 10-Q
PART I - FINANCIAL INFORMATION


Item 1. Financial Statements

WINDSTREAM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Millions, except per share amounts)
 
2015
 
2014

 
2015

 
2014

Revenues and sales:
 
 
 
 
 
 
 
 
Service revenues:
 
 
 
 
 
 
 
 
Enterprise
 
$
500.6

 
$
476.8

 
$
1,468.0

 
$
1,405.4

Consumer and small business - ILEC
 
420.8

 
432.6

 
1,263.5

 
1,286.6

Carrier
 
169.0

 
180.1

 
517.8

 
553.2

Small business - CLEC
 
145.5

 
163.4

 
441.3

 
507.3

Regulatory and other
 
215.3

 
156.7

 
519.6

 
494.5

Total service revenues
 
1,451.2

 
1,409.6

 
4,210.2

 
4,247.0

Product sales
 
47.4

 
45.9

 
128.1

 
139.4

Total revenues and sales
 
1,498.6

 
1,455.5

 
4,338.3

 
4,386.4

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization
   included below)
 
703.9

 
684.4

 
2,069.1

 
2,008.6

Cost of products sold
 
41.5

 
39.0

 
111.8

 
120.1

Selling, general and administrative
 
215.8

 
218.4

 
656.5

 
693.9

Depreciation and amortization
 
350.5

 
348.5

 
1,033.0

 
1,031.4

Merger and integration costs
 
3.1

 
10.0

 
74.5

 
26.0

Restructuring charges
 
5.3

 
3.6

 
15.7

 
19.8

Total costs and expenses
 
1,320.1

 
1,303.9

 
3,960.6

 
3,899.8

Operating income
 
178.5

 
151.6

 
377.7

 
486.6

Other income (expense), net
 
17.4

 
(0.1
)
 
38.5

 
0.1

Gain (loss) on early extinguishment of debt
 
7.6

 
—

 
(35.8
)
 
—

Interest expense
 
(230.2
)
 
(143.4
)
 
(588.8
)
 
(427.8
)
(Loss) income before income taxes
 
(26.7
)
 
8.1

 
(208.4
)
 
58.9

Income tax (benefit) expense
 
(19.5
)
 
0.1

 
(95.3
)
 
20.9

Net (loss) income
 
$
(7.2
)
 
$
8.0

 
$
(113.1
)
 
$
38.0

Basic and diluted (loss) earnings per share:
 
 
 
 
 
 
 
 
Net (loss) income
 

($.08
)
 

$.07

 

($1.16
)
 

$.35











See the accompanying notes to the unaudited interim consolidated financial statements.

2



WINDSTREAM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Millions)
 
2015

 
2014

 
2015

 
2014

Net (loss) income
 
$
(7.2
)
 
$
8.0

 
$
(113.1
)
 
$
38.0

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
Unrealized holding loss arising during the period
 
(200.4
)
 
—

 
(309.7
)
 
—

Unrealized holding loss on available-for-sale securities
 
(200.4
)
 
—

 
(309.7
)
 
—

Interest rate swaps:
 
 
 
 
 
 
 
 
Changes in designated interest rate swaps
 
(25.4
)
 
6.3

 
(13.1
)
 
(13.6
)
Amortization of unrealized losses on de-designated interest
    rate swaps
 
2.9

 
3.9

 
10.0

 
12.2

Income tax benefit (expense)
 
8.7

 
(3.9
)
 
1.2

 
0.5

Unrealized (loss) gain on interest rate swaps
 
(13.8
)
 
6.3

 
(1.9
)
 
(0.9
)
Postretirement and pension plans:
 
 
 
 
 
 
 
 
Change in net actuarial gain (loss) for postretirement plan
 
—

 
0.4

 
(0.6
)
 
3.3

Plan curtailment
 
(3.0
)
 
—

 
(16.4
)
 
(9.5
)
Amounts included in net periodic benefit cost:
 
 
 
 
 
 
 
 
Amortization of net actuarial loss
 
0.2

 
0.1

 
0.7

 
0.1

Amortization of prior service credits
 
(0.8
)
 
(1.6
)
 
(3.4
)
 
(4.4
)
Income tax benefit
 
1.6

 
0.4

 
7.5

 
4.0

Change in postretirement and pension plans
 
(2.0
)
 
(0.7
)
 
(12.2
)
 
(6.5
)
Other comprehensive (loss) income
 
(216.2
)
 
5.6

 
(323.8
)
 
(7.4
)
Comprehensive (loss) income
 
$
(223.4
)
 
$
13.6

 
$
(436.9
)
 
$
30.6



























See the accompanying notes to the unaudited interim consolidated financial statements.

3



WINDSTREAM HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Millions, except par value)
 
September 30,
2015

 
December 31,
2014

Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
97.2

 
$
27.8

Restricted cash
 
—

 
6.7

Accounts receivable (less allowance for doubtful
 
 
 
 
accounts of $38.2 and $43.4, respectively)
 
657.3

 
635.5

Inventories
 
81.0

 
63.7

Deferred income taxes
 
128.8

 
105.4

Prepaid expenses and other
 
158.7

 
164.6

Total current assets
 
1,123.0

 
1,003.7

Goodwill
 
4,340.0

 
4,352.8

Other intangibles, net
 
1,586.2

 
1,764.0

Net property, plant and equipment
 
5,329.7

 
5,412.3

Investment in CS&L common stock
 
526.0

 
—

Other assets
 
99.5

 
92.9

Total Assets
 
$
13,004.4

 
$
12,625.7

Liabilities and Shareholders’ Equity
 
 
 
 
Current Liabilities:
 
 
 
 
Current maturities of long-term debt
 
$
5.9

 
$
717.5

Current portion of long-term lease obligations
 
146.4

 
—

Current portion of interest rate swaps
 
19.2

 
28.5

Accounts payable
 
366.7

 
403.3

Advance payments and customer deposits
 
207.4

 
214.7

Accrued dividends
 
15.7

 
152.4

Accrued taxes
 
93.2

 
95.2

Accrued interest
 
139.0

 
102.5

Other current liabilities
 
304.2

 
328.9

Total current liabilities
 
1,297.7

 
2,043.0

Long-term debt
 
5,693.4

 
7,846.5

Long-term lease obligations
 
5,007.6

 
81.0

Deferred income taxes
 
322.8

 
1,878.6

Other liabilities
 
508.6

 
551.8

Total liabilities
 
12,830.1

 
12,400.9

Commitments and Contingencies (See Note 7)
 


 


Shareholders’ Equity:
 
 
 
 
Common stock, $.0001 par value, 166.7 shares authorized,
 
 
 
 
101.0 and 100.5 shares issued and outstanding, respectively
 
—

 
—

Additional paid-in capital
 
638.6

 
252.2

Accumulated other comprehensive (loss) income
 
(311.7
)
 
12.1

Accumulated deficit
 
(152.6
)
 
(39.5
)
Total shareholders’ equity
 
174.3

 
224.8

Total Liabilities and Shareholders’ Equity
 
$
13,004.4

 
$
12,625.7





See the accompanying notes to the unaudited interim consolidated financial statements.

4



WINDSTREAM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Nine Months Ended
September 30,
(Millions)
 
2015

 
2014

Cash Provided from Operations:
 
 
 
 
Net (loss) income
 
$
(113.1
)
 
$
38.0

Adjustments to reconcile net (loss) income to net cash provided from operations:
 
 
 
 
Depreciation and amortization
 
1,033.0

 
1,031.4

Provision for doubtful accounts
 
37.1

 
38.8

Share-based compensation expense
 
42.9

 
38.3

Deferred income taxes
 
(103.3
)
 
10.8

Unamortized net premium on retired debt
 
(15.0
)
 
—

Amortization of unrealized losses on de-designated interest rate swaps
 
10.0

 
12.2

Plan curtailment and other, net
 
(29.5
)
 
11.5

Changes in operating assets and liabilities, net
 
 
 
 
Accounts receivable
 
(58.9
)
 
(20.8
)
Prepaid income taxes
 
4.3

 
8.7

Prepaid expenses and other
 
(9.1
)
 
(4.1
)
Accounts payable
 
(37.9
)
 
(49.2
)
Accrued interest
 
34.2

 
64.8

Accrued taxes
 
(2.0
)
 
(6.6
)
Other current liabilities
 
8.2

 
(0.8
)
Other liabilities
 
(3.8
)
 
(38.3
)
Other, net
 
(40.8
)
 
(22.1
)
Net cash provided from operations
 
756.3

 
1,112.6

Cash Flows from Investing Activities:
 
 
 
 
Additions to property, plant and equipment
 
(744.4
)
 
(552.7
)
Broadband network expansion funded by stimulus grants
 
—

 
(11.6
)
Changes in restricted cash
 
6.7

 
2.0

Grant funds received for broadband stimulus projects
 
23.5

 
25.8

Grant funds received from Connect America Fund - Phase I
 
—

 
26.0

Network expansion funded by Connect America Fund - Phase I
 
(67.4
)
 
(2.0
)
Other, net
 
8.9

 
—

Net cash used in investing activities
 
(772.7
)
 
(512.5
)
Cash Flows from Financing Activities:
 
 
 
 
Dividends paid to shareholders
 
(354.1
)
 
(451.6
)
Payment received from CS&L in spin-off
 
1,035.0

 
—

Repayments of debt and swaps
 
(2,098.6
)
 
(1,049.0
)
Proceeds of debt issuance
 
1,620.0

 
985.0

Debt issuance costs
 
(4.3
)
 
—

Stock repurchases
 
(20.0
)
 
—

Payments under long-term lease obligations
 
(59.3
)
 
—

Payments under capital lease obligations
 
(24.7
)
 
(19.8
)
Other, net
 
(8.2
)
 
(9.2
)
Net cash provided from (used in) financing activities
 
85.8

 
(544.6
)
Increase in cash and cash equivalents
 
69.4

 
55.5

Cash and Cash Equivalents:
 
 
 
 
Beginning of period
 
27.8

 
48.2

End of period
 
$
97.2

 
$
103.7

Supplemental Cash Flow Disclosures:
 
 
 
 
Interest paid
 
$
551.7

 
$
358.3

Income taxes paid, net
 
$
0.8

 
$
4.0





See the accompanying notes to the unaudited interim consolidated financial statements.

5



WINDSTREAM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(Millions, except per share amounts)
 
Common Stock
and Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Accumulated Deficit
 
Total
Balance at December 31, 2014
 
$
252.2

 
$
12.1

 
$
(39.5
)
 
$
224.8

Net loss
 
—

 
—

 
(113.1
)
 
(113.1
)
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
Unrealized holding loss on available-for-sale securities
 
—

 
(309.7
)
 
—

 
(309.7
)
Change in postretirement and pension plans
 
—

 
(12.2
)
 
—

 
(12.2
)
Amortization of unrealized losses on de-designated
   interest rate swaps
 
—

 
6.1

 
—

 
6.1

Changes in designated interest rate swaps
 
—

 
(8.0
)
 
—

 
(8.0
)
Comprehensive loss
 
—

 
(323.8
)
 
(113.1
)
 
(436.9
)
Effect of REIT spin-off (See Note 2)
 
589.5

 
—

 
—

 
589.5

Share-based compensation expense (See Note 9)
 
17.1

 
—

 
—

 
17.1

Stock issued for management incentive compensation plans
   (See Note 9)
 
3.6

 
—

 
—

 
3.6

Stock issued to employee savings plan (See Note 8)
 
21.6

 
—

 
—

 
21.6

Stock repurchases
 
(20.0
)
 
—

 
—

 
(20.0
)
Taxes withheld on vested restricted stock and other
 
(8.4
)
 
—

 
—

 
(8.4
)
Dividends of $2.16 per share declared to shareholders
 
(217.0
)
 
—

 
—

 
(217.0
)
Balance at September 30, 2015
 
$
638.6

 
$
(311.7
)
 
$
(152.6
)
 
$
174.3






























See the accompanying notes to the unaudited interim consolidated financial statements.

6




WINDSTREAM SERVICES, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Millions)
 
2015

 
2014

 
2015

 
2014

Revenues and sales:
 
 
 
 
 
 
 
 
Service revenues:
 
 
 
 
 
 
 
 
Enterprise
 
$
500.6

 
$
476.8

 
$
1,468.0

 
$
1,405.4

Consumer and small business - ILEC
 
420.8

 
432.6

 
1,263.5

 
1,286.6

Carrier
 
169.0

 
180.1

 
517.8

 
553.2

Small business - CLEC
 
145.5

 
163.4

 
441.3

 
507.3

Regulatory and other
 
215.3

 
156.7

 
519.6

 
494.5

Total service revenues
 
1,451.2

 
1,409.6

 
4,210.2

 
4,247.0

Product sales
 
47.4

 
45.9

 
128.1

 
139.4

Total revenues and sales
 
1,498.6

 
1,455.5

 
4,338.3

 
4,386.4

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization
   included below)
 
703.9

 
684.4

 
2,069.1

 
2,008.6

Cost of products sold
 
41.5

 
39.0

 
111.8

 
120.1

Selling, general and administrative
 
215.5

 
218.0

 
654.9

 
691.9

Depreciation and amortization
 
350.5

 
348.5

 
1,033.0

 
1,031.4

Merger and integration costs
 
3.1

 
10.0

 
74.5

 
26.0

Restructuring charges
 
5.3

 
3.6

 
15.7

 
19.8

Total costs and expenses
 
1,319.8

 
1,303.5

 
3,959.0

 
3,897.8

Operating income
 
178.8

 
152.0

 
379.3

 
488.6

Other income (expense), net
 
17.4

 
(0.1
)
 
38.5

 
0.1

Gain (loss) on early extinguishment of debt
 
7.6

 
—

 
(35.8
)
 
—

Interest expense
 
(230.2
)
 
(143.4
)
 
(588.8
)
 
(427.8
)
(Loss) income before income taxes
 
(26.4
)
 
8.5

 
(206.8
)
 
60.9

Income tax (benefit) expense
 
(19.4
)
 
0.3

 
(94.7
)
 
21.7

Net (loss) income
 
$
(7.0
)
 
$
8.2

 
$
(112.1
)
 
$
39.2





















See the accompanying notes to the unaudited interim consolidated financial statements.

7



WINDSTREAM SERVICES, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(Millions)
 
2015

 
2014

 
2015

 
2014

Net (loss) income
 
$
(7.0
)
 
$
8.2

 
$
(112.1
)
 
$
39.2

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
Unrealized holding loss arising during the period
 
(200.4
)
 
—

 
(309.7
)
 
—

Unrealized holding loss on available-for-sale securities
 
(200.4
)
 
—

 
(309.7
)
 
—

Interest rate swaps:
 
 
 
 
 
 
 
 
Changes in designated interest rate swaps
 
(25.4
)
 
6.3

 
(13.1
)
 
(13.6
)
Amortization of unrealized losses on de-designated interest
    rate swaps
 
2.9

 
3.9

 
10.0

 
12.2

Income tax benefit (expense)
 
8.7

 
(3.9
)
 
1.2

 
0.5

Unrealized (loss) gain on interest rate swaps
 
(13.8
)
 
6.3

 
(1.9
)
 
(0.9
)
Postretirement and pension plans:
 
 
 
 
 
 
 
 
Change in net actuarial gain (loss) for postretirement plan
 
—

 
0.4

 
(0.6
)
 
3.3

Plan curtailment
 
(3.0
)
 
—

 
(16.4
)
 
(9.5
)
Amounts included in net periodic benefit cost:
 
 
 
 
 
 
 
 
Amortization of net actuarial loss
 
0.2

 
0.1

 
0.7

 
0.1

Amortization of prior service credits
 
(0.8
)
 
(1.6
)
 
(3.4
)
 
(4.4
)
Income tax benefit
 
1.6

 
0.4

 
7.5

 
4.0

Change in postretirement and pension plans
 
(2.0
)
 
(0.7
)
 
(12.2
)
 
(6.5
)
Other comprehensive (loss) income
 
(216.2
)
 
5.6

 
(323.8
)
 
(7.4
)
Comprehensive (loss) income
 
$
(223.2
)
 
$
13.8

 
$
(435.9
)
 
$
31.8



























See the accompanying notes to the unaudited interim consolidated financial statements.

8



WINDSTREAM SERVICES, LLC
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Millions, except number of shares)
 
September 30,
2015

 
December 31,
2014

Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
97.2

 
$
27.8

Restricted cash
 
—

 
6.7

Accounts receivable (less allowance for doubtful
 
 
 
 
accounts of $38.2 and $43.4, respectively)
 
657.3

 
635.5

Inventories
 
81.0

 
63.7

Deferred income taxes
 
128.8

 
105.4

Prepaid expenses and other
 
158.7

 
164.6

Total current assets
 
1,123.0

 
1,003.7

Goodwill
 
4,340.0

 
4,352.8

Other intangibles, net
 
1,586.2

 
1,764.0

Net property, plant and equipment
 
5,329.7

 
5,412.3

Investment in CS&L common stock
 
526.0

 
—

Other assets
 
99.5

 
92.9

Total Assets
 
$
13,004.4

 
$
12,625.7

Liabilities and Member Equity
 
 
 
 
Current Liabilities:
 
 
 
 
Current maturities of long-term debt
 
$
5.9

 
$
717.5

Current portion of long-term lease obligations
 
146.4

 
—

Current portion of interest rate swaps
 
19.2

 
28.5

Accounts payable
 
366.7

 
403.3

Advance payments and customer deposits
 
207.4

 
214.7

Payable to Windstream Holdings, Inc.
 
15.7

 
152.4

Accrued taxes
 
93.2

 
95.2

Accrued interest
 
139.0

 
102.5

Other current liabilities
 
304.2

 
328.9

Total current liabilities
 
1,297.7

 
2,043.0

Long-term debt
 
5,693.4

 
7,846.5

Long-term lease obligations
 
5,007.6

 
81.0

Deferred income taxes
 
322.8

 
1,878.6

Other liabilities
 
508.6

 
551.8

Total liabilities
 
12,830.1

 
12,400.9

Commitments and Contingencies (See Note 7)
 

 


Member Equity:
 
 
 
 
Additional paid-in capital
 
636.2

 
250.8

Accumulated other comprehensive (loss) income
 
(311.7
)
 
12.1

Accumulated deficit
 
(150.2
)
 
(38.1
)
Total member equity
 
174.3

 
224.8

Total Liabilities and Member Equity
 
$
13,004.4

 
$
12,625.7







See the accompanying notes to the unaudited interim consolidated financial statements.

9



WINDSTREAM SERVICES, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Nine Months Ended
September 30,
(Millions)
 
2015

 
2014

Cash Provided from Operations:
 
 
 
 
Net (loss) income
 
$
(112.1
)
 
$
39.2

Adjustments to reconcile net (loss) income to net cash provided from operations:
 
 
 
 
Depreciation and amortization
 
1,033.0

 
1,031.4

Provision for doubtful accounts
 
37.1

 
38.8

Share-based compensation expense
 
42.9

 
38.3

Deferred income taxes
 
(103.3
)
 
10.8

Unamortized net premium on retired debt
 
(15.0
)
 
—

Amortization of unrealized losses on de-designated interest rate swaps
 
10.0

 
12.2

Plan curtailment and other, net
 
(29.5
)
 
11.5

Changes in operating assets and liabilities, net
 
 
 
 
Accounts receivable
 
(58.9
)
 
(20.8
)
Prepaid income taxes
 
4.3

 
8.7

Prepaid expenses and other
 
(9.1
)
 
(4.1
)
Accounts payable
 
(37.9
)
 
(49.2
)
Accrued interest
 
34.2

 
64.8

Accrued taxes
 
(2.0
)
 
(6.7
)
Other current liabilities
 
8.2

 
(0.8
)
Other liabilities
 
(3.8
)
 
(38.3
)
Other, net
 
(40.8
)
 
(22.1
)
Net cash provided from operations
 
757.3

 
1,113.7

Cash Flows from Investing Activities:
 
 
 
 
Additions to property, plant and equipment
 
(744.4
)
 
(552.7
)
Broadband network expansion funded by stimulus grants
 
—

 
(11.6
)
Changes in restricted cash
 
6.7

 
2.0

Grant funds received for broadband stimulus projects
 
23.5

 
25.8

Grant funds received from Connect America Fund - Phase I
 
—

 
26.0

Network expansion funded by Connect America Fund - Phase I
 
(67.4
)
 
(2.0
)
Other, net
 
8.9

 
—

Net cash used in investing activities
 
(772.7
)
 
(512.5
)
Cash Flows from Financing Activities:
 
 
 
 
Distributions to Windstream Holdings, Inc.
 
(355.1
)
 
(452.4
)
Payment received from CS&L in spin-off
 
1,035.0

 
—

Repayments of debt and swaps
 
(2,098.6
)
 
(1,049.0
)
Proceeds of debt issuance
 
1,620.0

 
985.0

Debt issuance costs
 
(4.3
)
 
—

Stock repurchases
 
(20.0
)
 
—

Payments under long-term lease obligations
 
(59.3
)
 
—

Payments under capital lease obligations
 
(24.7
)
 
(19.8
)
Other, net
 
(8.2
)
 
(9.5
)
Net cash provided from (used in) financing activities
 
84.8

 
(545.7
)
Increase in cash and cash equivalents
 
69.4

 
55.5

Cash and Cash Equivalents:
 
 
 
 
Beginning of period
 
27.8

 
48.2

End of period
 
$
97.2

 
$
103.7

Supplemental Cash Flow Disclosures:
 
 
 
 
Interest paid
 
$
551.7

 
$
358.3

Income taxes paid, net
 
$
0.8

 
$
4.0





See the accompanying notes to the unaudited interim consolidated financial statements.

10



WINDSTREAM SERVICES, LLC
CONSOLIDATED STATEMENTS OF MEMBER EQUITY (UNAUDITED)
(Millions, except per share amounts)
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Accumulated Deficit
 
Total
Balance at December 31, 2014
 
$
250.8

 
$
12.1

 
$
(38.1
)
 
$
224.8

Net loss
 
—

 
—

 
(112.1
)
 
(112.1
)
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
Unrealized holding loss on available-for-sale securities
 
—

 
(309.7
)
 
—

 
(309.7
)
Change in postretirement and pension plans
 
—

 
(12.2
)
 
—

 
(12.2
)
Amortization of unrealized losses on de-designated
   interest rate swaps
 
—

 
6.1

 
—

 
6.1

Changes in designated interest rate swaps
 
—

 
(8.0
)
 
—

 
(8.0
)
Comprehensive loss
 
—

 
(323.8
)
 
(112.1
)
 
(435.9
)
Effect of REIT spin-off (See Note 2)
 
589.5

 
—

 
—

 
589.5

Share-based compensation expense (See Note 9)
 
17.1

 
—

 
—

 
17.1

Stock issued for management incentive compensation plans
   (See Note 9)
 
3.6

 
—

 
—

 
3.6

Stock issued to employee savings plan (See Note 8)
 
21.6

 
—

 
—

 
21.6

Stock repurchases
 
(20.0
)
 
—

 
—

 
(20.0
)
Taxes withheld on vested restricted stock and other
 
(8.4
)
 
—

 
—

 
(8.4
)
Distributions payable to Windstream Holdings, Inc.
 
(218.0
)
 
—

 
—

 
(218.0
)
Balance at September 30, 2015
 
$
636.2

 
$
(311.7
)
 
$
(150.2
)
 
$
174.3






























See the accompanying notes to the unaudited interim consolidated financial statements.

11



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 

1. Preparation of Interim Financial Statements:

In these consolidated financial statements, unless the context requires otherwise, the use of the terms “Windstream,” “we,” “us” or “our” shall refer to Windstream Holdings, Inc. and its subsidiaries, including Windstream Services, LLC, and the term “Windstream Services” shall refer to Windstream Services, LLC and its subsidiaries.
 
Organizational Structure –Windstream Holdings, Inc. (“Windstream Holdings”) is a publicly traded holding company and the parent of Windstream Services, LLC (“Windstream Services”), formerly Windstream Corporation. Windstream Holdings common stock trades on the Nasdaq Global Select Market (“NASDAQ”) under the ticker symbol “WIN”. Effective February 28, 2015, Windstream Corporation was converted to a limited liability company (“LLC”). Following the conversion, Windstream Holdings owns a 100 percent interest in Windstream Services. The conversion of Windstream Services to a LLC has been accounted for as a change in reporting entity and accordingly, the historical equity presentation of Windstream Services reflect the effect of the LLC conversion for all periods presented. Windstream Services and its guarantor subsidiaries are the sole obligors of all outstanding debt obligations and, as a result also file periodic reports with the Securities and Exchange Commission (“SEC”). Windstream Holdings is not a guarantor of nor subject to the restrictive covenants included in any of Windstream Services’ debt agreements. The Windstream Holdings board of directors and officers oversee both companies.

As further discussed in Note 2, on April 24, 2015, we completed the spin-off of certain telecommunications network assets, including our fiber and copper networks and other real estate into an independent, publicly traded real estate investment trust (“REIT”). Upon completion of the spin-off, we amended our certificate of incorporation to decrease the number of authorized shares of common stock from 1.0 billion to 166.7 million and enacted a one-for-six reverse stock split with respect to all of our outstanding shares of common stock which became effective on April 26, 2015. All share data of Windstream Holdings presented has been retrospectively adjusted to reflect the effects of the decrease in its authorized shares and the reverse stock split, as appropriate.

Description of Business – We are a leading provider of advanced network communications and technology solutions for consumers, businesses, enterprise organizations and carrier partners across the United States. We offer bundled services, including broadband, security solutions, voice and digital television to consumers. We also provide data, cloud solutions, unified communications and managed services to business and enterprise clients. We supply core transport solutions on a local and long-haul fiber-optic network spanning approximately 121,000 miles.

Enterprise service revenues include revenues from integrated voice and data services, advanced data, traditional voice and long-distance services provided to enterprise customers. Consumer service revenues are generated from the provisioning of high-speed Internet, voice and video services to consumers. Small business service revenues include revenues from integrated voice and data services, advanced data and traditional voice and long-distance services provided to small business customers. Carrier revenues include revenues from other carriers for special access circuits and fiber connections as well as voice and data services sold on a wholesale basis. Regulatory revenues include switched access revenues, federal and state Universal Service Fund (“USF”) revenues and amounts received from Connect America Fund - Phase II. Other service revenues include USF surcharge revenues, other miscellaneous services and, for periods prior to the April 24, 2015 spin-off, consumer revenues generated in markets where we lease the connection to the customer premise. As further discussed in Note 2, substantially all of this business was transferred to the REIT.

Basis of Presentation – The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. Certain information and footnote disclosures have been condensed or omitted in accordance with those rules and regulations. The accompanying consolidated balance sheet as of December 31, 2014, was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. In our opinion, these financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year. For a more complete discussion of significant accounting policies and certain other information, this report should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on February 24, 2015.


12
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


1. Preparation of Interim Financial Statements, Continued:

Windstream Holdings and its domestic subsidiaries, including Windstream Services, file a consolidated federal income tax return. As such, Windstream Services and its subsidiaries are not separate taxable entities for federal and certain state income tax purposes. In instances when Windstream Services does not file a separate return, income taxes as presented within the accompanying consolidated financial statements attribute current and deferred income taxes of Windstream Holdings to Windstream Services and its subsidiaries in a manner that is systematic, rational and consistent with the asset and liability method. Income tax provisions presented for Windstream Services and its subsidiaries are prepared under the “separate return method.” The separate return method represents a hypothetical computation assuming that the reported revenue and expenses of Windstream Services and its subsidiaries were incurred by separate taxable entities.

The preparation of financial statements, in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the date of the consolidated financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying consolidated financial statements, and such differences could be material.

There are no significant differences between the consolidated results of operations, financial condition, and cash flows of Windstream Holdings and those of Windstream Services other than for certain expenses incurred directly by Windstream Holdings principally consisting of audit, legal and board of director fees, NASDAQ listing fees, other shareholder-related costs, income taxes, common stock activity, and payables from Windstream Services to Windstream Holdings. Earnings per share data has not been presented for Windstream Services, because that entity has not issued publicly held common stock as defined in accordance with U.S. GAAP. Unless otherwise indicated, the note disclosures included herein pertain to both Windstream Holdings and Windstream Services.

Revisions to Prior Period Financial Statements

During the first quarter of 2015, management became aware of and corrected for the immaterial misclassification of certain operating expenses. The previously reported amounts included certain costs related to customer service delivery, customer care and field operations that had been classified as selling, general and administrative expense and should have been reported as cost of services. These revisions did not impact previously reported operating income, net income or comprehensive income.

The following tables present the effect of the revisions to Windstream Holdings’ consolidated statements of operations for the three and nine month periods ended September 30:
 
 
Three Months Ended
September 30, 2014
 
Nine Months Ended
September 30, 2014
(Millions)
 
As Previously Reported
 
Effect of
Revision
 
As Revised
 
As Previously Reported
 
Effect of
Revision
 
As Revised
Cost of services
 
$
670.9

 
$
13.5

 
$
684.4

 
$
1,967.8

 
$
40.8

 
$
2,008.6

Selling, general and administrative
$
231.9

 
$
(13.5
)
 
$
218.4

 
$
734.7

 
$
(40.8
)
 
$
693.9


The effect of the revisions to Windstream Services’ consolidated statements of operations would be the same for all periods presented. We evaluated the materiality of these revisions and have determined they were not material to any prior period.

During the second quarter of 2015, management identified a classification error within the shareholders’ equity section of our consolidated balance sheet as of December 31, 2014.  Specifically, additional paid-in capital as originally reported of $212.7 million was understated by $39.5 million while retained earnings as originally reported of zero was overstated by $39.5 million due to the manner in which dividends were recorded during the year.  As this classification error had no effect on our total shareholders’ equity balance as of December 31, 2014, management determined the related impact was not material to the previously issued financial statements. The accompanying consolidated balance sheet as of December 31, 2014 has been revised to correct this classification error.

Certain other prior year amounts have been reclassified to conform to the current year financial statement presentation. These changes and reclassifications did not impact net (loss) income or comprehensive (loss) income.
 

13


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


1. Preparation of Interim Financial Statements, Continued:

Recently Adopted Accounting Standards

Presentation of Debt Issuance Costs – In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The standard outlines a simplified presentation of debt issuance costs and 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, consistent with debt discounts. ASU 2015-03 does not affect the recognition and measurement guidance for debt issuance costs. ASU 2015-03 is effective for annual periods beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016, with early adoption permitted. During the second quarter of 2015, we early adopted this guidance and have classified in our consolidated balance sheets unamortized debt issuance costs from other assets to long-term debt for all periods presented (see Note 4). The effect of this change was to reduce the previously reported amounts within the accompanying consolidated balance sheet as of December 31, 2014 for other assets and long-term debt by $87.7 million or a decrease in other assets from $180.6 million to $92.9 million and long-term debt from $7,934.2 million to $7,846.5 million. Adoption of this guidance did not affect our consolidated results of operations, financial position or liquidity.

Recently Issued Authoritative Guidance

Revenue Recognition – In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The standard outlines a single comprehensive revenue recognition model for entities to follow in accounting for revenue from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive for those goods or services. ASU 2014-09 also includes new accounting principles related to the deferral and amortization of contract acquisition and fulfillment costs. ASU 2014-09 may be adopted by applying the provisions of the new standard on a retrospective basis to all periods presented in the financial statements or on a modified retrospective basis which would result in the recognition of a cumulative effect adjustment in the year of adoption. When issued, ASU 2014-09 was to be effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption was not permitted. On July 9, 2015, the FASB deferred the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date, or January 1, 2018, for calendar companies like Windstream. Entities are permitted to early adopt the standard, but not before the original effective date of December 15, 2016. We are in the process of determining the method of adoption and assessing the impact the new standard will have on our consolidated financial statements.

Fair Value Measurement Disclosures - In May 2015, the FASB issued Accounting Standards Update No. 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value Per Share (or Its Equivalent), which amends certain fair value measurement disclosures (“ASU 2015-07”). The standard removes the requirement to categorize within the fair value hierarchy investments for which fair value is measured using the net asset value per share practical expedient and also removes certain related disclosure requirements. ASU 2015-07 is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 31, 2015, with early adoption permitted.

Pension Plan Investment Disclosures - In July 2015, the FASB issued Accounting Standards Update 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965) (“ ASU 2015-12”). This standard eliminates the requirement to measure the fair value of fully benefit-responsive investment contracts and provide the related fair value disclosures. Under the new guidance, fully benefit-responsive investment contracts will be measured and disclosed only at contract value. The standard also eliminates certain disclosure requirements related to an employee benefit plan’s investments presented in the plan’s standalone financial statements. ASU 2015-12 is effective retrospectively for fiscal years beginning after December 31, 2015, with early adoption permitted.

Adoption of ASU 2015-07 and 2015-12 will impact certain of the disclosures related to our qualified pension plan assets, but otherwise is not expected to have a material impact on our consolidated financial statements.

Measurement Period Adjustments in a Business Combination - In September 2015, the FASB issued Accounting Standards Update No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”), which eliminates the requirement to restate prior period financial statements for measurement period adjustments related to a business combination. The standard requires that the cumulative impact of a measurement period adjustment be recognized in the reporting period in which the adjustment is identified. ASU 2015-16 also requires companies to disclose the portion of the adjustment recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date, either separately in the income statement or in the notes.

14


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


1. Preparation of Interim Financial Statements, Continued:

ASU 2015-16 is effective prospectively for annual and interim periods after December 15, 2015, with early adoption permitted. We do not expect the adoption of ASU 2015-16 to have a material impact on our consolidated financial statements.

2. Completion of Spin-off of Certain Network and Real Estate Assets:

On April 24, 2015, we completed the spin-off of certain telecommunications network assets, including our fiber and copper networks and other real estate, into an independent, publicly traded REIT. The spin-off also included substantially all of our consumer competitive local exchange carrier (“CLEC”) business. The telecommunications network assets consisted of copper cable and fiber optic cable lines, telephone poles, underground conduits, concrete pads, attachment hardware (e.g., bolts and lashings), pedestals, guy wires, anchors, signal repeaters, and central office land and buildings, with a net book value of approximately $2.5 billion. We requested and received a private letter ruling from the Internal Revenue Service on the qualification of the spin-off as a tax-free transaction and the designation of the telecommunications network assets as real estate.

Pursuant to the plan of distribution and immediately prior to the effective time of the spin-off, we contributed the telecommunications network assets and the consumer CLEC business to Communications Sales & Leasing, Inc. (“CS&L”), a wholly owned subsidiary of Windstream, in exchange for: (i) the issuance to Windstream of CS&L common stock of which 80.4 percent of the shares were distributed on a pro rata basis to Windstream’s stockholders, (ii) cash payment to Windstream in the amount of $1.035 billion and (iii) the distribution by CS&L to Windstream of approximately $2.5 billion of CS&L debt securities. After giving effect to the interest in CS&L retained by Windstream, each Windstream Holdings shareholder received one share of CS&L for every five shares of Windstream Holdings common stock held as of the record date of April 10, 2015 in the form of a tax-free dividend. An ex-date of April 27, 2015 was established by NASDAQ, and all trades through the close of business on April 24, 2015 carried the right to receive the distribution. No fractional shares were distributed in connection with the spin-off, with a cash payment being made in lieu of any fractional shares.

In connection with the distribution, CS&L borrowed approximately $2.14 billion through a new senior credit agreement. CS&L also issued debt securities in the private placement market to fund the cash payment and to issue its debt securities to Windstream, consisting of $1,110.0 million aggregate principal amount of 8.25 percent senior notes due April 15, 2023 and $400.0 million aggregate principal amount of 6.00 percent senior secured notes due October 15, 2023. The CS&L unsecured notes and the borrowings under CS&L’s new senior credit agreement were issued at a discount, and accordingly, at the date of distribution, CS&L issued to Windstream approximately $2.5 billion of its debt securities consisting of $970.2 million in term loans, $400.0 million in secured and $1,077.3 million in unsecured notes (the “CS&L Securities”).

In connection with the spin-off transaction, Windstream entered into an exchange agreement (the “Exchange Agreement”), with J.P. Morgan Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Inc. (together, the “Investment Banks”), and CS&L. Pursuant to the terms of the Exchange Agreement, Windstream agreed to transfer the CS&L Securities and cash to the Investment Banks, in exchange for the transfer by the Investment Banks to Windstream of certain debt securities of Windstream Services consisting of $1.7 billion aggregate principal amount of borrowings outstanding under Tranches A3, A4 and B4 of Windstream Services’ senior credit facility and $752.2 million aggregate principal amount of borrowings outstanding under the revolving line of credit held by the Investment Banks. On April 24, 2015, following the completion of the spin-off transaction, Windstream and the Investment Banks completed the exchange of debt securities pursuant to the terms of the Exchange Agreement. We incurred approximately $35.4 million of costs in completing the debt-for-debt exchange. In conjunction with the retirement of debt, Windstream Services terminated seven of its ten interest rate swaps designated as cash flow hedges of the variable cash flows paid on its senior secured credit facility. Windstream Services paid $22.7 million to terminate the interest rate swaps.

As of the spin-off date, excluding restricted shares held by Windstream employees and directors, Windstream retained a passive ownership interest in approximately 19.6 percent of the common stock of CS&L. Windstream intends to use all of its shares of CS&L to retire additional Windstream Services debt within 18 to 24 months from the date of the spin-off, subject to market conditions. Windstream has classified its shares of CS&L common stock as an available-for-sale security and, accordingly, the shares are recorded at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss). No deferred income taxes will be recorded with respect to any unrealized gains and losses due to the tax-free qualification of the spin-off.


15


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


2. Completion of Spin-off of Certain Network and Real Estate Assets, Continued:

For employees and directors remaining with Windstream, restricted stock awarded pursuant to our equity incentive plans and held by employees and directors at the time of the distribution continue to represent the right to receive shares of Windstream Holdings’ common stock. In addition, the holders of these restricted shares received restricted shares of CS&L common stock equivalent to the number of shares of CS&L common stock that was received with respect to each share of unrestricted Windstream Holdings’ common stock at the time of the distribution. The existing Windstream Holdings’ restricted stock and newly issued CS&L restricted stock remain subject to vesting and other terms and conditions as prescribed by our equity incentive plans. The number of Windstream Holdings’ shares underlying any outstanding stock options and the related per share exercise price were adjusted to maintain both the aggregate fair market value of stock underlying the stock options and the relationship between the per share exercise price and the related per share market value, pursuant to the terms of the applicable Windstream Holdings’ equity incentive plans and taking into account the change in the market value of Windstream Holdings’ common stock as a result of the distribution.

As further discussed in Note 4, following the spin-off, Windstream entered into an agreement to lease back the telecommunications network assets from CS&L.
 
3. Goodwill and Other Intangible Assets:

Goodwill represents the excess of cost over the fair value of net identifiable tangible and intangible assets acquired through various business combinations. The cost of acquired entities at the date of the acquisition is allocated to identifiable assets, and the excess of the total purchase price over the amounts assigned to identifiable assets has been recorded as goodwill. In accordance with authoritative guidance, goodwill is to be assigned to a company’s reporting units and tested for impairment at least annually using a consistent measurement date, which for us is January 1st of each year. Goodwill is tested at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment, referred to as a component. A component of an operating segment is a reporting unit for which discrete financial information is available and our executive management team regularly reviews the operating results of that component. Additionally, components of an operating segment can be combined as a single reporting unit if the components have similar economic characteristics. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is performed. If the carrying value of the reporting unit exceeds its fair value, then a second step must be performed, and the implied fair value of the reporting unit’s goodwill must be determined and compared to the carrying value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then an impairment loss equal to the difference will be recorded. Prior to performing the two step evaluation, an entity has the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit
exceeds the carrying value. Under the qualitative assessment, if an entity determines that it is more likely than not that a reporting unit’s fair value exceeds its carrying value, then the entity is not required to complete the two step goodwill impairment evaluation.

Changes in the carrying amount of goodwill were as follows:
(Millions)
  
Balance at December 31, 2014
$
4,352.8

Disposition during the period (a)
(12.8
)
Balance at September 30, 2015
$
4,340.0


(a)
Represents the portion of historical goodwill allocated to the consumer CLEC business that was transferred to CS&L in conjunction with the spin-off (see Note 2).

As of January 1, 2015, we have three reporting units, excluding corporate level activities. In performing our annual goodwill impairment assessment, we estimated the fair value of each of our three reporting units utilizing both an income approach and a market approach. The income approach is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the reporting unit beyond the cash flows from the discrete projection period of five years. We discounted the estimated cash flows for each of the reporting units using a rate that represents a market participant’s weighted average cost of capital commensurate with the reporting unit’s underlying business operations. The market approach included the use of comparable multiples of publicly traded companies operating in businesses similar to ours. We also reconciled the estimated fair value of our reporting units to our total market capitalization.

As of January 1, 2015, based on our assessment performed with respect to our three reporting units as described above, we concluded that goodwill for all of our reporting units was not impaired as of that date, and accordingly, no further analysis was required.


16


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


3. Goodwill and Other Intangible Assets, Continued:

As a result of changes in our executive management team, we are in the process of reorganizing the way in which we manage our business for purposes of operating decisions and assessing profitability. We expect to complete the reorganization of our operations in the fourth quarter of 2015, at which time, we will reassess our reporting unit and operating segment structure.

Other intangible assets arising from business combinations are initially recorded at estimated fair value and amortized over the estimated useful lives. Other intangible assets were as follows at:
  
 
September 30, 2015
 
December 31, 2014
(Millions)
 
Gross
Cost
 
Accumulated
Amortization
 
Net Carrying
Value
 
Gross
Cost
 
Accumulated
Amortization
 
Net Carrying
Value
Franchise rights
 
$
1,285.1

 
$
(275.4
)
 
$
1,009.7

 
$
1,285.1

 
$
(243.3
)
 
$
1,041.8

Customer lists (a)
 
1,879.5

 
(1,316.9
)
 
562.6

 
1,914.0

 
(1,203.4
)
 
710.6

Cable franchise rights
 
39.8

 
(29.1
)
 
10.7

 
39.8

 
(28.2
)
 
11.6

Other (b)
 
42.0

 
(38.8
)
 
3.2

 
37.9

 
(37.9
)
 
—

Balance
 
$
3,246.4

 
$
(1,660.2
)
 
$
1,586.2

 
$
3,276.8

 
$
(1,512.8
)
 
$
1,764.0


(a)
In connection with the spin-off, we transferred customer lists with a gross cost of $34.5 million and a net carrying value of $13.1 million to CS&L (see Note 2).

(b)
During the first quarter of 2015, we acquired for cash non-exclusive licenses to various patents, which are being amortized on a straight-line basis over the estimated useful life of 3 years.

Intangible asset amortization methodology and useful lives were as follows as of September 30, 2015:
Intangible Assets
  
Amortization Methodology
  
Estimated Useful Life
Franchise rights
  
straight-line
  
30 years
Customer lists
  
sum-of-years-digits
  
9 - 15 years
Cable franchise rights
  
straight-line
  
15 years
Other
  
straight-line
  
1 - 3 years

Amortization expense for intangible assets subject to amortization was $54.8 million and $168.9 million for the three and nine month periods ended September 30, 2015, as compared to $63.7 million and $194.4 million for the same periods in 2014. Amortization expense for intangible assets subject to amortization is estimated to be as follows for each of the twelve month periods ended September 30:
Year
(Millions)
2016
$
194.6

2017
170.4

2018
142.9

2019
116.4

2020
95.1

Thereafter
866.8

Total
$
1,586.2



17


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


4. Long-term Debt and Lease Obligations:

Windstream Holdings has no debt obligations. All debt, including the senior secured credit facility described below, have been incurred by Windstream Services and its subsidiaries. Windstream Holdings is neither a guarantor of nor subject to the restrictive covenants imposed by such debt.

Long-term debt was as follows at:
(Millions)
 
September 30,
2015

 
December 31,
2014

Issued by Windstream Services:
 
 
 
 
Senior secured credit facility, Tranche A3 – variable rates, due December 30, 2016 (a)
 
$
—

 
$
344.3

Senior secured credit facility, Tranche A4 – variable rates, due August 8, 2017 (a)
 
—

 
255.0

Senior secured credit facility, Tranche B4 – variable rates, due January 23, 2020 (a)
 
—

 
1,318.1

Senior secured credit facility, Tranche B5 – variable rates, due August 8, 2019
 
579.7

 
584.1

Senior secured credit facility, Revolving line of credit – variable rates, due
   April 24, 2020
 
785.0

 
625.0

Debentures and notes, without collateral:
 
 
 
 
2017 Notes – 7.875%, due November 1, 2017 (b)
 
942.3

 
1,100.0

2018 Notes – 8.125%, due September 1, 2018
 
—

 
400.0

2020 Notes – 7.750%, due October 15, 2020
 
700.0

 
700.0

2021 Notes – 7.750%, due October 1, 2021 (b)
 
920.4

 
950.0

2022 Notes – 7.500%, due June 1, 2022 (b)
 
493.5

 
500.0

2023 Notes – 7.500%, due April 1, 2023 (b)
 
540.1

 
600.0

2023 Notes – 6.375%, due August 1, 2023
 
700.0

 
700.0

Issued by subsidiaries of Windstream Services:
 
 
 
 
Windstream Holdings of the Midwest, Inc. – 6.75%, due April 1, 2028
 
100.0

 
100.0

Cinergy Communications Company – 6.58%, due January 1, 2022
 
—

 
1.9

Debentures and notes, without collateral:
 
 
 
 
PAETEC 2018 Notes – 9.875%, due December 1, 2018
 
—

 
450.0

Premium on long-term debt, net
 
4.4

 
23.3

Unamortized debt issuance costs
 
(66.1
)
 
(87.7
)
 
 
5,699.3

 
8,564.0

Less current maturities
 
(5.9
)
 
(717.5
)
Total long-term debt
 
$
5,693.4

 
$
7,846.5


(a)
Debt obligation was retired in connection with completion of the debt-for-debt exchange (see Note 2).

(b)
During the third quarter of 2015, Windstream Services repurchased in the open market a portion of this debt obligation.
    
Senior Secured Credit Facility

Revolving Line of Credit - On April 24, 2015, Windstream Services amended the revolving line of credit and extended its maturity from December 17, 2015 to April 24, 2020. During the first nine months of 2015, Windstream Services borrowed $1,620.0 million under the revolving line of credit in its senior secured credit facility and through completion of the debt-for-debt exchange and repayments retired $1,460.0 million of these borrowings through September 30, 2015. Letters of credit are deducted in determining the total amount available for borrowing under the revolving line of credit. Accordingly, the total amount outstanding under the letters of credit and the indebtedness incurred under the revolving line of credit may not exceed $1,250.0 million. Considering letters of credit of $23.1 million, the amount available for borrowing under the revolving line of credit was $441.9 million at September 30, 2015.

18


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


4. Long-term Debt and Lease Obligations, Continued:

During the first nine months of 2015, the variable interest rate on the revolving line of credit ranged from 2.19 percent to 4.50 percent, and the weighted average rate on amounts outstanding was 2.44 percent during the period. Comparatively, the variable interest rate ranged from 2.41 percent to 4.50 percent during the first nine months of 2014, with a weighted average rate on amounts outstanding during the period of 2.51 percent.

Debentures and Notes Repaid in 2015
Partial Repurchase of Senior Notes - In August 2015, Windstream Services’ board of directors authorized a debt repurchase program pursuant to which Windstream Services may purchase or redeem up to $300.0 million of any of its unsecured notes through one or more open market purchase offers, tender offers, privately negotiated transactions, or other purchase transactions, with the amount of such purchases funded by either borrowings under the revolving line of credit, new term loans under the senior secured credit facility, or a combination thereof. During the third quarter of 2015, Windstream Services repurchased in the open market $253.7 million aggregate principal amount of its senior unsecured notes consisting of the following:

•
$157.7 million aggregate principal amount of 7.875 percent senior unsecured notes due November 1, 2017, (the “2017 Notes) at a repurchase price of $168.7 million, including accrued and unpaid interest;

•
$29.6 million aggregate principal amount of 7.750 percent senior unsecured notes due October 1, 2021, (the “2021 Notes), at a repurchase price of $25.8 million, including accrued and unpaid interest;

•
$6.5 million aggregate principal amount of 7.500 percent senior unsecured notes due June 1, 2022, (the “2022 Notes), at a repurchase price of $5.3 million, including accrued and unpaid interest; and

•
$59.9 million aggregate principal amount of 7.500 percent senior unsecured notes due April 1, 2023, (the “2023 Notes) at a repurchase price of $50.2 million, including accrued and unpaid interest.

At the time of repurchase, there was $3.3 million in unamortized net discount and debt issuance costs related to the repurchased notes. The repurchases were funded utilizing available borrowings under the amended revolving line of credit.

2018 Notes - On May 27, 2015, Windstream Services redeemed all of its $400.0 million aggregate principal amount of 8.125 percent senior unsecured notes due September 1, 2018 (the “2018 Notes”), at a redemption price payable in cash equal to $1,040.63 per $1,000 principal amount of the notes, plus accrued and unpaid interest. At the time of redemption, there was $1.4 million and $4.0 million in unamortized discount and debt issuance costs, respectively, related to the 2018 Notes.

PAETEC 2018 Notes - On May 27, 2015, PAETEC Holding, LLC (“PAETEC”), a direct, wholly-owned subsidiary of Windstream Services, redeemed all $450.0 million of the outstanding aggregate principal amount of 9.875 percent notes due 2018 (the “PAETEC 2018 Notes”), at a redemption price payable in cash equal to $1,049.38 per $1,000 principal amount of the notes, plus accrued and unpaid interest. At the time of redemption, there was $16.9 million in unamortized premium related to the PAETEC 2018 Notes.

Windstream used a portion of the $1.035 billion cash payment received from CS&L in conjunction with the spin-off of certain telecommunication network assets to redeem these two debt obligations (see Note 2).
 
Cinergy Communications Company - On April 24, 2015, Windstream Services repaid all $1.9 million of the outstanding aggregate principal amount of these unsecured notes utilizing available borrowings under the amended revolving line of credit.

Debt Compliance

The terms of Windstream Services’ credit facility and indentures include customary covenants that, among other things, require maintenance of certain financial ratios and restrict Windstream Services’ ability to incur additional indebtedness. These financial ratios include a maximum leverage ratio of 4.5 to 1.0 and a minimum interest coverage ratio of 2.75 to 1.0. In addition, the covenants include restrictions on dividend and certain other types of payments. As of September 30, 2015, Windstream Services was in compliance with all of these covenants.


19


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


4. Long-term Debt and Lease Obligations, Continued:

In addition, certain of Windstream Services’ debt agreements contain various covenants and restrictions specific to the subsidiary that is the legal counterparty to the agreement. Under Windstream Services’ long-term debt agreements, acceleration of principal payments would occur upon payment default, violation of debt covenants not cured within 30 days, a change in control including a person or group obtaining 50 percent or more interest in Windstream Services, or breach of certain other conditions set forth in the borrowing agreements. Windstream Services and its subsidiaries were in compliance with these covenants as of September 30, 2015.

Maturities for long-term debt outstanding as of September 30, 2015, excluding $4.4 million of unamortized net premium and $66.1 million of unamortized debt issuance costs, were as follows:
Twelve month period ended:
(Millions)
September 30, 2016
$
5.9

September 30, 2017
5.9

September 30, 2018
948.2

September 30, 2019
562.0

September 30, 2020
785.0

Thereafter
3,454.0

Total
$
5,761.0


Gain (Loss) on Extinguishment of Debt

Under the debt repurchase program previously discussed, Windstream Services repurchased in the open market certain of its senior unsecured notes representing an aggregate principal amount of $253.7 million. The partial repurchase was accounted for under the extinguishment method of accounting, and as a result, Windstream Services recognized a pretax gain of $7.6 million during the third quarter of 2015.

In conjunction with the spin-off, Windstream completed a debt-for-debt exchange retiring $1.7 billion aggregate principal amount of borrowings outstanding under Tranches A3, A4 and B4 of Windstream Services’ senior credit facility and $752.2 million aggregate principal amount of borrowings outstanding under the revolving line of credit. Following the completion of the debt-for-debt exchange, Windstream Services repaid the remaining $241.8 million aggregate principal amount of borrowings under Tranche B4. The debt-for-debt exchange and repayment were accounted for under the extinguishment method of accounting and, as a result, Windstream Services recognized a loss due to the extinguishment of the aforementioned debt obligations of $15.9 million.

As previously discussed, Windstream Services retired all $400.0 million of the outstanding 2018 Notes and all $450.0 million of the PAETEC 2018 Notes using a portion of the cash payment received from CS&L in conjunction with the spin-off. The retirements were accounted for under the extinguishment method of accounting, and as a result, Windstream Services recognized losses due to the extinguishment of the aforementioned debt obligations during the second quarter of 2015.


20


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


4. Long-term Debt and Lease Obligations, Continued:

The gain (loss) on extinguishment of debt was as follows for the three and nine month periods ended September 30:
(Millions)