Quarterly Report






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 March 31, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-32422
WINDSTREAM CORPORATION
 (Exact name of registrant as specified in its charter)

DELAWARE
  
20-0792300
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
 
 
 
4001 Rodney Parham Road, Little Rock, Arkansas
  
72212
(Address of principal executive offices)
  
(Zip Code)
 
 
 
Registrant’s telephone number, including area code             (501) 748-7000                 
(Former name, former address and former fiscal year, if changed since last report)

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.  
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).
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):

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).

¨   YES   ý   NO   
Number of common shares outstanding as of April 30, 2013 - 592,761,683
 
 
 
 
 
 
The Exhibit Index is located on page 61.
  
 





Table of Contents


WINDSTREAM CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
 
 
Page No.
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
*
Item 3.
Defaults Upon Senior Securities
*
Item 4.
Mine Safety Disclosures
*
Item 5.
Other Information
*
Item 6.
 _____________
*
No reportable information under this item.





1



Table of Contents



WINDSTREAM CORPORATION
FORM 10-Q
PART I - FINANCIAL INFORMATION

Item 1 Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
Three Months Ended
March 31,
(Millions, except per share amounts)
 
2013

 
2012

Revenues and sales:
 
 
 
 
Service revenues:
 
 
 
 
Business
 
$
914.3

 
$
896.2

Consumer
 
328.1

 
335.9

Wholesale
 
151.9

 
183.5

Other
 
60.9

 
70.7

Total service revenues
 
1,455.2

 
1,486.3

Product sales
 
45.2

 
52.0

Total revenues and sales
 
1,500.4

 
1,538.3

Costs and expenses:
 
 
 
 
Cost of services (exclusive of depreciation and amortization included below)
 
641.3

 
660.2

Cost of products sold
 
43.4

 
44.9

Selling, general and administrative
 
239.8

 
252.1

Depreciation and amortization
 
329.5

 
312.1

Merger and integration costs
 
5.1

 
22.3

Restructuring charges
 
4.9

 
0.9

Total costs and expenses
 
1,264.0

 
1,292.5

Operating income
 
236.4

 
245.8

Othe r income, ne t
 
2.3

 
6.6

(Loss) gain o n early extinguishment of debt
 
(13.8
)
 
1.9

Interest expense
 
(168.9
)
 
(156.5
)
Income from continuing operations before income taxes
 
56.0

 
97.8

Income taxes
 
3.7

 
37.3

Income from continuing operations
 
52.3

 
60.5

Discontinued operations
 

 
(0.1
)
Net income
 
$
52.3

 
$
60.4

Basic and diluted earnings per share:
 
 
 
 
From continuing operations
 

$.09

 

$.10

From discontinued operations
 

 

Net income
 

$.09

 

$.10











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

2




CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
Three Months Ended
March 31,
(Millions)
 
2013

 
2012

Net income
 
$
52.3

 
$
60.4

Other comprehensive (loss) income:
 
 
 
 
Interest rate swaps:
 
 
 
 
Changes in designated interest rate swaps
 
(0.5
)
 
(0.7
)
Amortization of unrealized losses on de-designated interest rate swaps
 
13.2

 
11.1

Income tax expense
 
(4.8
)
 
(4.0
)
Unrealized holding gains on interest rate swaps
 
7.9

 
6.4

Postretirement and pension plans:
 
 
 
 
Plan curtailment
 
(19.8
)
 

Amounts included in net periodic benefit cost:
 
 
 
 
Amortization of net actuarial loss
 
0.7

 
0.3

Amortization of prior service credits
 
(2.8
)
 
(3.1
)
Income tax benefit
 
8.3

 
1.1

Change in postretirement and pension plans
 
(13.6
)
 
(1.7
)
Other comprehensive (loss) income
 
(5.7
)
 
4.7

Comprehensive income
 
$
46.6

 
$
65.1

































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

3




CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Millions, except par value)
 
March 31,
2013

 
December 31,
2012

Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
54.4

 
$
132.0

Restricted cash
 
18.9

 
26.5

Accounts receivable (less allowance for doubtful
 
 
 
 
accounts of $38.8 and $42.6, respectively)
 
594.1

 
614.1

Inventories
 
71.4

 
75.0

Deferred income taxes
 
145.0

 
249.5

Prepaid income taxes
 
26.6

 
23.3

Prepaid expenses and other
 
204.2

 
179.7

Total current assets
 
1,114.6

 
1,300.1

Goodwill
 
4,340.9

 
4,340.9

Other intangibles, net
 
2,236.9

 
2,311.3

Net property, plant and equipment
 
5,858.2

 
5,862.7

Other assets
 
172.9

 
167.0

Total Assets
 
$
13,723.5

 
$
13,982.0

Liabilities and Shareholders’ Equity
 
 
 
 
Current Liabilities:
 
 
 
 
Current maturities of long-term debt and capital lease obligations
 
$
888.0

 
$
881.6

Current portion of interest rate swaps
 
28.6

 
29.0

Accounts payable
 
301.5

 
363.7

Advance payments and customer deposits
 
223.2

 
223.3

Accrued dividends
 
149.2

 
148.9

Accrued taxes
 
96.2

 
104.3

Accrued interest
 
160.8

 
113.6

Other current liabilities
 
257.4

 
304.0

Total current liabilities
 
2,104.9

 
2,168.4

Long-term debt and capital lease obligations
 
8,108.7

 
8,114.9

Deferred income taxes
 
1,815.2

 
1,896.3

Other liabilities
 
670.8

 
697.6

Total liabilities
 
12,699.6

 
12,877.2

Commitments and Contingencies (See Note 7)
 


 


Shareholders’ Equity:
 
 
 
 
Common stock, $0.0001 par value, 1,000.0 shares authorized,
 
 
 
 
592.7 and 588.2 shares issued and outstanding, respectively
 
0.1

 
0.1

Additional paid-in capital
 
1,023.1

 
1,098.3

Accumulated other comprehensive income
 
0.7

 
6.4

Retained earnings
 

 

Total shareholders’ equity
 
1,023.9

 
1,104.8

Total Liabilities and Shareholders’ Equity
 
$
13,723.5

 
$
13,982.0








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

4




CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended
March 31,
(Millions)
 
2013

 
2012

Cash Provided from Operations:
 
 
 
 
Net income
 
$
52.3

 
$
60.4

Adjustments to reconcile net income to net cash provided from operations:
 
 
 
 
Depreciation and amortization
 
329.5

 
312.1

Provision for doubtful accounts
 
16.1

 
14.7

Share-based compensation expense
 
12.4

 
7.4

Deferred income taxes
 
26.9

 
35.8

Unamortized net premium on retired debt
 
(38.7
)
 
(16.2
)
Amortization of unrealized losses on de-designated interest rate swaps
 
13.2

 
11.1

Plan curtailment and other, net
 
(22.6
)
 
(13.1
)
Changes in operating assets and liabilities, net
 
 
 
 
Accounts receivable
 
3.9

 
(9.9
)
Income tax receivable
 

 
121.1

Prepaid income taxes
 
(3.3
)
 
(1.0
)
Prepaid expenses and other
 
(25.6
)
 
(56.9
)
Accounts payable
 
(69.2
)
 
22.8

Accrued interest
 
47.2

 
10.0

Accrued taxes
 
(8.1
)
 
(14.7
)
Other current liabilities
 
(31.6
)
 
(42.3
)
Other liabilities
 
(16.1
)
 
(6.3
)
Other, net
 
18.3

 
3.8

Net cash provided from operations
 
304.6

 
438.8

Cash Flows from Investing Activities:
 
 
 
 
Additions to property, plant and equipment
 
(243.5
)
 
(226.1
)
Broadband network expansion funded by stimulus grants
 
(11.9
)
 
(12.0
)
Changes in restricted cash
 
7.6

 
(3.9
)
Grant funds received for broadband stimulus projects
 
13.3

 
6.7

Disposition of wireless assets
 

 
57.0

Other, net
 

 
2.6

Net cash used in investing activities
 
(234.5
)
 
(175.7
)
Cash Flows from Financing Activities:
 
 
 
 
Dividends paid on common shares
 
(148.1
)
 
(146.5
)
Repayment of debt and swaps
 
(2,164.9
)
 
(774.4
)
Proceeds of debt issuance
 
2,195.0

 
505.0

Debt issuance costs
 
(19.6
)
 
(2.2
)
Payment under capital lease obligations
 
(4.0
)
 
(5.4
)
Other, net
 
(6.1
)
 
(2.4
)
Net cash used in financing activities
 
(147.7
)
 
(425.9
)
Decrease in cash and cash equivalents
 
(77.6
)
 
(162.8
)
Cash and Cash Equivalents:
 
 
 
 
Beginning of period
 
132.0

 
227.0

End of period
 
$
54.4

 
$
64.2

Supplemental Cash Flow Disclosures:
 
 
 
 
Interest paid
 
$
105.2

 
$
139.0

Income taxes paid (refunded), net
 
$
0.5

 
$
(120.1
)
Non-cash investing activities:
 
 
 
 
Equipment acquired under capital leases
 
$
7.0

 
$











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

5




CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(Millions, except per share amounts)
 
Common Stock
and Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
Balance at December 31, 2012
 
$
1,098.4

 
$
6.4

 
$

 
$
1,104.8

Net income
 

 

 
52.3

 
52.3

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
Change in postretirement and pension plans
 

 
(13.6
)
 

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

 
8.2

 

 
8.2

Changes in designated interest rate swaps
 

 
(0.3
)
 

 
(0.3
)
Comprehensive income
 

 
(5.7
)
 
52.3

 
46.6

Share-based compensation expense
 
6.7

 

 

 
6.7

Stock options exercised
 
0.3

 

 

 
0.3

Stock issued to 401(k) plan
 
20.4

 

 

 
20.4

Taxes withheld on vested restricted stock and other
 
(6.6
)
 

 

 
(6.6
)
Dividends of $0.25 per share declared to stockholders
 
(96.0
)
 

 
(52.3
)
 
(148.3
)
Balance at March 31, 2013
 
$
1,023.2

 
$
0.7

 
$

 
$
1,023.9




































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

6




NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  

1. Background and Basis for Presentation:

Unless the context requires otherwise, the use of the terms "Windstream," "we," "us" and "our" in this Quarterly Report on Form 10-Q refers to Windstream Corporation and its consolidated subsidiaries.

Description of the Business – We are a leading provider of advanced communications and technology solutions, including managed services and cloud computing, to businesses nationwide. In addition to business services, we offer broadband, voice and video services to consumers in primarily rural markets. We have operations in 48 states and the District of Columbia, a local and long-haul fiber network spanning approximately 115,000 miles, a robust business sales division and 23 data centers offering managed services and cloud computing.

Business service revenues include revenues from integrated voice and data services, advanced data, traditional voice and long-distance services to enterprise and small-business customers, and revenues from other carriers for special access circuits and fiber connections. Consumer service revenues are generated from the provision of high-speed Internet, voice and video services to consumers. Wholesale service revenues include switched access revenues, Universal Service Fund ("USF") revenues and voice and data services sold on a wholesale basis. Other service revenues include USF surcharge revenues, revenues from software, other miscellaneous services and consumer revenues generated in markets where we lease the connection to the customer premise, and we no longer offer new consumer service in those areas.

Basis of Presentation – The accompanying unaudited consolidated financial statements have been prepared based upon Securities and Exchange Commission ("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, 2012 , 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, 2012, which was filed with the SEC on February 20, 2013 .

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.

Revision of Prior Period Financial Statements In connection with the preparation of our consolidated financial statements for the year ended December 31, 2012 , we became aware of and corrected an error in the accounting for certain promotional credits for new consumer customers. We have retrospectively adjusted financial information for all prior periods presented to reflect this correction. These errors were non-cash and did not affect our total operating cash flow for any period. We have concluded that the effect is immaterial to the unaudited quarterly financial information. See Notes 2 and 18 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012 .


7

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


1. Background and Basis for Presentation, Continued:

The following table presents the effects of the revision on our Consolidated Statements of Income for the quarter ended March 31, 2012:
(Millions, except per share amounts)
 
As Previously Reported
 
Effect of
Revision
 
As Revised
Consumer service revenues
 
$
338.0

 
$
(2.1
)
 
$
335.9

Total service revenues
 
1,488.4

 
(2.1
)
 
1,486.3

Product sales
 
56.8

 
(4.8
)
 
52.0

Total revenues and sales
 
1,545.2

 
(6.9
)
 
1,538.3

Income taxes
 
40.0

 
(2.7
)
 
37.3

Income from continuing operations
 
64.7

 
(4.2
)
 
60.5

Net income
 
64.6

 
(4.2
)
 
60.4

Basic and diluted earnings per share:
 
 
 
 
 
 
   Net income
 

$.11

 

($.01
)
 

$.10


Additionally, certain prior year amounts have been reclassified to conform to the current year financial statement presentation. These reclassifications did not impact net or comprehensive income.

2. Summary of Significant Accounting Policies and Changes:

Significant Accounting Policies

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. We have acquired identifiable intangible assets through our acquisitions. 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 is 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 1 st of each year. Goodwill is tested at the reporting unit level, which 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. Effective January 1, 2013, we determined that we have one reporting unit, which includes all Windstream operations, to test for impairment. We assessed impairment of our goodwill based upon step one of the authoritative guidance by evaluating the carrying value of our shareholders' equity against the current fair market value of our outstanding equity, where the fair market value of our equity is equal to our current market capitalization plus a control premium estimated to be 20.0 percent . The fair market value of our equity, both including and excluding the control premium, exceed our carrying value as of January 1, 2013. As a result, goodwill is considered not impaired and the second step of the impairment test is unnecessary.

Recently Adopted Accounting Standards

Balance Sheet Offsetting – Effective January 1, 2013, we adopted authoritative guidance related to balance sheet offsetting. This guidance requires enhanced disclosures for financial instruments and derivative instruments that are subject to an enforceable master netting arrangement. Other than the additional disclosure requirements, the adoption of these changes had no impact on our consolidated financial statements. See Note 5 for the required disclosures.


8



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


2. Summary of Significant Accounting Policies and Changes, Continued:

Comprehensive Income – Effective January 1, 2013, we adopted authoritative guidance requiring additional disclosure of the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in our consolidated statements of income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. Other than the additional disclosure requirements, the adoption of these changes had no impact on our consolidated financial statements. See Note 10 for the required disclosures.

Recently Issued Authoritative Guidance

Liabilities – In February 2013, the FASB issued authoritative guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors plus any additional amount the reporting entity expects to pay on behalf of its co-obligors. This guidance requires disclosure of the nature and amount of the obligations, as well as other information about the obligations. This guidance is effective for fiscal years beginning on or after December 15, 2013, including interim periods therein and requires retrospective application. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
   
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.

As of January 1, 2013, we completed our annual impairment review of goodwill in accordance with authoritative guidance and determined that no write-down in carrying value was required. As discussed in Note 2, effective January 1, 2013, we have determined that we have one reporting unit to test for impairment. We assess goodwill impairment by evaluating the carrying value of shareholder’s equity against the current fair market value of outstanding equity, which is determined to be equal to our current market capitalization plus a control premium of 20.0 percent . This premium is estimated through a review of recent market observable transactions involving telecommunication companies.

Intangible assets were as follows at:
   
 
March 31, 2013
 
December 31, 2012
(Millions)
 
Gross
Cost
 
Accumulated
Amortization
 
Net Carrying
Value
 
Gross
Cost
 
Accumulated
Amortization
 
Net Carrying
Value
Franchise rights
 
$
1,285.1

 
$
(168.3
)
 
$
1,116.8

 
$
1,285.1

 
$
(157.6
)
 
$
1,127.5

Customer lists
 
1,914.0

 
(810.3
)
 
1,103.7

 
1,914.0

 
(747.6
)
 
1,166.4

Cable franchise rights
 
39.8

 
(26.2
)
 
13.6

 
39.8

 
(25.9
)
 
13.9

Other
 
37.9

 
(35.1
)
 
2.8

 
37.9

 
(34.4
)
 
3.5

Balance
 
$
3,276.8

 
$
(1,039.9
)
 
$
2,236.9

 
$
3,276.8

 
$
(965.5
)
 
$
2,311.3

 
Amortization expense for intangible assets subject to amortization was $74.4 million and $88.1 million for the three month periods ended March 31, 2013 and 2012 , respectively. Amortization expense for intangible assets is expected to be $216.7 million for the remainder of 2013 . Amortization expense for intangible assets subject to amortization is estimated to be $256.2 million , $223.1 million , $185.0 million , $157.2 million and $130.2 million in 2014 , 2015 , 2016 , 2017 and 2018 , respectively.

9



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


4. Long-term Debt and Capital Lease Obligations:

Long-term debt and capital lease obligations were as follows at:
(Millions)
 
March 31,
2013

 
December 31,
2012

Issued by Windstream Corporation:
 
 
 
 
Senior secured credit facility, Tranche A2 – variable rates, due July 17, 2013
 
$

 
$
19.5

Senior secured credit facility, Tranche A3 – variable rates, due December 30, 2016
 
403.5

 
408.8

Senior secured credit facility, Tranche A4 – variable rates, due August 8, 2017
 
288.7

 
292.5

Senior secured credit facility, Tranche B – variable rates, due July 17, 2013
 

 
280.9

Senior secured credit facility, Tranche B2 – variable rates, due December 17, 2015
 

 
1,042.9

Senior secured credit facility, Tranche B3 – variable rates, due August 8, 2019
 
595.5

 
597.0

Senior secured credit facility, Tranche B4 – variable rates, due January 23, 2020
 
1,341.6

 

Debentures and notes, without collateral:
 
 
 
 
2013 Notes – 8.125%, due August 1, 2013
 
800.0

 
800.0

2017 Notes – 7.875%, due November 1, 2017
 
1,100.0

 
1,100.0

2018 Notes – 8.125%, due September 1, 2018
 
400.0

 
400.0

2019 Notes – 7.000%, due March 15, 2019
 
500.0

 
500.0

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

 
700.0

2021 Notes – 7.750%, due October 1, 2021
 
450.0

 
450.0

2022 Notes – 7.500%, due June 1, 2022
 
500.0

 
500.0

2023 Notes – 7.500%, due April 1, 2023
 
600.0

 
600.0

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

 

Issued by subsidiaries of the Company:
 
 
 
 
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
 
2.1

 
2.1

PAETEC 2017 Notes – 8.875%, due June 30, 2017
 

 
650.0

Debentures and notes, without collateral:
 
 
 
 
Windstream Georgia Communications LLC – 6.50%, due November 15, 2013
 
10.0

 
10.0

PAETEC 2018 Notes – 9.875%, due December 1, 2018
 
450.0

 
450.0

Capital lease obligations
 
36.7

 
30.7

Premium on long-term debt, net
 
18.6

 
62.1

 
 
8,996.7

 
8,996.5

Less current maturities
 
(888.0
)
 
(881.6
)
Total long-term debt and capital lease obligations
 
$
8,108.7

 
$
8,114.9

 
Senior Secured Credit Facility

On January 23, 2013, we incurred new borrowings of $1,345.0 million of Tranche B4 senior secured credit facility due January 23, 2020; the proceeds of which were used to repay $19.5 million of the credit facility Tranche A2 and $280.9 million Tranche B term loans due in July 2013 and $1,042.9 million of the credit facility Tranche B2 term loans due in December 2015, plus accrued interest. Debt issuance costs associated with the new borrowings were $11.9 million . Of this amount, $5.7 million was recorded in other assets on the balance sheet and will be amortized into interest expense over the life of the borrowings. The remaining $6.2 million of debt issuance costs were recorded to interest expense in the first quarter of 2013 under modification accounting.

Revolving line of credit - During the first three months of 2013 , we borrowed $150.0 million under the revolving line of credit in our senior secured credit facility and later repaid $150.0 million . 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


10



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


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

credit and the indebtedness incurred under the revolving line of credit may not exceed $1,250.0 million . Considering letters of credit of $15.7 million , the amount available for borrowing under the revolving line of credit was $1,234.3 million at March 31, 2013 .

The variable interest rate on our revolving line of credit was 4.50 percent and the weighted average rate on amounts outstanding was 4.50 percent during the first three months of 2013 , as compared to variable interest rates during the first three months of 2012 , which ranged from 2.50 percent to 4.50 percent with a weighted average rate on amounts outstanding of 2.54 percent . All $1,250.0 million available under the revolving line of credit will expire December 17, 2015.

Debentures and notes, without collateral

2023 Notes - On January 23, 2013, we completed the private placement of $700.0 million in aggregate principal amount of 6.375 percent senior unsecured notes due August 1, 2023 , at an issue price at par to yield 6.375 percent ("the 2023 Notes"). Proceeds from the private placement, together with available cash were used to pay the consideration for the tender offer and consent solicitation announced by Windstream on January 8, 2013 to purchase for cash any and all of the outstanding 8.875 percent notes due June 30, 2017 (" PAETEC 2017 Notes"), which we acquired in connection with our acquisition of PAETEC, together with related fees and expenses. The remaining net proceeds of the notes offering, together with available cash, were used to redeem all of the remaining outstanding PAETEC Notes. Interest is paid semi-annually. Debt issuance costs associated with the new borrowings were $13.9 million , which were recorded in other assets on the balance sheet and will be amortized into interest expense over the life of the borrowings.

Notes Issued by Subsidiaries

PAETEC 2017 Notes - In connection with our acquisition of PAETEC Holding Corp ("PAETEC") on November 30, 2011 , we assumed PAETEC 2017 Notes with an aggregate principal amount of $650.0 million . Interest is payable semi-annually.

On January 8, 2013, we announced a tender offer to purchase for cash any and all of the outstanding $650.0 million aggregate principal amount of PAETEC 2017 Notes. As of February 6, 2013 , approximately $588.5 million outstanding of the PAETEC 2017 Notes had been tendered. On or prior to the early tender deadline of January 22, 2013, we paid total consideration of $1,080 per 1,000 aggregate principal amount of PAETEC 2017 Notes, which included a $30 early tender payment, plus accrued and unpaid interest. For the period beginning after the early tender deadline, but on or prior to the expiration date, we paid total consideration of $1,050 per 1,000 aggregate principal amount of PAETEC 2017 Notes plus accrued and unpaid interest. We settled the redemption of the remaining $61.5 million outstanding principal amount at a price equal to 100 percent of the remaining principal thereof, plus the applicable premium, and accrued and unpaid interest on February 25, 2013.

Premium on Long-term Debt, Net of Discounts

The premium on long-term debt, net of discounts is primarily due to the debt issuance premium recorded on the debt acquired in the PAETEC acquisition, partially offset by the net discount recorded on debt in the table above. The premium and discount balances are amortized over the life of the related debt instrument.

Debt Compliance

The terms of our credit facility and indentures include customary covenants that, among other things, require us to maintain certain financial ratios and restrict our ability to incur additional indebtedness. These financial ratios include a maximum leverage ratio of 4.50 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. The terms of the indentures assumed in connection with the acquisition of PAETEC include restrictions on the ability of the subsidiary to incur additional indebtedness, including a maximum leverage ratio, with the most restrictive being 4.75 to 1.0 . As of March 31, 2013 , we were in compliance with all of our covenants.

In addition, certain of our debt agreements contain various covenants and restrictions specific to the subsidiary that is the legal counterparty to the agreement. Under our 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 of our outstanding voting stock, or breach of certain other conditions set forth in the borrowing agreements. We were in compliance with these covenants as of March 31, 2013 .


11



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


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

Maturities for debt outstanding, excluding capital lease obligations, as of March 31, 2013 for each of the twelve month periods ended March 31 , 2014 , 2015 , 2016 , 2017 and 2018 were $871.4 million , $88.8 million , $92.6 million , $340.1 million and $1,307.1 million , respectively.

(Loss) Gain on Extinguishment of Debt

During the three month period ended March 31, 2013 , we retired all $650.0 million of the outstanding PAETEC 2017 Notes. The PAETEC 2017 Notes were purchased using proceeds of the 2023 Notes. We also amended our senior secured credit facility including issuance of Tranche B4, the proceeds of which were used to repay Tranche A2, Tranche B and Tranche B2 during the first quarter. The retirements and a portion of the credit facility amendment were accounted for under the extinguishment method, and as a result, we recognized a loss on extinguishment of debt of $13.8 million during the three month period ended March 31, 2013 .

During 2012 , we retired all $300.0 million of the outstanding 9.500 percent notes due July 15, 2015 ("PAETEC 2015 Notes"). The PAETEC 2015 Notes were purchased using borrowings on our revolving line of credit. The retirements were accounted for under the extinguishment method, and as a result, we recognized a gain on extinguishment of debt of $1.9 million during the three month period ended March 31, 2012 .

The (loss) gain on extinguishment of debt is as follows for the three month periods ended March 31 :
(Millions)
 
2013

 
2012

Senior secured credit facility:
 
 
 
 
Unamortized debt issuance costs on original issuance
 
$
(2.5
)
 
$

Loss on early extinguishment for senior secured credit facility
 
(2.5
)
 

PAETEC 2017 Notes:
 
 
 

Premium on early redemption
 
(51.5
)
 

Third-party fees for early redemption
 
(1.0
)
 

Unamortized premium on original issuance
 
41.2

 

Loss on early extinguishment for PAETEC 2017 Notes
 
(11.3
)
 

PAETEC 2015 Notes:
 
 
 
 
Premium on early redemption
 

 
(14.3
)
Unamortized premium on original issuance
 

 
16.2

Gain on early extinguishment for PAETEC 2015 Notes
 

 
1.9

Total (loss) gain on early extinguishment of debt
 
$
(13.8
)
 
$
1.9


Interest Expense

Interest expense was as follows for the three month periods ended March 31 :
(Millions)
 
 
2013

 
2012

Interest expense related to long-term debt
 
 
$
154.1

 
$
143.1

Impacts of interest rate swaps
 
 
15.9

 
14.2

Interest on capital leases and other
 
 
0.7

 
1.0

Less capitalized interest expense
 
 
(1.8
)
 
(1.8
)
Total interest expense
 
 
$
168.9

 
$
156.5



12



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


5. Derivatives:

We enter into interest rate swap agreements to mitigate the interest rate risk inherent in our variable rate senior secured credit facility. We account for our derivative instruments using authoritative guidance for recognition, measurement and disclosures about derivative instruments and hedging activities, including when a derivative or other financial instrument can be designated as a hedge. This guidance requires recognition of all derivative instruments at fair value, and accounting for the changes in fair value depends on whether the derivative has been designated as, qualifies as and is effective as a hedge. We record changes in fair value of the effective portions of cash flow hedges as a component of other comprehensive (loss) income in the current period. Any ineffective portion of our hedges is recognized in earnings in the current period.

In 2006, we entered into four pay fixed, receive variable interest rate swap agreements to serve as cash flow hedges of the interest rate risk inherent in our senior secured credit facility. We renegotiated the four interest rate swap agreements on December 3, 2010, and again on August 21, 2012, each time lowering the fixed interest rate paid and extending the maturity.

As a result of the August 21, 2012 transaction, we reduced our fixed interest rate paid from 4.553 percent to 3.391 percent effective October 17, 2012. The fixed interest rate paid includes a component which serves to settle the liability existing on our swaps at the time of the transaction. The variable rate received resets on the seventeenth day of each month to the one-month London Interbank Offered Rate ("LIBOR"). Our swaps had a notional value of $925.0 million as of March 31, 2013 , which will amortize down to $900.0 million on July 17, 2013, where they will remain until maturity on October 17, 2019.

The current swaps are designated as cash flow hedges of the benchmark LIBOR interest rate risk created by the variable rate cash flows paid on our senior secured credit facility, which have varying maturity dates from December 30, 2016 to January 23, 2020 . We are hedging probable variable cash flows which extend up to four years beyond the maturity of certain components of our variable rate debt. Consistent with past practice, we expect to extend or otherwise replace these components of our debt with variable rate debt.

We recognize all derivative instruments at fair value in the accompanying consolidated balance sheets as either assets or liabilities, depending on the rights or obligations under the related contracts.

Set forth below is information related to our interest rate swap agreements:
(Millions, except for percentages)
 
March 31,
2013

 
December 31,
2012

Designated portion, measured at fair value:
 
 
 
 
Other current liabilities
 
$
28.6

 
$
29.0

Other non-current liabilities
 
$
86.2

 
$
91.2

Accumulated other comprehensive loss
 
$
(0.5
)
 
$
(14.7
)
De-designated portion, unamortized value:
 
 
 
 
Accumulated other comprehensive loss
 
$
(47.5
)
 
$
(45.9
)
Weighted average fixed rate paid
 
3.39
%
 
4.26
%
Variable rate received
 
0.20
%
 
0.21
%

We assess our derivatives for effectiveness each quarter and recognized a $1.2 million increase to earnings, reflected in other income, net related to ineffectiveness of our cash flow hedges for the three month period ended March 31, 2013 .

Our swaps are off-market swaps, meaning they contain an embedded financing element. Our swap counterparties recover this financing through an incremental charge in our fixed rate over what we would be charged for an on-market swap. As such, a portion of our swaps' cash payment is representing the rate we would pay on a hypothetical on-market interest rate swap and is recognized in interest expense. The remainder represents the repayment of the embedded financing element and reduces our swap liability.


13



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


5. Derivatives, Continued:

All or a portion of the change in fair value of our interest rate swap agreements recorded in accumulated other comprehensive income may be recognized in earnings in certain situations. If we extinguish all of our variable rate debt, or a portion of our variable rate debt such that our variable rate interest received on our swaps exceeds the variable rate interest paid on our debt, we would recognize in earnings all or portion of the change in fair value of our swaps. In addition, we may recognize the change in fair value of our swaps in earnings if we determine it is no longer probable that we will have future variable rate cash flows to hedge against or if a swap agreement is terminated prior to maturity. We have assessed our counterparty risk and determined that no substantial risk of default exists as of March 31, 2013 . Each counterparty is a bank with a current credit rating at or above A .

We expect to recognize losses of $12.6 million , net of taxes, in interest expense in the next twelve months related to the unamortized value of the de-designated portion of interest rate swap agreements at March 31, 2013 . Payments on our off-market swaps are presented in the financing activities section of our consolidated statements of cash flows.

Changes in value of these instruments were as follows for the three month periods ended March 31 :
(Millions)
 
2013

 
2012

Changes in fair value of effective portion, net of tax (a)
 
$
(0.3
)
 
$
(0.4
)
Amortization of unrealized losses on de-designated interest rate swaps, net of tax (a)
 
$
8.2

 
$
6.8


(a)
Included as a component of other comprehensive (loss) income and will be reclassified into earnings as the hedged transaction affects earnings.

Balance Sheet Offsetting

We are party to master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions, with counterparties. We do not, however, offset assets and liabilities under these arrangements for financial statement presentation purposes.

The following table presents the liabilities subject to an enforceable master netting arrangement as of March 31, 2013 and December 31, 2012. As of these dates, all of our swap agreements with our counterparties were in a liability position. Therefore, there were no assets to be recognized in the consolidated balance sheets.
(Millions)
Gross Amount of Recognized Liabilities
 
Net Amount of Liabilities presented in the Consolidated Balance Sheets
 
Net Amount
March 31, 2013:
 
 
 
 
 
Derivatives
$
114.8

 
$
114.8

 
$
114.8

 
 
 
 
 
 
December 31, 2012:
 
 
 
 
 
Derivatives
$
120.2

 
$
120.2

 
$
120.2







14



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


6. 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 transfer a liability in an orderly transaction between market participants. Authoritative guidance defines the following three tier hierarchy for assessing the inputs used in fair value measurements:

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 or liabilities
Level 3 – Unobservable inputs

The highest priority is given to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority is given to unobservable inputs (level 3 measurement). Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

Our non-financial assets and liabilities, including property, plant and equipment, goodwill, intangible assets and asset retirement obligations, are measured at fair value on a non-recurring basis. No event occurred during the three month period ended March 31, 2013 requiring these non-financial assets and liabilities to be subsequently recognized at fair value.

Our financial instruments consist primarily of cash and cash equivalents, restricted cash, accounts receivable, income tax receivable, accounts payable, long-term debt, capital lease obligations and interest rate swaps. The carrying amount of cash, restricted cash, accounts receivable and accounts payable was estimated by management to approximate fair value due to the relatively short period of time to maturity for those instruments. Cash equivalents, long-term debt and interest rate swaps are measured at fair value on a recurring basis.

The fair values of our interest rate swaps, long-term debt and capital lease obligations were determined using the following inputs at:
(Millions)
 
March 31,
2013

 
December 31,
2012

Level 1 measurements:
 
 
 
 
  Long-term debt, including current maturities (a)
 
$
5,964.3

 
$
6,140.5

Level 2 measurements:
 
 
 
 
Interest rate swaps (b) (See Note 5)
 
$
(114.8
)
 
$
(120.2
)
Long-term debt and capital lease obligations, including current maturities (a)
 
$
3,497.4

 
$
3,304.2

 
(a)
Recognized at carrying value of $8,996.7 million and $8,996.5 million in long-term debt, including current maturities and capital lease obligations, on the consolidated balance sheets as of March 31, 2013 and December 31, 2012 , respectively.

(b)
Recognized at fair value in current portion of interest rate swaps and other liabilities on the consolidated balance sheets as of March 31, 2013 and December 31, 2012 .

The fair values of our interest rate swaps are determined based on the present value of expected future cash flows using observable, quoted LIBOR swap rates for the full term of the swaps. We also incorporate credit valuation adjustments to appropriately reflect both our own non-performance risk and non-performance risk of the respective counterparties. As of March 31, 2013 and December 31, 2012 , the fair values of our interest rate swaps were reduced by $11.1 million and $16.1 million , respectively, to reflect non-performance risk.

The fair value of the corporate bonds was calculated based on quoted market prices of the specific issuances in an active market when available. The fair values of our other debt were estimated based on appropriate market interest rates being applied to this debt. In calculating the fair market value of the Windstream Holdings of the Midwest, Inc., an appropriate market price for the same or similar instruments in an active market is used considering credit quality, nonperformance risk and maturity of the instrument.


15



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


7. Commitments and Contingencies:
On June 22, 2009, a putative class action lawsuit was filed in Kentucky federal district court on behalf of current and former customers in Kentucky. The complaint alleged that we overcharged customers because we collected a gross receipts surcharge ("GRS") in violation of state and federal statutes and tariffs and common law. The court referred the state tariff issues to the Kentucky Public Service Commission ("Kentucky PSC"). In 2011, the federal court ruled that the GRS was a rate that should have been listed in our federal tariffs prior to its collection and that class certification was proper. Based on that ruling, in the third quarter 2011, we accrued an amount that was not material and that represented the amount of loss estimable and probable at the time. On May 4, 2012, the Kentucky PSC issued an order also finding the GRS was a rate that should have been in our local retail tariff before being assessed on certain types of services. We appealed the order to state court in Franklin County, Kentucky, primarily asserting that the Kentucky PSC erred in classifying the GRS as a rate. Additionally, on July 22, 2012, the federal court formally certified a class of all retail and wholesale Windstream customers assessed the GRS on services subject to our federal tariff. We filed an interlocutory appeal of the class certification with the Sixth Circuit. On November 1, 2012, the Sixth Circuit denied the appeal, holding that the matter was not ripe for a decision.
On March 29, 2013, we entered into a proposed class settlement and the settlement terms are subject to objections from individual class members and approval of the federal court. We anticipate court approval of the settlement terms this year. The final settlement is not expected to be material in excess of the amount we currently have accrued.

We are party to various other legal proceedings. Although the ultimate resolution of these various proceedings cannot be determined at this time, management does not believe that such proceedings, individually or in the aggregate, will have a material adverse effect on the future consolidated results of income, cash flows or our financial condition.
In addition, management is currently not aware of any environmental matters that, individually or in the aggregate, would have a material adverse effect on the consolidated financial condition or our results of operations.
 
8. Employee Benefit Plans and Postretirement Benefits:

We maintain a non-contributory qualified defined benefit pension plan. Future benefit accruals for all eligible nonbargaining employees covered by the pension plan ceased as of December 31, 2005 (December 31, 2010 for employees who had attained age 40 with two years of service as of December 31, 2005). We also maintain supplemental executive retirement plans that provide unfunded, non-qualified supplemental retirement benefits to a select group of management employees. Additionally, we provide postretirement healthcare and life insurance benefits for eligible employees. Employees share in, and we fund, the costs of these plans as benefits are paid.

The components of pension benefit income (including provision for executive retirement agreements) were as follows for the three month periods ended March 31 :
(Millions)
 
2013

 
2012

Benefits earned during the period
 
$
2.7

 
$
2.7

Interest cost on benefit obligation
 
13.1

 
14.5

Expected return on plan assets
 
(17.0
)
 
(18.3
)
Net periodic benefit income
 
$
(1.2
)
 
$
(1.1
)

The components of postretirement benefit income were as follows for the three month periods ended March 31 :
(Millions)
 
2013

 
2012

Interest cost on benefit obligation
 
$
0.4

 
$
0.5

Amortization of net actuarial loss
 
0.7

 
0.3

Amortization of prior service credit
 
(2.8
)
 
(3.1
)
Plan curtailment
 
(20.1
)
 

Net periodic benefit income
 
$
(21.8
)
 
$
(2.3
)


16



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


8. Employee Benefit Plans and Postretirement Benefits, Continued:

During the first quarter of 2013, we made changes to our postretirement medical plan, eliminating medical and prescription drug subsidies primarily for certain active participants effective January 1, 2014 . As a result, we remeasured the plan and recognized a curtailment gain of $20.1 million , of which $15.4 million was recognized in cost of services expenses and $4.7 million was recognized in selling, general and administrative expenses.

We contributed $0.3 million to the postretirement plan during the three month period ended March 31, 2013 , and expect to contribute an additional $2.8 million for postretirement benefits throughout the remainder of 2013, excluding amounts that will be funded by participant contributions to the plans.

We also recorded $5.7 million and $5.6 million in the three month period ended March 31, 2013 and 2012, respectively, related to the employee savings plan, which was included in cost of services and selling, general and administrative and other expenses in the consolidated statements of income. Additionally, we contributed $20.4 million of Windstream stock for the 2012 matching contribution during the three month period ended March 31, 2013.

9. Merger, Integration and Restructuring Charges:

We incur a significant amount of costs to complete a merger or acquisition and integrate its operations into our business, which are presented as merger and integration expense in our results of operations. These costs include transaction costs, such as accounting, legal and broker fees; severance and related costs; IT and network conversion; rebranding; and consulting fees. Our recent acquisitions of PAETEC Holding Corp ("PAETEC"), NuVox Inc. ("NuVox"), Iowa Telecommunications Services, Inc. ("Iowa Telecom"), Q-Comm Corporation ("Q-Comm") and Hosted Solutions Acquisitions, LLC ("Hosted Solutions"), (collectively known as the "Acquired Companies"), drive merger and integration costs for the years presented.

Restructuring charges are sometimes incurred as a result of evaluations of our operating structure. Among other things, these evaluations explore opportunities for task automation, network efficiency and the balancing of our workforce based on the current needs of our customers. Severance, lease exit costs and other related charges are included in restructuring charges.

The following is a summary of the merger, integration and restructuring charges recorded for the three month periods ended March 31 :
(Millions)
 
2013

 
2012

Merger and integration costs:
 
 
 
 
Transaction costs associated with acquisitions
 
$

 
$
8.7

Employee related transition costs
 
1.7

 
10.2

Information technology conversion costs
 
1.4

 
2.2

Rebranding, consulting and other costs
 
2.0

 
1.2

Total merger and integration costs
 
5.1

 
22.3

Restructuring charges
 
4.9

 
0.9

Total merger, integration and restructuring charges
 
$
10.0

 
$
23.2


Merger, integration and restructuring charges decreased net income $6.3 million and $14.3 million for the three month periods ended March 31, 2013 and 2012, respectively, giving consideration to tax benefits on deductible items.


17



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


9. Merger, Integration and Restructuring Charges, Continued:

The following is a summary of the activity related to the liabilities associated with our merger, integration and restructuring charges at March 31 :
(Millions)
 
2013

Balance, beginning of period
 
$
20.3

Merger, integration and restructuring charges
 
10.0

Cash outlays during the period
 
(17.1
)
Balance, end of period
 
$
13.2


As of March 31, 2013 , we had unpaid merger, integration and restructuring liabilities totaling $13.2 million , which consisted of $2.4 million of accrued severance costs primarily associated with the integration of the Acquired Companies, $3.1 million primarily associated with the restructuring announcement made on May 31, 2012, and $7.7 million related to other integration activities. Each of these payments will be funded through operating cash flows.

10. Accumulated Other Comprehensive Income:  

Accumulated other comprehensive income balances, net of tax, were as follows:
(Millions)
 
March 31,
2013

 
December 31,
2012

Pension and postretirement plans
 
$
30.3

 
$
43.9

Unrealized holding losses on interest rate swaps:
 
 
 
 
Designated portion
 
(0.3
)
 
(9.1
)
De-designated portion
 
(29.3
)
 
(28.4
)
Accumulated other comprehensive income
 
$
0.7

 
$
6.4


Changes in accumulated other comprehensive income balances, net of tax, were as follows:
(Millions)
 
Gains (Losses)
on Interest
Rate Swaps
 
Pension and
Postretirement
Plans
 
Total
Balance at December 31, 2012
 
$
(37.5
)
 
$
43.9

 
$
6.4

Other comprehensive losses before reclassifications
 
(0.3
)
 

 
(0.3
)
Amounts reclassified from other accumulated comprehensive income (a)
 
8.2

 
(13.6
)
 
(5.4
)
Balance at March 31, 2013
 
$
(29.6
)
 
$
30.3

 
$
0.7


(a)
See separate table below for details about these reclassifications.


18



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


10. Accumulated Other Comprehensive Income, Continued:
 
Reclassifications out of accumulated other comprehensive income were as follows for the three month periods ended March 31, 2013:
Details about
Accumulated Other
Comprehensive Income
Components
 
(Millions)
Amount
Reclassified from
Accumulated Other
Comprehensive Income
 
Affected Line Item
in the Consolidated
Statements of Income
Losses on interest rate swaps:
 
 
 
 
Amortization of unrealized losses on
de-designated interest rate swaps
 
$
13.2

 
Interest expense
 
 
13.2

 
Income from continuing
operations before income taxes
 
 
(5.0
)
 
Income taxes
 
 
8.2

 
Net income
Pension and postretirement plans:
 
 
 
 
Plan curtailment
 
(19.8
)
(a)
 
Amortization of net actuarial loss
 
0.7

(a)
 
Amortization of prior service credits
 
(2.8
)
(a)
 
 
 
(21.9
)
 
Income from continuing
operations before income taxes
 
 
8.3

 
Income taxes
 
 
(13.6
)
 
Net income
Total reclassification for the period, net of tax
 
$
(5.4
)
 
Net income

(a)
These accumulated other comprehensive income components are included in the computation of net periodic benefit income. See Note 8 for additional details.

19



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


11. Earnings per Share:

We compute basic earnings per share by dividing net income applicable to common shares by the weighted average number of common shares outstanding during each period. Our non-vested restricted shares containing a non-forfeitable right to receive dividends on a one-to-one per share ratio to common shares are considered participating securities, and the impact is included in the computation of basic earnings per share pursuant to the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings attributable to common shares and participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Earnings per common share was computed by dividing the sum of distributed earnings and undistributed earnings allocated to common
shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and non-vested restricted shares based on the pro-rata weighted average shares outstanding during the period.

We also issue performance-based restricted stock units as part of our share-based compensation plan. These restricted stock units contain a forfeitable right to receive dividends. Because dividends attributable to these shares are forfeited if the vesting provisions are not met, they are considered non-participating restricted shares and are not dilutive under the two class method until the performance conditions have been satisfied. As of March 31, 2013 , the performance conditions for the outstanding restricted stock units have not yet been satisfied. We considered the options granted in conjunction with the acquisition of PAETEC in the computation of dilutive earnings per share using the treasury stock method.

A reconciliation of net income and number of shares used in computing basic and diluted earnings per share was as follows for the three month periods ended March 31 :
(Millions, except per share amounts)
 
2013

 
2012

Basic and diluted earnings per share:
 
 
 
 
Numerator:
 
 
 
 
Income from continuing operations
 
$
52.3

 
$
60.5

Income from continuing operations allocable to participating securities
 
(1.1
)
 
(1.1
)
Adjusted income from continuing operations attributable to common shares
 
51.2

 
59.4

Loss from discontinued operations
 

 
(0.1
)
Loss from discontinued operations allocable to participating securities
 

 

Adjusted loss from discontinued operations attributable to common shares
 

 
(0.1
)
Net income attributable to common shares
 
$
51.2

 
$
59.3

Denominator:
 
 
 
 
Basic shares outstanding
 
 
 
 
  Weighted average basic shares outstanding
 
590.4

 
587.6

  Weighted average participating securities
 
(3.8
)
 
(3.9
)
  Weighted average shares outstanding for basic earnings per share
 
586.6

 
583.7

Basic and diluted earnings per share:
 
 
 
 
From continuing operations
 

$.09

 

$.10

From discontinued operations
 

 

Net income
 

$.09

 

$.10


The calculation of basic earnings per share excludes income attributable to participating non-vested restricted shares from the numerator and excludes the dilutive impact of participating non-vested restricted shares from the denominator.


20



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


12. Share-Based Compensation Plans:

Under the Amended and Restated 2006 Equity Incentive Plan (the "Incentive Plan"), we may issue a maximum of 20.0 million equity stock awards in the form of restricted stock, restricted stock units, stock appreciation rights or stock options. Restricted stock, restricted stock units and stock appreciation rights were limited to 18.5 million of the total awards issuable under the Incentive Plan. As of March 31, 2013 , the Incentive Plan had remaining capacity of 6.0 million awards, of which 4.5 million were issuable in the form of restricted stock, restricted stock units or stock appreciation rights. As of March 31, 2013 , we had additional remaining capacity of 2.5 million awards from a similar equity incentive plan acquired in the PAETEC acquisition. The cost of each award is determined based on the fair value of the shares on the date of grant and is fully expensed over the vesting period.

On February 5, 2013 , our Board of Directors approved grants of restricted stock and restricted stock units to officers, executives, non-employee directors and certain management employees. These grants include the standard annual grants to this employee and director group as a key component of their annual incentive compensation plan. The performance based restricted stock units granted may vest in a number of shares from zero to 150.0 percent of their award based on attainment of certain operating targets, some of which are indexed to the performance of Standard & Poor's 500 Stock Index, over a three-year period. The operating targets for the first vesting period for these performance based restricted stock units granted were approved by the Board of Directors in February 2013 .
   
The vesting periods and grant date fair value for restricted stock and restricted stock units issued during the three month period ended March 31 , 2013 , were as follows:
(Thousands)
 
Common
Shares
Vest ratably over a three-year service period
 
2,087.4

Vest variably over a three-year service period
 
10.2

Vest contingently over a three-year performance period
 
786.7

Vest one year from date of grant, service based (a)
 
81.5

Total granted
 
2,965.8

Grant date fair value (Millions)
 
$
29.1


(a)
Represents restricted stock granted to non-employee directors.

At March 31, 2013 , unrecognized compensation expense totaled $56.6 million and is expected to be recognized over the weighted average vesting period of 1.8 years. Unrecognized compensation expense is included in additional paid-in capital in the accompanying consolidated balance sheets and statements of shareholders’ equity. Share-based compensation expense for restricted stock and restricted stock units was $6.7 million and $7.4 million for the three month periods ended March 31, 2013 and 2012 , respectively.






21



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


13. Supplemental Guarantor Information:

Debentures and notes, without collateral, issued by Windstream Corporation
In connection with the issuance of the 8.125 percent Senior Notes due August 1, 2013, the 7.875 percent Senior Notes due November 1, 2017, the 8.125 percent Senior Notes due September 1, 2018, the 7.000 percent Senior Notes due March 15, 2019, the 7.750 percent Senior Notes due October 15, 2020, the 7.750 percent Senior Notes due October 1, 2021, the 7.500 percent Senior Notes due June 1, 2022, the 7.500 percent Senior Notes due April 1, 2023 and the 2023 Notes ("the guaranteed notes"), certain of our wholly-owned subsidiaries (the "Guarantors"), provide guarantees of those debentures. These guarantees are full and unconditional, subject to certain customary release provisions, as well as joint and several. Certain Guarantors may be subject to restrictions on their ability to distribute earnings to us. Our remaining subsidiaries (the "Non-Guarantors") are not guarantors of the guaranteed notes. Following the acquisitions of acquired businesses, the guaranteed notes were amended to include certain subsidiaries of the acquired businesses as guarantors. The parent company and issuer of the notes is Windstream Corporation.
The following information presents condensed consolidated statements of income, including comprehensive income, for the three month periods ended March 31, 2013 and 2012 , condensed consolidated balance sheets as of March 31, 2013 and December 31, 2012 , and condensed consolidated statements of cash flows for the three month periods ended March 31, 2013 and 2012 of the parent company, the Guarantors and the Non-Guarantors. Investments consist of investments in net assets of subsidiaries held by the parent company and other subsidiaries and have been presented using the equity method of accounting.

In connection with the preparation of our consolidated financial statements for the year ended December 31, 2012 , we became aware of and corrected an error in the accounting for certain promotional credits for new consumer customers. We have retrospectively adjusted financial information for all prior periods presented to reflect this correction. See Note 1. The impact to the Parent, the Guarantors and the Non-Guarantors has been appropriately reflected herein.

 
 
Condensed Consolidated Statement of Income (Unaudited)
 
 
Three Months Ended
March 31, 2013
(Millions)
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Revenues and sales:
 
 
 
 
 
 
 
 
 
 
Service revenues
 
$

 
$
263.6

 
$
1,200.0

 
$
(8.4
)
 
$
1,455.2

Product sales
 

 
14.3

 
30.9

 

 
45.2

Total revenues and sales
 

 
277.9

 
1,230.9

 
(8.4
)
 
1,500.4

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
  Cost of services
 

 
90.8

 
556.9

 
(6.4
)
 
641.3

  Cost of products sold
 

 
14.8

 
28.6

 

 
43.4

  Selling, general and administrative
 

 
11.7

 
230.1

 
(2.0
)
 
239.8

  Depreciation and amortization
 

 
78.8

 
250.7

 

 
329.5

  Merger and integration costs
 

 

 
5.1

 

 
5.1

  Restructuring charges
 

 
0.9

 
4.0

 

 
4.9

Total costs and expenses
 

 
197.0

 
1,075.4

 
(8.4
)
 
1,264.0

Operating income
 

 
80.9

 
155.5

 

 
236.4

Earnings from consolidated subsidiaries
 
123.8

 
13.2

 
0.3

 
(137.3
)
 

Other income (expense), net
 
2.1

 
66.2

 
(66.0
)
 

 
2.3

Loss on early extinguishment on debt
 
(2.5
)
 

 
(11.3
)
 

 
(13.8
)
Intercompany interest income (expense)
 
40.1

 
(25.0
)
 
(15.1
)
 

 

Interest expense
 
(155.6
)
 
(1.7
)
 
(11.6
)
 

 
(168.9
)
Income before income taxes
 
7.9

 
133.6

 
51.8

 
(137.3
)
 
56.0

Income tax (benefit) expense
 
(44.4
)
 
46.1

 
2.0

 

 
3.7

Net income
 
$
52.3

 
$
87.5

 
$
49.8

 
$
(137.3
)
 
$
52.3

Comprehensive income
 
$
46.6

 
$
87.5

 
$
49.8

 
$
(137.3
)
 
$
46.6


22



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


13. Supplemental Guarantor Information, Continued:
 
 
Condensed Consolidated Statement of Income (Unaudited)
 
 
Three Months Ended
March 31, 2012
(Millions)
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Revenues and sales:
 
 
 
 
 
 
 
 
 
 
Service revenues
 
$

 
$
270.0

 
$
1,222.1

 
$
(5.8
)
 
$
1,486.3

Product sales
 

 
15.7

 
36.3

 

 
52.0

Total revenues and sales
 

 
285.7

 
1,258.4

 
(5.8
)
 
1,538.3

Costs and expenses:
 
 
 
 
 
 
 
 
 

Cost of services
 

 
90.5

 
573.3

 
(3.6
)
 
660.2

Cost of products sold
 

 
15.6

 
29.3

 

 
44.9

Selling, general and administrative
 

 
23.1

 
231.2

 
(2.2
)
 
252.1

Depreciation and amortization
 

 
78.8

 
233.3

 

 
312.1

  Merger and integration costs
 

 

 
22.3

 

 
22.3

  Restructuring charges
 

 
0.2

 
0.7

 

 
0.9

Total costs and expenses
 

 
208.2

 
1,090.1

 
(5.8
)
 
1,292.5

Operating income
 

 
77.5

 
168.3

 

 
245.8

Earnings from consolidated subsidiaries
 
120.3

 
12.9

 
0.6

 
(133.8
)
 

Other (expense) income, net
 
(0.8
)
 
51.7

 
(44.3
)
 

 
6.6

Gain on early extinguishment of debt
 

 

 
1.9

 

 
1.9

Intercompany interest income (expense)
 
37.5

 
(24.8
)
 
(12.7
)
 

 

Interest expense
 
(133.3
)
 
(1.3
)
 
(21.9
)
 

 
(156.5
)
Income from continuing operations before income taxes
 
23.7

 
116.0

 
91.9

 
(133.8
)
 
97.8

Income tax (benefit) expense
 
(36.7
)
 
39.2

 
34.8

 

 
37.3

Income from continuing operations
 
60.4

 
76.8

 
57.1

 
(133.8
)
 
60.5

Discontinued operations
 

 

 
(0.1
)
 

 
(0.1
)
Net income
 
$
60.4

 
$
76.8

 
$
57.0

 
$
(133.8
)
 
$
60.4

Comprehensive income
 
$
65.1

 
$
76.8

 
$
57.0

 
$
(133.8
)
 
$
65.1





23



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


13. Supplemental Guarantor Information, Continued:
 
 
Condensed Consolidated Balance Sheet (Unaudited)
 
 
As of March 31, 2013
(Millions)
 
Parent
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
3.8

 
$
2.3

 
$
48.3

 
$

 
$
54.4

Restricted cash
 
18.9

 

 

 

 
18.9

Accounts receivable (less allowance for doubtful accounts of $38.8)
 

 
121.4

 
477.5

 
(4.8
)
 
594.1

 Affiliates receivable, net
 

 
431.5

 
1,788.1

 
(2,219.6
)