UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 20152016
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  ¨ý
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 April 30, 2015, 100,825,00929, 2016, 96,310,037 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 7068.
  

Table of Contents


WINDSTREAM HOLDINGS, INC.
WINDSTREAM SERVICES, LLC
FORM 10-Q
TABLE OF CONTENTS
 
   
  Page No.
PART I – FINANCIAL INFORMATION
   
Item 1.
Financial Statements
 
 
Windstream Holdings, Inc. Consolidated Financial Statements
 
 
Consolidated Statements of Operations (Unaudited)
2
 
Consolidated Statements of Comprehensive Income (Unaudited)
3
 
Consolidated Balance Sheets (Unaudited)
4
 
Consolidated Statements of Cash Flows (Unaudited)
5
 
Consolidated StatementsStatement of Shareholders' Equity (Unaudited)
6
 
Windstream Services, LLC Consolidated Financial Statements
 
 
Consolidated Statements of Operations (Unaudited)
7
 
Consolidated Statements of Comprehensive Income (Unaudited)
8
 
Consolidated Balance Sheets (Unaudited)
9
 
Consolidated Statements of Cash Flows (Unaudited)
10
 
Consolidated StatementsStatement of Member Equity (Unaudited)
11
 
Notes to Unaudited Interim Consolidated Financial Statements
12
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
4338
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
6663
Item 4.
Controls and Procedures
6764
 
PART II – OTHER INFORMATION
   
Item 1.
Legal Proceedings
6865
Item 1A.
Risk Factors
6865
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
*
66
Item 3.Defaults Upon Senior Securities*
Item 4.Mine Safety Disclosures*
Item 5.Other Information*
Item 6.
Exhibits
6866
 _____________
*No reportable information under this item.





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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
March 31,
(Millions, except per share amounts)     2015
 2014
Revenues and sales:        
Service revenues:        
Enterprise and small business     $740.9
 $748.1
Consumer     312.2
 313.0
Carrier     176.5
 189.8
Wholesale     98.3
 113.8
Other     53.9
 55.0
Total service revenues     1,381.8
 1,419.7
Product sales     36.8
 45.2
Total revenues and sales     1,418.6
 1,464.9
Costs and expenses:        
Cost of services (exclusive of depreciation and amortization
    included below)
     680.0
 657.9
Cost of products sold     31.9
 41.1
Selling, general and administrative     225.0
 238.9
Depreciation and amortization     340.7
 338.9
Merger and integration costs     14.1
 7.9
Restructuring charges     7.0
 12.4
Total costs and expenses     1,298.7
 1,297.1
Operating income     119.9
 167.8
Other (expense) income, net     (1.2) 0.9
Interest expense     (141.1) (141.9)
(Loss) income before income taxes     (22.4) 26.8
Income tax (benefit) expense     (27.7) 10.8
Net income     $5.3
 $16.0
Basic and diluted earnings per share:        
Net income     
$.05
 
$.15
    Three Months Ended
March 31,
(Millions, except per share amounts)     2016
 2015
Revenues and sales:        
Service revenues     $1,340.6
 $1,381.8
Product sales     32.8
 36.8
Total revenues and sales     1,373.4
 1,418.6
Costs and expenses:        
Cost of services (exclusive of depreciation and amortization
   included below)
     668.8
 680.0
Cost of products sold     28.9
 31.9
Selling, general and administrative     203.8
 225.0
Depreciation and amortization     304.8
 340.7
Merger and integration costs     5.0
 14.1
Restructuring charges     4.4
 7.0
Total costs and expenses     1,215.7
 1,298.7
Operating income     157.7
 119.9
Dividend income on CS&L common stock     17.6
 —
Other expense, net     (1.2) (1.2)
Net loss on early extinguishment of debt     (35.4) —
Other-than-temporary impairment loss on investment in CS&L
   common stock
     (181.9) —
Interest expense     (219.7) (141.1)
Loss before income taxes     (262.9) (22.4)
Income tax benefit     (31.0) (27.7)
Net (loss) income     $(231.9) $5.3
Basic and diluted (loss) earnings per share:        
Net (loss) income     
($2.52) 
$.05














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

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WINDSTREAM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
   Three Months Ended
March 31,		   Three Months Ended
March 31,
(Millions) 2015
 2014
 2016
 2015
Net income $5.3
 $16.0
Other comprehensive (loss) income:    
Net (loss) income $(231.9) $5.3
Other comprehensive income (loss):    
Available-for-sale securities:    
Unrealized holding gain arising during the period 104.6
 —
Other-than-temporary impairment loss recognized in the
period
 181.9
 —
Change in available-for-sale securities 286.5
 —
Interest rate swaps:        
Changes in designated interest rate swaps (8.6) (6.9)
Unrealized loss on designated interest rate swaps (8.3) (8.6)
Amortization of unrealized losses on de-designated interest
rate swaps
 3.4
 4.2
 1.2
 3.4
Income tax benefit 2.0
 1.0
 2.7
 2.0
Unrealized holding loss on interest rate swaps (3.2) (1.7)
Change in interest rate swaps (4.4) (3.2)
Postretirement and pension plans:        
Change in net actuarial gain for postretirement plan —
 (0.8)
Plan curtailment —
 (9.5) (5.5) —
Amounts included in net periodic benefit cost:        
Amortization of net actuarial loss 0.2
 —
 0.1
 0.2
Amortization of prior service credits (1.3) (1.7) (0.5) (1.3)
Income tax benefit 0.2
 4.5
 2.3
 0.2
Change in postretirement and pension plans (0.9) (7.5) (3.6) (0.9)
Other comprehensive loss (4.1) (9.2)
Other comprehensive income (loss) 278.5
 (4.1)
Comprehensive income $1.2
 $6.8
 $46.6
 $1.2

























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

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WINDSTREAM HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Millions, except par value) March 31,
2016
 December 31,
2015
Assets    
Current Assets:    
Cash and cash equivalents $74.6
 $31.3
Accounts receivable (less allowance for doubtful    
accounts of $30.6 and $33.1, respectively) 636.1
 643.9
Inventories 79.4
 79.5
Prepaid expenses and other 149.9
 120.6
Total current assets 940.0
 875.3
Goodwill 4,213.6
 4,213.6
Other intangibles, net 1,457.2
 1,504.7
Net property, plant and equipment 5,255.7
 5,279.8
Investment in CS&L common stock 653.8
 549.2
Other assets 90.9
 95.5
Total Assets $12,611.2
 $12,518.1
Liabilities and Shareholders’ Equity    
Current Liabilities:    
Current maturities of long-term debt $11.9
 $5.9
Current portion of long-term lease obligations 156.6
 152.7
Accounts payable 323.6
 430.1
Advance payments and customer deposits 193.9
 193.9
Accrued taxes 71.6
 84.1
Accrued interest 118.1
 78.4
Other current liabilities 273.9
 322.0
Total current liabilities 1,149.6
 1,267.1
Long-term debt 5,433.1
 5,164.6
Long-term lease obligations 4,959.8
 5,000.4
Deferred income taxes 254.9
 287.4
Other liabilities 476.1
 492.2
Total liabilities 12,273.5
 12,211.7
Commitments and Contingencies (See Note 13) 

 

Shareholders’ Equity:    
Common stock, $.0001 par value, 166.7 shares authorized,    
96.3 and 96.7 shares issued and outstanding, respectively —
 —
Additional paid-in capital 587.6
 602.9
Accumulated other comprehensive loss (5.9) (284.4)
Accumulated deficit (244.0) (12.1)
Total shareholders’ equity 337.7
 306.4
Total Liabilities and Shareholders’ Equity $12,611.2
 $12,518.1









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

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WINDSTREAM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
  Three Months Ended
March 31,
(Millions) 2016
 2015
Cash Flows from Operating Activities:    
Net (loss) income $(231.9) $5.3
Adjustments to reconcile net (loss) income to net cash provided from operations:    
Depreciation and amortization 304.8
 340.7
Provision for doubtful accounts 9.7
 10.3
Share-based compensation expense 13.7
 14.8
Deferred income taxes (27.5) (33.8)
Other-than-temporary impairment loss on investment in CS&L
   common stock
 181.9
 —
Noncash portion of net loss on early extinguishment of debt (7.4) —
Amortization of unrealized losses on de-designated interest rate swaps 1.2
 3.4
Plan curtailment (5.5) —
Other, net (15.3) 6.9
Changes in operating assets and liabilities, net    
Accounts receivable (2.0) (33.3)
Prepaid income taxes (5.8) 7.8
Prepaid expenses and other (6.0) (24.8)
Accounts payable (100.2) (64.2)
Accrued interest 39.8
 67.4
Accrued taxes (12.5) (10.9)
Other current liabilities 4.2
 (43.2)
Other liabilities (10.0) (2.6)
Other, net (4.0) —
Net cash provided from operating activities 127.2
 243.8
Cash Flows from Investing Activities:    
Additions to property, plant and equipment (263.8) (189.3)
Proceeds from the sale of property 6.2
 —
Grant funds received for broadband stimulus projects —
 7.4
Network expansion funded by Connect America Fund - Phase I —
 (8.3)
Change in restricted cash —
 (0.4)
Other, net —
 (2.1)
Net cash used in investing activities (257.6) (192.7)
Cash Flows from Financing Activities:    
Dividends paid to shareholders (14.9) (151.5)
Repayments of debt and swaps (985.3) (325.4)
Proceeds of debt issuance 1,278.0
 490.0
Debt issuance costs (10.7) —
Stock repurchases (28.9) —
Payments under long-term lease obligations (36.8) —
Payments under capital lease obligations (19.8) (11.2)
Other, net (7.9) (6.8)
Net cash provided from (used in) financing activities 173.7
 (4.9)
Increase in cash and cash equivalents 43.3
 46.2
Cash and Cash Equivalents:    
Beginning of period 31.3
 27.8
End of period $74.6
 $74.0
Supplemental Cash Flow Disclosures:    
Interest paid $178.6
 $74.7
Income taxes paid (refunded), net $6.5
 $(1.2)



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

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WINDSTREAM HOLDINGS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(Millions, except per share amounts) 
Common Stock
and Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 Accumulated Deficit Total
Balance at December 31, 2015 $602.9
 $(284.4) $(12.1) $306.4
Net loss —
 —
 (231.9) (231.9)
Other comprehensive income (loss), net of tax:        
Change in available-for-sale securities —
 286.5
 —
 286.5
Change in postretirement and pension plans —
 (3.6) —
 (3.6)
Amortization of unrealized losses on de-designated
   interest rate swaps
 —
 0.7
 —
 0.7
Change in designated interest rate swaps —
 (5.1) —
 (5.1)
Comprehensive income (loss) —
 278.5
 (231.9) 46.6
Share-based compensation expense (See Note 6) 6.6
 —
 —
 6.6
Stock options exercised 0.4
 —
 —
 0.4
Stock issued for management incentive compensation plans
   (See Note 6)
 5.5
 —
 —
 5.5
Stock issued to employee savings plan (See Note 5) 24.0
 —
 —
 24.0
Stock repurchases (28.9) —
 —
 (28.9)
Taxes withheld on vested restricted stock and other (8.3) —
 —
 (8.3)
Dividends of $.15 per share declared to shareholders (14.6) —
 —
 (14.6)
Balance at March 31, 2016 $587.6
 $(5.9) $(244.0) $337.7





























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

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WINDSTREAM HOLDINGS, INC.SERVICES, LLC
CONSOLIDATED BALANCE SHEETSSTATEMENTS OF OPERATIONS (UNAUDITED)

(Millions, except par value) March 31,
2015
 December 31,
2014
Assets    
Current Assets:    
Cash and cash equivalents $74.0
 $27.8
Restricted cash 7.1
 6.7
Accounts receivable (less allowance for doubtful    
accounts of $42.3 and $43.4, respectively) 658.5
 635.5
Inventories 63.0
 63.7
Deferred income taxes 91.7
 105.4
Prepaid expenses and other 171.6
 164.6
Total current assets 1,065.9
 1,003.7
Goodwill 4,352.8
 4,352.8
Other intangibles, net 1,710.5
 1,764.0
Net property, plant and equipment 5,315.0
 5,412.3
Other assets 174.9
 180.6
Total Assets $12,619.1
 $12,713.4
Liabilities and Shareholders’ Equity    
Current Liabilities:    
Current maturities of long-term debt $92.5
 $717.5
Current portion of interest rate swaps 28.5
 28.5
Accounts payable 332.0
 403.3
Advance payments and customer deposits 214.5
 214.7
Accrued dividends 151.7
 152.4
Accrued taxes 84.3
 95.2
Accrued interest 170.4
 102.5
Other current liabilities 282.4
 328.9
Total current liabilities 1,356.3
 2,043.0
Long-term debt 8,728.1
 7,934.2
Deferred income taxes 1,828.8
 1,878.6
Other liabilities 610.9
 632.8
Total liabilities 12,524.1
 12,488.6
Commitments and Contingencies (See Note 6) 

 

Shareholders’ Equity:    
Common stock, $.0001 par value, 166.7 shares authorized,    
100.8 and 100.5 shares issued and outstanding, respectively 0.1
 0.1
Additional paid-in capital 86.9
 212.6
Accumulated other comprehensive income 8.0
 12.1
Retained earnings —
 —
Total shareholders’ equity 95.0
 224.8
Total Liabilities and Shareholders’ Equity $12,619.1
 $12,713.4
    Three Months Ended
March 31,
(Millions)     2016
 2015
Revenues and sales:        
Service revenues     $1,340.6
 $1,381.8
Product sales     32.8
 36.8
Total revenues and sales     1,373.4
 1,418.6
Costs and expenses:        
Cost of services (exclusive of depreciation and amortization
   included below)
     668.8
 680.0
Cost of products sold     28.9
 31.9
Selling, general and administrative     203.3
 224.4
Depreciation and amortization     304.8
 340.7
Merger and integration costs     5.0
 14.1
Restructuring charges     4.4
 7.0
Total costs and expenses     1,215.2
 1,298.1
Operating income     158.2
 120.5
Dividend income on CS&L common stock     17.6
 —
Other expense, net     (1.2) (1.2)
Net loss on early extinguishment of debt     (35.4) —
Other-than-temporary impairment loss on investment in CS&L
   common stock
     (181.9) —
Interest expense     (219.7) (141.1)
Loss before income taxes     (262.4) (21.8)
Income tax benefit     (30.8) (27.4)
Net (loss) income     $(231.6) $5.6























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

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WINDSTREAM HOLDINGS, INC.SERVICES, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWSCOMPREHENSIVE INCOME (UNAUDITED)
  Three Months Ended
March 31,
(Millions) 2015
 2014
Cash Provided from Operations:    
Net income $5.3
 $16.0
Adjustments to reconcile net income to net cash provided from operations:    
Depreciation and amortization 340.7
 338.9
Provision for doubtful accounts 10.3
 12.3
Share-based compensation expense 14.8
 13.7
Deferred income taxes (33.8) 9.3
Amortization of unrealized losses on de-designated interest rate swaps 3.4
 4.2
Plan curtailment and other, net 6.9
 (4.9)
Changes in operating assets and liabilities, net    
Accounts receivable (33.3) (9.7)
Prepaid income taxes 7.8
 5.6
Prepaid expenses and other (24.8) (20.1)
Accounts payable (64.2) (46.1)
Accrued interest 67.4
 66.0
Accrued taxes (10.9) (15.2)
Other current liabilities (43.2) (32.4)
Other liabilities (2.6) (3.3)
Other, net —
 (14.5)
Net cash provided from operations 243.8
 319.8
Cash Flows from Investing Activities:    
Additions to property, plant and equipment (189.3) (153.0)
Broadband network expansion funded by stimulus grants —
 (7.1)
Changes in restricted cash (0.4) (0.9)
Grant funds received for broadband stimulus projects 7.4
 11.4
Grant funds received from Connect America Fund - Phase I —
 26.0
Network expansion funded by Connect America Fund - Phase I (8.3) —
Other, net (2.1) —
Net cash used in investing activities (192.7) (123.6)
Cash Flows from Financing Activities:    
Dividends paid to shareholders (151.5) (150.2)
Repayments of debt and swaps (325.4) (331.6)
Proceeds of debt issuance 490.0
 325.0
Payments under capital lease obligations (11.2) (7.8)
Other, net (6.8) (9.8)
Net cash used in financing activities (4.9) (174.4)
Increase in cash and cash equivalents 46.2
 21.8
Cash and Cash Equivalents:    
Beginning of period 27.8
 48.2
End of period $74.0
 $70.0
Supplemental Cash Flow Disclosures:    
Interest paid $74.7
 $74.7
Income taxes refunded, net $(1.2) $(1.0)
    Three Months Ended
March 31,
(Millions)     2016
 2015
Net (loss) income     $(231.6) $5.6
Other comprehensive income (loss):        
Available-for-sale securities:        
Unrealized holding gain arising during the period     104.6
 —
Other-than-temporary impairment loss recognized in the
   period
     181.9
 —
Change in available-for-sale securities     286.5
 —
Interest rate swaps:        
Unrealized loss on designated interest rate swaps     (8.3) (8.6)
Amortization of unrealized losses on de-designated
   interest rate swaps
     1.2
 3.4
Income tax benefit     2.7
 2.0
Change in interest rate swaps     (4.4) (3.2)
Postretirement and pension plans:        
Plan curtailment     (5.5) —
Amounts included in net periodic benefit cost:        
Amortization of net actuarial loss     0.1
 0.2
Amortization of prior service credits     (0.5) (1.3)
Income tax benefit     2.3
 0.2
Change in postretirement and pension plans     (3.6) (0.9)
Other comprehensive income (loss)     278.5
 (4.1)
Comprehensive income     $46.9
 $1.5

























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

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WINDSTREAM HOLDINGS, INC.SERVICES, LLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYBALANCE SHEETS (UNAUDITED)
(Millions, except per share amounts) 
Common Stock
and Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 Total
Balance at December 31, 2014 $212.7
 $12.1
 $—
 $224.8
Net income —
 —
 5.3
 5.3
Other comprehensive (loss) income, net of tax:        
Change in postretirement and pension plans —
 (0.9) —
 (0.9)
Amortization of unrealized losses on de-designated
    interest rate swaps
 —
 2.0
 —
 2.0
Changes in designated interest rate swaps —
 (5.2) —
 (5.2)
Comprehensive (loss) income —
 (4.1) 5.3
 1.2
Share-based compensation expense (See Note 8) 5.0
 —
 —
 5.0
Stock issued to employee savings plan (See Note 7) 21.6
 —
 —
 21.6
Taxes withheld on vested restricted stock and other (7.1) —
 —
 (7.1)
Dividends of $1.50 per share declared to shareholders (145.2) —
 (5.3) (150.5)
Balance at March 31, 2015 $87.0
 $8.0
 $—
 $95.0
(Millions, except number of shares) March 31,
2016
 December 31,
2015
Assets    
Current Assets:    
Cash and cash equivalents $74.6
 $31.3
Accounts receivable (less allowance for doubtful    
accounts of $30.6 and $33.1, respectively) 636.1
 643.9
Inventories 79.4
 79.5
Prepaid expenses and other 149.9
 120.6
Total current assets 940.0
 875.3
Goodwill 4,213.6
 4,213.6
Other intangibles, net 1,457.2
 1,504.7
Net property, plant and equipment 5,255.7
 5,279.8
Investment in CS&L common stock 653.8
 549.2
Other assets 90.9
 95.5
Total Assets $12,611.2
 $12,518.1
Liabilities and Member Equity    
Current Liabilities:    
Current maturities of long-term debt $11.9
 $5.9
Current portion of long-term lease obligations 156.6
 152.7
Accounts payable 323.6
 430.1
Advance payments and customer deposits 193.9
 193.9
Payable to Windstream Holdings, Inc. 14.9
 15.1
Accrued taxes 71.6
 84.1
Accrued interest 118.1
 78.4
Other current liabilities 259.0
 306.9
Total current liabilities 1,149.6
 1,267.1
Long-term debt 5,433.1
 5,164.6
Long-term lease obligations 4,959.8
 5,000.4
Deferred income taxes 254.9
 287.4
Other liabilities 476.1
 492.2
Total liabilities 12,273.5
 12,211.7
Commitments and Contingencies (See Note 13) 
 

Member Equity:    
Additional paid-in capital 584.7
 600.3
Accumulated other comprehensive loss (5.9) (284.4)
Accumulated deficit (241.1) (9.5)
Total member equity 337.7
 306.4
Total Liabilities and Member Equity $12,611.2
 $12,518.1










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

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WINDSTREAM SERVICES, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
  Three Months Ended
March 31,
(Millions) 2016
 2015
Cash Flows from Operating Activities:    
Net (loss) income $(231.6) $5.6
Adjustments to reconcile net (loss) income to net cash provided from operations:    
Depreciation and amortization 304.8
 340.7
Provision for doubtful accounts 9.7
 10.3
Share-based compensation expense 13.7
 14.8
Deferred income taxes (27.5) (33.8)
Other-than-temporary impairment loss on investment in CS&L
   common stock
 181.9
 —
Noncash portion of net loss on early extinguishment of debt (7.4) —
Amortization of unrealized losses on de-designated interest rate swaps 1.2
 3.4
Plan curtailment (5.5) —
Other, net (15.3) 6.9
Changes in operating assets and liabilities, net    
Accounts receivable (2.0) (33.3)
Prepaid income taxes (5.8) 7.8
Prepaid expenses and other (6.0) (24.8)
Accounts payable (100.2) (64.2)
Accrued interest 39.8
 67.4
Accrued taxes (12.5) (10.9)
Other current liabilities 4.2
 (43.2)
Other liabilities (10.0) (2.6)
Other, net (4.0) —
Net cash provided from operating activities 127.5
 244.1
Cash Flows from Investing Activities:    
Additions to property, plant and equipment (263.8) (189.3)
Proceeds from the sale of property 6.2
 —
Grant funds received for broadband stimulus projects —
 7.4
Network expansion funded by Connect America Fund - Phase I —
 (8.3)
Change in restricted cash —
 (0.4)
Other, net —
 (2.1)
Net cash used in investing activities (257.6) (192.7)
Cash Flows from Financing Activities:    
Distributions to Windstream Holdings, Inc. (44.1) (151.8)
Repayments of debt and swaps (985.3) (325.4)
Proceeds of debt issuance 1,278.0
 490.0
Debt issuance costs (10.7) —
Payments under long-term lease obligations (36.8) —
Payments under capital lease obligations (19.8) (11.2)
Other, net (7.9) (6.8)
Net cash provided from (used in) financing activities 173.4
 (5.2)
Increase in cash and cash equivalents 43.3
 46.2
Cash and Cash Equivalents:    
Beginning of period 31.3
 27.8
End of period $74.6
 $74.0
Supplemental Cash Flow Disclosures:    
Interest paid $178.6
 $74.7
Income taxes paid (refunded), net $6.5
 $(1.2)




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

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WINDSTREAM SERVICES, LLC
CONSOLIDATED STATEMENT OF MEMBER EQUITY (UNAUDITED)
(Millions) 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 Accumulated Deficit Total
Balance at December 31, 2015 $600.3
 $(284.4) $(9.5) $306.4
Net loss —
 —
 (231.6) (231.6)
Other comprehensive income (loss), net of tax:        
Change in available-for-sale securities —
 286.5
 —
 286.5
Change in postretirement and pension plans —
 (3.6) —
 (3.6)
Amortization of unrealized losses on de-designated
   interest rate swaps
 —
 0.7
 —
 0.7
Change in designated interest rate swaps —
 (5.1) —
 (5.1)
Comprehensive income (loss) —
 278.5
 (231.6) 46.9
Share-based compensation expense (See Note 6) 6.6
 —
 —
 6.6
Stock options exercised 0.4
 —
 —
 0.4
Stock issued for management incentive compensation plans
   (See Note 6)
 5.5
 —
 —
 5.5
Stock issued to employee savings plan (See Note 5) 24.0
 —
 —
 24.0
Taxes withheld on vested restricted stock and other (8.3) —
 —
 (8.3)
Distributions payable to Windstream Holdings, Inc. (43.8) —
 —
 (43.8)
Balance at March 31, 2016 $584.7
 $(5.9) $(241.1) $337.7































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

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WINDSTREAM SERVICES, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

    Three Months Ended
March 31,
(Millions)     2015
 2014
Revenues and sales:        
Service revenues:        
Enterprise and small business     $740.9
 $748.1
Consumer     312.2
 313.0
Carrier     176.5
 189.8
Wholesale     98.3
 113.8
Other     53.9
 55.0
Total service revenues     1,381.8
 1,419.7
Product sales     36.8
 45.2
Total revenues and sales     1,418.6
 1,464.9
Costs and expenses:        
Cost of services (exclusive of depreciation and amortization
    included below)
     680.0
 657.9
Cost of products sold     31.9
 41.1
Selling, general and administrative     224.4
 238.4
Depreciation and amortization     340.7
 338.9
Merger and integration costs     14.1
 7.4
Restructuring charges     7.0
 12.9
Total costs and expenses     1,298.1
 1,296.6
Operating income     120.5
 168.3
Other (expense) income, net     (1.2) 0.9
Interest expense     (141.1) (141.9)
(Loss) income before income taxes     (21.8) 27.3
Income tax (benefit) expense     (27.4) 11.0
Net income     $5.6
 $16.3





















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

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WINDSTREAM SERVICES, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
    Three Months Ended
March 31,
(Millions)     2015
 2014
Net income     $5.6
 $16.3
Other comprehensive (loss) income:        
Interest rate swaps:        
Changes in designated interest rate swaps     (8.6) (6.9)
Amortization of unrealized losses on de-designated interest rate swaps 3.4
 4.2
Income tax benefit     2.0
 1.0
Unrealized holding loss on interest rate swaps     (3.2) (1.7)
Postretirement and pension plans:        
Change in net actuarial gain for postretirement plan     —
 (0.8)
Plan curtailment     —
 (9.5)
Amounts included in net periodic benefit cost:        
Amortization of net actuarial loss     0.2
 —
Amortization of prior service credits     (1.3) (1.7)
Income tax benefit     0.2
 4.5
Change in postretirement and pension plans     (0.9) (7.5)
Other comprehensive loss     (4.1) (9.2)
Comprehensive income     $1.5
 $7.1






























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

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WINDSTREAM SERVICES, LLC
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Millions, except number of shares) March 31,
2015
 December 31,
2014
Assets    
Current Assets:    
Cash and cash equivalents $74.0
 $27.8
Restricted cash 7.1
 6.7
Accounts receivable (less allowance for doubtful    
accounts of $42.3 and $43.4, respectively) 658.5
 635.5
Inventories 63.0
 63.7
Deferred income taxes 91.7
 105.4
Prepaid expenses and other 171.6
 164.6
Total current assets 1,065.9
 1,003.7
Goodwill 4,352.8
 4,352.8
Other intangibles, net 1,710.5
 1,764.0
Net property, plant and equipment 5,315.0
 5,412.3
Other assets 174.9
 180.6
Total Assets $12,619.1
 $12,713.4
Liabilities and Member Equity    
Current Liabilities:    
Current maturities of long-term debt $92.5
 $717.5
Current portion of interest rate swaps 28.5
 28.5
Accounts payable 332.0
 403.3
Advance payments and customer deposits 214.5
 214.7
Payable to Windstream Holdings, Inc. 151.7
 152.4
Accrued taxes 84.3
 95.2
Accrued interest 170.4
 102.5
Other current liabilities 282.4
 328.9
Total current liabilities 1,356.3
 2,043.0
Long-term debt 8,728.1
 7,934.2
Deferred income taxes 1,828.8
 1,878.6
Other liabilities 610.9
 632.8
Total liabilities 12,524.1
 12,488.6
Commitments and Contingencies (See Note 6)    
Member Equity:    
Additional paid-in capital 87.0
 212.7
Accumulated other comprehensive income 8.0
 12.1
Retained earnings —
 —
Total member equity 95.0
 224.8
Total Liabilities and Member Equity $12,619.1
 $12,713.4









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

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WINDSTREAM SERVICES, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
  Three Months Ended
March 31,
(Millions) 2015
 2014
Cash Provided from Operations:    
Net income $5.6
 $16.3
Adjustments to reconcile net income to net cash provided from operations:    
Depreciation and amortization 340.7
 338.9
Provision for doubtful accounts 10.3
 12.3
Share-based compensation expense 14.8
 13.7
Deferred income taxes (33.8) 9.3
Amortization of unrealized losses on de-designated interest rate swaps 3.4
 4.2
Plan curtailment and other, net 6.9
 (4.9)
Changes in operating assets and liabilities, net    
Accounts receivable (33.3) (9.7)
Prepaid income taxes 7.8
 5.6
Prepaid expenses and other (24.8) (20.1)
Accounts payable (64.2) (46.1)
Accrued interest 67.4
 66.0
Accrued taxes (10.9) (15.0)
Other current liabilities (43.2) (32.4)
Other liabilities (2.6) (3.3)
Other, net —
 (14.5)
Net cash provided from operations 244.1
 320.3
Cash Flows from Investing Activities:    
Additions to property, plant and equipment (189.3) (153.0)
Broadband network expansion funded by stimulus grants —
 (7.1)
Changes in restricted cash (0.4) (0.9)
Grant funds received for broadband stimulus projects 7.4
 11.4
Grant funds received from Connect America Fund - Phase I —
 26.0
Network expansion funded by Connect America Fund - Phase I (8.3) —
Other, net (2.1) —
Net cash used in investing activities (192.7) (123.6)
Cash Flows from Financing Activities:    
Distributions to Windstream Holdings, Inc. (151.8) (150.7)
Repayments of debt and swaps (325.4) (331.6)
Proceeds of debt issuance 490.0
 325.0
Payments under capital lease obligations (11.2) (7.8)
Other, net (6.8) (9.8)
Net cash used in financing activities (5.2) (174.9)
Increase in cash and cash equivalents 46.2
 21.8
Cash and Cash Equivalents:    
Beginning of period 27.8
 48.2
End of period $74.0
 $70.0
Supplemental Cash Flow Disclosures:    
Interest paid $74.7
 $74.7
Income taxes refunded, net $(1.2) $(1.0)





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

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WINDSTREAM SERVICES, LLC
CONSOLIDATED STATEMENTS OF MEMBER EQUITY (UNAUDITED)
(Millions, except per share amounts) 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 Total
Balance at December 31, 2014 $212.7
 $12.1
 $—
 $224.8
Net income —
 —
 5.6
 5.6
Other comprehensive (loss) income, net of tax:        
Change in postretirement and pension plans —
 (0.9) —
 (0.9)
Amortization of unrealized losses on de-designated
    interest rate swaps
 —
 2.0
 —
 2.0
Changes in designated interest rate swaps —
 (5.2) —
 (5.2)
Comprehensive (loss) income —
 (4.1) 5.6
 1.5
Share-based compensation expense (See Note 8) 5.0
 —
 —
 5.0
Stock issued to employee savings plan (See Note 7) 21.6
 —
 —
 21.6
Taxes withheld on vested restricted stock and other (7.1) —
 —
 (7.1)
Distributions payable to Windstream Holdings, Inc. (145.2) —
 (5.6) (150.8)
Balance at March 31, 2015 $87.0
 $8.0
 $—
 $95.0



































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

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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 –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 NasdaqNASDAQ Global Select Market (“NASDAQ”) under the ticker symbol “WIN”. Effective February 28, 2015, Windstream Corporation was converted to a limited liability company (“LLC”). As a result, all issued and outstanding common stock of Windstream Corporation held by Windstream Holdings was converted intoowns 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 13, on April 24, 2015, we completed the spin-off 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 and cloud computing, to businesses nationwide. In addition to business services, we offer broadband, voice and video services to consumers primarily in rural markets.enterprise clients. We have operations in 48 states and the District of Columbia,supply core transport solutions on a local and long-haul fiberfiber-optic network spanning approximately 121,000 miles, a robust business sales division and 27 data centers offering managed services and cloud computing.125,000 miles.

Enterprise and small business 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. Consumer service revenues are generated from the provision of high-speed Internet, voice and video services to consumers. Wholesale serviceRegulatory revenues include switched access revenues, federal and state Universal Service Fund (“USF”) revenues.revenues and amounts received from Connect America Fund - Phase II. Other service revenues include USF surcharge revenues, other miscellaneous services and consumer revenues generated in markets where we lease the connection to the customer premise. We no longer offer new consumer service in those areas.

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, 2014,2015, 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, 2014,2015, which was filed with the SEC on February 24, 201525, 2016..


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.

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


1. Preparation of Interim Financial Statements, Continued:

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, NasdaqNASDAQ 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.

Revision to Prior Period Financial Statements

During the first quarter of 2015, as a result of the recent change in our executive management team, we have begun to reorganize the way in which we will manage our business for purposes of operating decisions and assessing profitability. In undertaking this reorganizational effort, which has yet to be completed, management became aware of and corrected for the immaterial misclassification of certain operating expenses. The previously reportedCertain prior year 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.reclassified to conform to the current year financial statement presentation. These revisionschanges and reclassifications did not impact previously reported operating income, net (loss) income or comprehensive income.

The following tables present the effect of the revisions to Windstream Holdings’ consolidated statements of operations for the three months ended March 31, 2014 and the annual periods ended December 31, 2014, 2013 and 2012.
  
Three Months Ended
March 31, 2014
 
Year Ended
December 31, 2014
(Millions) As Previously Reported 
Effect of
Revision
 As Revised As Previously Reported 
Effect of
Revision
 As Revised
Cost of services $644.6
 $13.3
 $657.9
 $2,719.3
 $54.0
 $2,773.3
Selling, general and administrative252.2
 (13.3) 238.9
 983.8
 (54.0) 929.8
  
Year Ended
December 31, 2013
 
Year Ended
December 31, 2012
(Millions) As Previously Reported 
Effect of
Revision
 As Revised As Previously Reported 
Effect of
Revision
 As Revised
Cost of services $2,492.1
 $49.1
 $2,541.2
 $2,692.2
 $43.5
 $2,735.7
Selling, general and administrative923.4
 (49.1) 874.3
 967.3
 (43.5) 923.8

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. Upon completion of our reorganizational efforts, we will reassess our segment reporting during the second quarter of 2015.

13


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


1. Preparation of Interim Financial Statements, Continued:

Recently Issued Authoritative Guidance

Presentation of Debt Issuance CostsRevenue Recognition – In April 2015,May 2014, 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”ASU”). 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. Debt issuance costs totaling $84.0 million and $87.7 million were included in other assets in our accompanying consolidated balance sheets as of March 31, 2015 and December 31, 2014, respectively. In connection with the debt-for-debt exchange and redemption of long-term debt further discussed in Note 13, we expect to write off approximately $13.0 million of unamortized debt issuance costs. Upon adoption of ASU 2015-03, the remaining unamortized debt issuance costs will be reflected as a reduction of long-term debt.

Revenue Recognition – In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”).Customers. 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 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is not permitted. 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. On April 29,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.

In July 2015, the FASB proposed deferringdeferred the effective date of ASU 2014-09 by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB also proposed permittingdate, or January 1, 2018, for calendar companies like Windstream. Entities are permitted to early adoption ofadopt 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. We expect to adopt this standard effective January 1, 2018.

In March 2016, FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The effective date for this ASU is the same as the effective date for ASU 2014-09. In conjunction with our assessment of ASU 2014-09, we are currently evaluating the impacts of this new guidance.

Fair Value Measurement Disclosures – In May 2015, the FASB issued ASU 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. 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.

2. GoodwillPension Plan Investment Disclosures – In July 2015, the FASB issued ASU No. 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Plans (Topic 962), Health and Other Intangible Assets:

Goodwill representsWelfare Benefit Plans (Topic 965). This standard eliminates the excess of cost overrequirement to measure the fair value of net identifiable tangiblefully benefit-responsive investment contracts and intangible assets acquired through various business combinations. The cost of acquired entities atprovide 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 therelated 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 the reporting unit exceeds its carrying value, goodwillASU 2015-07 and 2015-12 will impact certain annual disclosures related to our qualified pension plan assets, but otherwise is not impaired and no further testing is performed. If the carrying value of the reporting unit exceeds its fair value, thenexpected to have 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.material impact on our consolidated financial statements.

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.


1413


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


2. Goodwill and Other Intangible Assets,1. Preparation of Interim Financial Statements, Continued:

AsValuation of January 1,Inventory – In July 2015, basedthe FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. The updated guidance requires that an entity should measure inventory valued using a first-in, first-out or average cost method at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 should be applied on our assessment performeda prospective basis and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with respectearly adoption permitted. We are currently assessing the timing of adoption of ASU 2015-11, however, we do not expect it to have a material impact to our three reporting units as described above, we concluded that goodwill for allconsolidated results of our reporting units was not impaired as of that date, and accordingly, no further analysis was required.

As previously discussed, as a result of recent changes in our executive management team, we have begun to reorganize the way in which we manage our business and will reassess our reporting unit structure during the second quarter of 2015.

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:
  
 March 31, 2015 December 31, 2014
(Millions) 
Gross
Cost
 
Accumulated
Amortization
 
Net Carrying
Value
 
Gross
Cost
 
Accumulated
Amortization
 
Net Carrying
Value
Franchise rights $1,285.1
 $(254.0) $1,031.1
 $1,285.1
 $(243.3) $1,041.8
Customer lists 1,914.0
 (1,249.8) 664.2
 1,914.0
 (1,203.4) 710.6
Cable franchise rights 39.8
 (28.5) 11.3
 39.8
 (28.2) 11.6
Other (a) 42.0
 (38.1) 3.9
 37.9
 (37.9) —
Balance $3,280.9
 $(1,570.4) $1,710.5
 $3,276.8
 $(1,512.8) $1,764.0

(a)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 operations, financial position or cash flows.March 31, 2015:
Intangible AssetsAmortization MethodologyEstimated Useful Life
Franchise rightsstraight-line30 years
Customer listssum-of-years-digits9 - 15 years
Cable franchise rightsstraight-line15 years
Otherstraight-line1 - 3 years

Amortization expenseLeases – In February 2016, the FASB issued ASU 2016-02, Leases, which will require that virtually all lease arrangements that do not meet the criteria of a short-term lease be presented on the lessee’s balance sheet by recording a right-of-use asset and a lease liability equal to the present value of the related future lease payments. The income statement impacts of the leases will depend on the nature of the leasing arrangement and will be similar to existing accounting for intangible assets subject to amortization was $57.6 millionoperating and capital leases. The new standard does not substantially change the accounting for lessors. The new standard will also require additional disclosures regarding an entity’s leasing arrangements and will be effective for the three monthfirst interim reporting period ended March 31, 2015, as comparedwithin annual periods beginning after December 15, 2018, although early adoption is permitted. Lessees and lessors will be required to apply the new standard at the beginning of the earliest period presented in the financial statements in which they first apply the new guidance, using a modified retrospective transition method. We are currently assessing the timing of adoption and the impact the new standard will have on our consolidated financial statements.

$65.6 millionDerivatives and Hedging – In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging Issues Task Force). ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We do not expect that the sameadoption of ASU 2016-05 will have a material impact on our consolidated financial statements.

Employee Share-Based Payment Accounting – In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.  Under the new guidance all excess tax benefits and tax deficiencies, including tax benefits of dividends on share-based payment awards, should be recognized as income tax expense or benefit in the income statement, eliminating the notion of the APIC pool. The excess tax benefits will be classified as operating activities along with other income tax cash flows rather than financing activities in the statement of cash flows. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in 2014. Amortization expensewhich they occur. ASU 2016-19 also allows entities to elect to either estimate the total number of awards that are expected to vest or account for intangible assets subjectforfeitures when they occur. Additionally, ASU 2016-09 clarifies that cash payments to amortization was estimatedtax authorities in connection with shares withheld to meet statutory tax withholding requirements should be presented as followsa financing activity in the statement of cash flows. ASU 2016-09 is effective for eachannual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. Early adoption is permitted. We are currently assessing the timing of adoption and the twelve month periods ended impact the new standard will have on our consolidated financial statements.March 31:
Year(Millions)
2016$215.2
2017187.1
2018159.1
2019131.3
2020106.2
Thereafter911.6
Total$1,710.5




1514


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


3.2. Long-term Debt and Lease Obligations:Debt:

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) March 31,
2015
 December 31,
2014
 March 31,
2016
 December 31,
2015
Issued by Windstream Services:        
Senior secured credit facility, Tranche A3 – variable rates, due December 30, 2016 (a) $333.5
 $344.3
Senior secured credit facility, Tranche A4 – variable rates, due August 8, 2017 (a) 247.5
 255.0
Senior secured credit facility, Tranche B4 – variable rates, due January 23, 2020 (a) 1,314.7
 1,318.1
Senior secured credit facility, Tranche B5 – variable rates, due August 8, 2019 582.6
 584.1
 $576.7
 $578.2
Senior secured credit facility, Revolving line of credit – variable rates, due
December 17, 2015 (b)
 820.0
 625.0
Senior secured credit facility, Tranche B6 – variable rates, due March 29, 2021 (a) 600.0
 —
Senior secured credit facility, Revolving line of credit – variable rates, due
April 24, 2020
 588.0
 300.0
Debentures and notes, without collateral:        
2017 Notes – 7.875%, due November 1, 2017 1,100.0
 1,100.0
 369.5
 904.1
2018 Notes – 8.125%, due September 1, 2018 (c) 400.0
 400.0
2020 Notes – 7.750%, due October 15, 2020 700.0
 700.0
 700.0
 700.0
2021 Notes – 7.750%, due October 1, 2021 950.0
 950.0
 887.3
 920.4
2022 Notes – 7.500%, due June 1, 2022 500.0
 500.0
 468.9
 485.9
2023 Notes – 7.500%, due April 1, 2023 600.0
 600.0
 529.5
 540.1
2023 Notes – 6.375%, due August 1, 2023 700.0
 700.0
 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
 100.0
 100.0
Cinergy Communications Company – 6.58%, due January 1, 2022 (d) 1.9
 1.9
Debentures and notes, without collateral:    
PAETEC 2018 Notes – 9.875%, due December 1, 2018 (c) 450.0
 450.0
Premium on long-term debt, net 20.4
 23.3
(Discount) premium on long-term debt, net (b) (8.7) 4.6
Unamortized debt issuance costs (b) (66.2) (62.8)
 8,820.6
 8,651.7
 5,445.0
 5,170.5
Less current maturities (92.5) (717.5) (11.9) (5.9)
Total long-term debt $8,728.1
 $7,934.2
 $5,433.1
 $5,164.6

(a)Subsequent to March 31, 2015,If the debt obligation was retired in connection with completionmaturity of the debt-for-debt exchange (see Note 13).revolving line of credit is not extended prior to April 24, 2020, the maturity date of the Tranche B6 term loan will be April 24, 2020; provided further, if the 2020 Notes have not been repaid or refinanced prior to July 15, 2020 with indebtedness having a maturity date no earlier than March 29, 2021, the maturity date of the Tranche B6 term loan will be July 15, 2020.

(b)On April 24, 2015, Windstream Services amendedThe net (discount) premium balance and unamortized debt issuance costs are amortized using the revolving line of credit and extended its maturity to April 24, 2020. In connection withinterest method over the debt-for-debt exchange, Windstream Services retired $752.2 million of borrowings outstanding under the revolving line of credit. Immediately following the completionlife of the spin-off, Windstream Services had borrowings outstanding under the amended revolving line of credit of approximately $277.8 million (see Note 13).related debt instrument.

(c)On April, 24, 2015, Windstream Services called for the redemption of these notes on May 27, 2015 (see Note 13).
Senior Secured Credit Facility - On March 29, 2016, Windstream Services executed an incremental amendment to its existing senior secured credit facility to provide for the issuance of an aggregate principal amount $600.0 million term loan under Tranche B6 due March 29, 2021, the proceeds of which were used to repurchase $441.1 million of outstanding 7.875 percent notes due November 1, 2017 (the “2017 Notes”) pursuant to a tender offer and to repay other debt obligations of Windstream Services along with related fees and expenses. The Tranche B6 term loan was issued at a discount of $15.0 million. Debt issuance costs associated with the Tranche B6 borrowings were $10.7 million which were capitalized and will be amortized over the life of the term loan.

(d)Note was repaid on April 24, 2015 utilizing available borrowings under the amended revolving line of credit.
On April 24, 2015, Windstream Services had amended its existing senior secured credit facility which includes a revolving line of credit in an aggregate principal amount of $1,250.0 million and Tranche B5 term loan. The amended credit facility provides that Windstream Services may seek to obtain incremental revolving or term loans in an unlimited amount subject to maintaining a maximum secured leverage ratio and other customary conditions, including obtaining commitments and pro forma compliance with financial maintenance covenants consisting of a maximum debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio and a minimum interest coverage ratio. In addition, Windstream Services may request extensions of the maturity date under any of its existing revolving or term loan facilities.


1615


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


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

Senior Secured Credit FacilityInterest rates applicable to the Tranche B5 term loan are, at Windstream Services’ option, equal to either a base rate plus a margin of 1.75 percent per annum or London Interbank Offered Rate (“LIBOR”) plus a margin of 2.75 percent per annum. LIBOR and the base rate for the Tranche B5 term loan shall at no time be less than 0.75 percent and 1.75 percent, respectively. Interest rates applicable to the Tranche B6 are, at Windstream Services’ option, equal to either a base rate plus a margin of 4.00 percent per annum or LIBOR plus a margin of 5.00 percent per annum. LIBOR and the base rate for the Tranche B6 term loan shall at no time be less than 0.75 percent and 4.00 percent, respectively. Tranche B5 and B6 term loans made under the credit facility are subject to quarterly amortization payments in an aggregate amount equal to 0.25 percent of the initial principal amount of such term loans, with the remaining balance payable on August 8, 2019 and March 29, 2021, respectively. The senior secured credit facility is guaranteed, jointly and severally, by certain of Windstream Services’ wholly owned subsidiaries.

Revolving Lineline of Creditcredit -During As a result of the first three monthsApril 24, 2015 amendment to the credit facility, the maturity date of 2015, Windstream Services borrowed $490.0 million under the revolving line of credit in its senior secured credit facilitywas extended to April 24, 2020. Windstream Services may obtain revolving loans and repaid $295.0may issue up to $30.0 million of these borrowings through March 31, 2015. Lettersletters of credit, are deducted in determiningwhich upon issuance reduce the total amount available for borrowing under the revolving lineother extensions 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. Borrowings under the revolving line of credit may be used for permitted acquisitions, working capital and other general corporate purposes of Windstream Services and its subsidiaries. Windstream Services will pay a commitment fee on the unused portion of the commitments under the revolving credit facility that will range from 0.40 percent to 0.50 percent per annum, depending on the debt to consolidated EBITDA ratio of Windstream Services and its subsidiaries. Revolving loans made under the credit facility are not subject to interim amortization and such loans are not required to be repaid prior to April 24, 2020, other than to the extent the outstanding borrowings exceed the aggregate commitments under the revolving credit facility. Interest rates applicable to loans under the revolving line of credit are, at Windstream Services’ option, equal to either a base rate plus a margin ranging from 0.25 percent to 1.00 percent per annum or LIBOR plus a margin ranging from 1.25 percent to 2.00 percent per annum, based on the debt to consolidated EBITDA ratio of Windstream Services and its subsidiaries.

During the first three months of 2016, Windstream Services borrowed $693.0 million under the revolving line of credit in its senior secured credit facility and repaid $405.0 million of these borrowings through March 31, 2016. Considering letters of credit of $20.8$23.1 million, the amount available for borrowing under the revolving line of credit was $409.2$638.9 million at March 31, 2015.2016.

During the first quarterthree months of 2015,2016, the variable interest rate on the revolving line of credit ranged from 2.412.25 percent to 4.50 percent, and the weighted average rate on amounts outstanding was 2.52 percent during the period. Comparatively, the variable interest rate ranged from 2.41 percent to 4.50 percent during the first three months of 2014,2015, with a weighted average rate on amounts outstanding during the period of 2.532.52 percent.

Debentures and Notes Repaid in 2016
Partial Repurchase of Senior Notes - Pursuant to a debt repurchase program authorized by Windstream Services’ board of directors, during the first quarter of 2016, Windstream Services repurchased in the open market $154.2 million aggregate principal amount of its senior unsecured notes consisting of the following:

$93.5 million aggregate principal amount of 7.875 percent senior unsecured notes due November 1, 2017, (the “2017 Notes”) at a repurchase price of $97.8 million, including accrued and unpaid interest;

$33.1 million aggregate principal amount of 7.750 percent senior unsecured notes due October 1, 2021, (the “2021 Notes”), at a repurchase price of $26.0 million, including accrued and unpaid interest;

$17.0 million aggregate principal amount of 7.500 percent senior unsecured notes due June 1, 2022, (the “2022 Notes”), at a repurchase price of $13.1 million, including accrued and unpaid interest; and

$10.6 million aggregate principal amount of 7.500 percent senior unsecured notes due April 1, 2023, (the “2023 Notes”) at a repurchase price of $8.0 million, including accrued and unpaid interest.

At the time of repurchase, there was $9.4 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.


16


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


2. Long-term Debt, Continued:

Tender Offer for 2017 Notes - On March 29, 2016, Windstream Services repurchased $441.1 million aggregate principal amount of the 2017 Notes for total consideration of $477.5 million, plus accrued interest, pursuant to a cash tender offer announced on March 14, 2016. Under the tender offer, Windstream Services paid total consideration of $1,082.50 per $1,000 principal amount of the 2017 Notes, which included a $30 early tender payment, plus accrued and unpaid interest. Windstream Services had accepted for payment the maximum principal amount of 2017 Notes contemplated under the tender offer, and as a result, no additional notes were repurchased under the tender offer which expired on April 11, 2016.
Net Loss on Early Extinguishment of Debt

The net loss on early extinguishment of debt was as follows for the three month period ended March 31, 2016:
(Millions)      
Partial repurchases of 2017 Notes:      
Premium on repurchases     $(40.6)
Third-party fees for repurchases     (2.2)
Unamortized net discount on original issuance     (2.0)
Unamortized debt issuance costs on original issuance     (3.7)
Loss on early extinguishment from partial repurchases of 2017 Notes   (48.5)
Partial repurchases of 2021, 2022 and 2023 Notes:      
Discount on repurchases     13.6
Unamortized net premium on original issuance     0.3
Unamortized debt issuance costs on original issuance     (0.8)
Gain on early extinguishment from partial repurchases of 2021, 2022 and 2023 Notes     13.1
Net loss on early extinguishment of debt     $(35.4)

Windstream Services repurchased a portion of its 2017 Notes during the first quarter of 2016. The partial repurchase was accounted for as an extinguishment, and accordingly, Windstream Services recognized a pre-tax loss of $(48.5) million.

Windstream Services repurchased in the open market certain of its senior unsecured notes representing an aggregate principal amount of $154.2 million. The partial repurchase was accounted for under the extinguishment method of accounting, and as a result, Windstream Services recognized a pretax gain of $13.1 million.

Maturities for long-term debt outstanding as of March 31, 2016, excluding $(8.7) million of unamortized net discount and $66.2 million of unamortized debt issuance costs, were as follows:
Twelve month period ended:(Millions)
March 31, 2017$11.9
March 31, 2018381.4
March 31, 201911.9
March 31, 2020565.0
March 31, 20211,864.0
Thereafter2,685.7
Total$5,519.9


17


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


2. Long-term Debt, Continued:

Interest Expense

Interest expense was as follows for the three month periods ended March 31:
(Millions)      2016
 2015
Interest expense - long-term debt      $91.5
 $133.6
Interest expense - long-term lease obligations:         
   Telecommunications network assets      126.9
 —
   Real estate contributed to pension plan      1.5
 1.7
Impact of interest rate swaps      2.8
 6.6
Interest on capital leases and other      0.6
 0.7
Less capitalized interest expense      (3.6) (1.5)
Total interest expense      $219.7
 $141.1

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 1.0.1.0. 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 Holding Corp. (“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, 2015,2016, Windstream Services was in compliance with all of these covenants.

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 ownership 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 March 31, 2015.2016.

Maturities for long-term debt outstanding as of March 31, 2015, excluding $20.4 million of unamortized net premium, were as follows for each of the twelve month periods ended March 31:
Year(Millions)
2016$912.5
2017339.9
20181,306.9
2019869.5
20201,820.1
Thereafter3,551.3
Total$8,800.2

Capital Lease Obligations

We lease facilities, equipment and software for use in our operations. These facilities and equipment are included in outside communications plant in property, plant and equipment in the accompanying consolidated balance sheets. Lease agreements that include a bargain purchase option, transfer of ownership, contractual lease term equal to or greater than 75 percent of the remaining estimated economic life of the leased facilities or equipment or minimum lease payments equal to or greater than 90 percent of the fair value of the leased facilities or equipment are accounted for as capital leases in accordance with authoritative guidance for capital leases. These capital lease obligations are included in the accompanying consolidated balance sheets within other current liabilities and other liabilities. During the three month periods ended March 31, 2015 and 2014, we acquired assets under capital leases of $4.2 million and $5.1 million, respectively.


17


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


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

Future minimum lease payments under capital lease obligations were as follows for each of the twelve month periods ended March 31:
Year   (Millions)
2016   $31.9
2017   17.0
2018   2.1
2019   0.6
2020   0.6
Thereafter   1.7
Total future payments   53.9
Less: Amounts representing interest   3.8
Present value of minimum lease payments   $50.1

Other Lease Obligations

During the third quarter of 2014, we contributed certain of our owned real property to the Windstream Pension Plan and then entered into agreements to leaseback the properties for continued use by our operating subsidiaries. Independent appraisals of the properties contributed were obtained and at the dates of contribution the properties’ aggregate fair value was $80.9 million. The lease agreements include initial lease terms of 10 years for certain properties and 20 years for the remaining properties at an aggregate annual rent of approximately $6.3 million. The lease agreements provide for annual rent increases ranging from 2.0 percent to 3.0 percent over the initial lease term and may be renewed for up to three additional five-year terms. The properties are managed on behalf of the Windstream Pension Plan by an independent fiduciary and terms of the lease agreements were negotiated with the fiduciary on an arm’s-length basis.

Due to various forms of continuing involvement, including Windstream Services’ benefit from the future appreciation of the property, the transaction has been accounted for as a failed contribution-leaseback. Accordingly, the properties continue to be reported as assets of Windstream and depreciated over their remaining useful lives until termination of the lease agreement. We recorded a long-term lease obligation equal to the fair value of the properties at the date of contribution. No gain or loss was recognized on the contribution. As lease payments are made to the Windstream Pension Plan, a portion of the payment will be applied to the long-term lease obligation with the balance of the payment charged to interest expense using the effective interest method. At March 31, 2015 and December 31, 2014, the total lease obligation was $81.1 million and $81.0 million, respectively, and was included within other current liabilities and other liabilities in the accompanying consolidated balance sheet.

Future minimum payments during the initial terms of the leases were as follows for each of the twelve month periods ended March 31:
Year(Millions)
2016$6.4
20176.6
20186.8
20196.9
20207.1
Thereafter90.2
Total$124.0


18


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


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

Interest Expense

Interest expense was as follows for the three month periods ended March 31:
     Three Months Ended
(Millions)      2015
 2014
Interest expense related to long-term debt      $133.6
 $134.5
Impact of interest rate swaps      6.6
 7.4
Interest on capital and other lease obligations      2.4
 1.1
Less capitalized interest expense      (1.5) (1.1)
Total interest expense      $141.1
 $141.9

4. Derivatives:

Windstream Services has enteredenters into the following interest rate swap agreements to mitigate the interest rate risk inherent in its variable rate senior secured credit facility. Derivative instruments are accounted for in accordance with 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. Changes in fair value of the effective portions of cash flow hedges are recorded as a component of other comprehensive income (loss) in the current period. Any ineffective portion of the hedges is recognized in earnings in the current period.

In 2006,As of March 31, 2016 and December 31, 2015, Windstream Services entered into fourwas party to three pay fixed, receive variable interest rate swap agreements to serve as cash flow hedges of the interest rate risk inherent in its senior secured credit facility. Windstream Services renegotiated the four interest rate swap agreements in December 2010,The swaps have a notional value of $675.0 million and again in August 2012, each time lowering theare scheduled to mature on October 17, 2019. The average fixed interest rate paid is 3.604 percent and extending the maturity. As a result of the August 2012 transaction, Windstream Services reduced its fixed interest rate paid from 4.553 percent to 3.391 percent. The fixed interest rate paid includes a component which serves to settle the liability existing on Windstream Services 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”). The swaps had a notional value of $900.0 million as of March 31, 2015, which will remain unchanged until maturity on October 17, 2019.

In May 2013, Windstream Services entered into six new pay fixed, receive variable interest rate swap agreements, designated as cash flow hedges of the previously unhedged interest rate risk inherent in its senior secured credit facility. These swaps have a fixed notional value of $750.0 million and mature on June 17, 2016. The fixed rate paid ranges from 1.026 to 1.040 percent plus a fixed spread of 2.750 percent. The variable rate received resets on the seventeenth day of each month to the one-month LIBOR subject to a minimum rate of 0.750 percent.

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 Windstream Services’ senior secured credit facility, which have varying maturity dates from December 30, 2016 to January 23, 2020. The swaps are hedging probable variable cash flows which extend up to four yearsone year beyond the maturity of certain components of theWindstream Services’ variable rate debt. Consistent with past practice, Windstream Services expects to extend or otherwise replace these components of its debt with variable rate debt. The swaps are off-market swaps, meaning they contain an embedded financing element, which the swap counterparties recover through an incremental charge in the fixed rate over what would be charged for an at-market swap. As such, a portion of the cash payment on the swaps represents the rate that Windstream Services would pay on a hypothetical at-market interest rate swap and is recognized in interest expense. The remaining portion represents the repayment of the embedded financing element and reduces the initial swap liability.


1918


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


4.3. Derivatives, Continued:

As a result of refinancing transactions completed in 2013 and April 2015, Windstream Services de-designated certain interest rate swaps and froze the accumulated net gains and losses in accumulated other comprehensive loss related to these swaps. The frozen balance is amortized from accumulated other comprehensive loss to interest expense over the remaining life of the original swaps. All derivative instruments are recognized 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 the interest rate swap agreements:
(Millions, except for percentages) March 31,
2015
 December 31,
2014
 March 31,
2016
 December 31,
2015
Designated portion, measured at fair value:        
Other assets $—
 $0.4
Other current liabilities $28.5
 $28.5
 $18.5
 $18.3
Other non-current liabilities $54.7
 $48.7
 $38.6
 $33.4
Accumulated other comprehensive (loss) income $(3.7) $4.9
Accumulated other comprehensive loss $(9.2) $(0.9)
De-designated portion, unamortized value:        
Accumulated other comprehensive loss $(5.5) $(8.8)
Accumulated other comprehensive income (loss) $0.9
 $(0.2)
Weighted average fixed rate paid 3.57% 3.57% 2.96% 2.99%
Variable rate received 0.17% 0.16% 0.44% 0.35%

Derivatives are assessed for effectiveness each quarter and any ineffectiveness is recognized in other (expense) income,expense, net in our consolidated statements of operations. Ineffectiveness recognized on the cash flow hedges was $(0.5) million and $(2.3) million for the three month period ended March 31, 2015. Comparatively, there was no ineffectiveness recognized for the three month periodperiods ended March 31, 2014.2016 and 2015, respectively.

Windstream Services’ original four swaps are off-market swaps, meaning they contain an embedded financing element, which the swap counterparties recover through an incremental charge in the fixed rate over what would be charged for an on-market swap. As such, a portion of the cash payment on the swaps represents the rate that Windstream Services would pay on a hypothetical on- market interest rate swap and is recognized in interest expense. The remaining portion represents the repayment of the embedded financing element and reduces the swap liability.

All or a portion of the change in fair value of Windstream Services’ interest rate swap agreements recorded in accumulated other comprehensive incomeloss may be recognized in earnings in certain situations. If Windstream Services extinguishes all of its variable rate debt, or a portion of its variable rate debt such that the variable rate interest received on the swaps exceeds the variable rate interest paid on its debt, all or a portion of the change in fair value of the swaps wouldmay be recognized in earnings. In addition, the change in fair value of the swaps may be recognized in earnings if Windstream Services determines it is no longer probable that it will have future variable rate cash flows to hedge against or if a swap agreement is terminated prior to maturity. Windstream Services has assessed the counterparty risk and determined that no substantial risk of default exists as of March 31, 2015.2016. Each counterparty is a bank with a current credit rating at or above A,. as determined by Moody’s Investors Service, Standard & Poor’s Corporation and Fitch Ratings.

Windstream Services expects to recognize losses of $5.0$(7.0) 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 and the interest settlements for the three remaining interest swap agreements at March 31, 2015.2016. Payments on the swaps are presented in the financing activities section of the accompanying consolidated statements of cash flows due to the embedded financing element discussed above.

Changes in the value of these derivative instruments were as follows for the three month periods ended March 31:
(Millions) 2015
 2014
 2016
 2015
Changes in fair value of effective portion, net of tax (a) $(5.2) $(4.3) $(5.1) $(5.2)
Amortization of unrealized losses on de-designated interest rate swaps, net of tax (a) $2.0
 $2.6
 $0.7
 $2.0

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


20


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


4. Derivatives, Continued:

The agreements with each of the derivative counterparties contain cross-default provisions, whereby if Windstream Services were to default on certain indebtedness, it could also be declared in default on its derivative obligations and may be required to net settle any outstanding derivative liability positions with its counterparties.counterparties at the swap termination value of $61.7 million including accrued interest and excluding the credit valuation adjustment to measure non-performance risk. In addition, certain of the agreements with the counterparties contain provisions where if a specified event or condition, such as a merger, occurs that materially changes Windstream Services’ creditworthiness in an adverse manner, Windstream Services may be required to fully collateralize its derivative obligations. At March 31, 2015,2016, Windstream Services had not posted any collateral related to its interest rate swap agreements.

19


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


3. Derivatives, Continued:

Balance Sheet Offsetting

Windstream Services is party to master netting arrangements, which are designed to reduce credit risk by permitting net settlement of transactions with counterparties. For financial statement presentation purposes, Windstream Services does not offset assets and liabilities under these arrangements.

The following table presents the assets and liabilities subject to an enforceable master netting arrangement as of March 31, 20152016 and December 31, 2014.2015. As of March 31, 20152016, and December 31, 2015, all swap agreements with counterparties were in a liability position and, accordingly, there were no assets to be recognized in the accompanying consolidated balance sheetsheets as of that date.those dates.

Information pertaining to derivative assets was as follows:
     
Gross Amounts Not Offset in the Consolidated
Balance Sheets
  
(Millions)
Gross Amount of Recognized
Assets
 Net Amount of Assets presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral Received Net Amount
December 31, 2014:         
Interest rate swaps$0.4
 $0.4
 $(0.3) $—
 $0.1

Information pertaining to derivative liabilities was as follows:
    
Gross Amounts Not Offset in the Consolidated
Balance Sheets
      
Gross Amounts Not Offset in the Consolidated
Balance Sheets
  
(Millions)Gross Amount of Recognized Liabilities Net Amount of Liabilities presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral Received Net AmountGross Amount of Recognized Liabilities Net Amount of Liabilities Presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral Received Net Amount
March 31, 2015:         
March 31, 2016:         
Interest rate swaps$83.2
 $83.2
 $—
 $—
 $83.2
$57.1
 $57.1
 $—
 $—
 $57.1
                  
December 31, 2014:         
December 31, 2015:         
Interest rate swaps$77.2
 $77.2
 $(0.3) $—
 $76.9
$51.7
 $51.7
 $—
 $—
 $51.7

As further discussed in Note 13, in conjunction with the spin-off, Windstream Services terminated seven of its interest rate swaps.


21


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


5.4. 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, 20152016 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, investment in CS&L common stock, accounts payable, long-term debt 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, investment in CS&L common stock, long-term debt and interest rate swaps are measured at fair value on a recurring basis. Cash equivalents were not significant as of March 31, 2016 or December 31, 2014.2015.


20


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


4. Fair Value Measurements, Continued:

The fair values of the investment in CS&L common stock, interest rate swaps and long-term debt were determined using the following inputs at:
(Millions) March 31,
2015
 December 31,
2014
 March 31,
2016
 December 31,
2015
Recorded at Fair Value in the Financial Statements:        
Cash equivalents - Level 1 $50.1
 $—
Derivatives:    
Interest rate swap assets - Level 2 $—
 $0.4
Interest rate swap liabilities - Level 2 $83.2
 $77.2
    
Investment in CS&L common stock - Level 1 $653.8
 $549.2
Derivatives - Interest rate swap liabilities - Level 2 $57.1
 $51.7
Not Recorded at Fair Value in the Financial Statements: (a)        
Long-term debt, including current maturities - Level 2 $8,835.9
 $8,777.5
 $4,797.5
 $4,452.7

(a)
Recognized at carrying value of $8,820.6$5,511.2 million and $8,651.7$5,233.3 million in long-term debt, including current maturities, and excluding unamortized debt issuance costs, in the accompanying consolidated balance sheets as of March 31, 20152016 and December 31, 20142015, respectively.

The fair value of CS&L common stock is based on the quoted market price of the shares on the last day of the reporting period. The CS&L common stock trades on NASDAQ.

The fair values of 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 and also incorporate credit valuation adjustments to appropriately reflect both Windstream Services’ own non-performance risk and non-performance risk of the respective counterparties. As of March 31, 20152016 and December 31, 20142015, the fair values of the interest rate swaps were reduced by $4.1$3.7 million and $3.3$2.9 million, respectively, to reflect non-performance risk.

In calculating the fair value of Windstream Services’ long-term debt, the fair value of the debentures and notes was calculated based on quoted market prices of the specific issuances in an active market when available. The fair value of the other debt obligations was estimated based on appropriate market interest rates applied to the debt instruments. In calculating the fair value of the Windstream Holdings of the Midwest, Inc. notes, an appropriate market price of similar instruments in an active market considering credit quality, nonperformance risk and maturity of the instrument was used.

We do not have any assets or liabilities measured for purposes of the fair value hierarchy at fair value using significant unobservable inputs (Level 3). We recognize transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the fair value hierarchy during the three month period ended March 31, 2015.

222016.


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


6. Commitments and Contingencies:
We are party to various legal proceedings, including certain lawsuits claiming infringement of patents relating to various aspects of our business. In certain of the patent matters, other industry participants are also parties, and we may have claims of indemnification against vendors/suppliers. The ultimate resolution of these legal proceedings cannot be determined at this time. However, based on current circumstances, management does not believe such proceedings, individually or in the aggregate, will have a material adverse effect on the future consolidated results of our income, cash flows or 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.

7.5. 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 have ceased. 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:
   Three Months Ended
(Millions) 2015
 2014
 2016
 2015
Benefits earned during the period $2.4
 $2.2
 $2.2
 $2.4
Interest cost on benefit obligation 13.4
 14.7
 13.8
 13.4
Amortization of prior service credit (0.1) —
Expected return on plan assets (17.6) (17.2) (16.2) (17.6)
Net periodic benefit income $(1.8) $(0.3) $(0.3) $(1.8)


21


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


5. Employee Benefit Plans and Postretirement Benefits, Continued:

The components of postretirement benefits income were as follows for the three month periods ended March 31:
   Three Months Ended
(Millions) 2015
 2014
 2016
 2015
Interest cost on benefit obligation $0.3
 $0.4
   $0.3
 $0.3
Amortization of net actuarial loss 0.2
 —
 0.1
 0.2
Amortization of prior service credit (1.3) (1.7) (0.4) (1.3)
Plan curtailments —
 (9.5)
Plan curtailment (5.5) —
Net periodic benefit income $(0.8) $(10.8) $(5.5) $(0.8)

During the first quarter of 2014,2016, we made changes to our postretirement medical plan, eliminating medical and prescription drug subsidies primarily for certain active participants effective April 1, 2014.March 14, 2016. As a result, we remeasured the plan and recognized curtailment gains totaling $9.5$5.5 million, of which $5.1 million was recognized in cost of services expenses and $4.4 million was recognized in selling, general and administrative expenses, with the offsetting effect recorded as a reduction in accumulated other comprehensive income of $9.5 million.loss.

We contributed $0.5 million to the postretirement plan during the three month period ended March 31, 2015,2016, and expect to contribute an additional $1.8$1.6 million for postretirement benefits throughout the remainder of 2015,2016, excluding amounts that will be funded by participant contributions to the plan. In 2015,2016, we expect to make in cash employer contributions for pension benefits of $0.8$1.0 million to the qualified pension plan to meet our 2016 funding requirements and $0.9 million necessary to fund the expected benefit payments related to theof our unfunded supplemental executive retirement plans. We do not expectpension plans to make a contribution to the Windstream Pension Plan during 2015.avoid certain benefit restrictions. The amount and timing of future contributions to our qualified pension plan are based on a myriad of factors including investment performance, changes in future discount rates and changes in the demographics of the population participating in the plan.


23


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


7. Employee Benefit Plans and Postretirement Benefits, Continued:

We also sponsor an employee savings plan under section 401(k) of the Internal Revenue Code, which covers substantially all salaried employees and certain bargaining unit employees. Windstream matches on an annual basis up to a maximum of 4.0 percent of employee pre-tax contributions to the plan for employees contributing up to 5.0 percent of their eligible pre-tax compensation. We recorded expenses of $5.6$6.5 million in the three month period ended March 31, 2015,2016, as compared to $7.2$5.6 million for the same period in 20142015 related to our matching contribution under the employee savings plan, which was included in cost of services and selling, general and administrative expenses in our consolidated statements of operations. Expense related to our 20152016 matching contribution expected to be made in Windstream Holdings common stock is included in share-based compensation expense in the accompanying consolidated statements of cash flow. Additionally, we contributed 3.2 million shares of our common stock to the plan for the 2015 annual matching contribution during the three month period ended March 31, 2016. At the time of our contribution, the shares had a fair value of approximately $24.0 million as determined by the plan trustee. During 2015, we contributed 2.7 million shares of our common stock to the plan for the 2014 annual matching contribution during the three month period ended March 31, 2015.contribution. At the time of ourthis contribution, the shares had a fair value of approximately $21.6 million as determined by the plan trustee.

8.6. Share-Based Compensation Plans:

All share-based compensation award information presented has been retrospectively adjusted to reflect the effects of the one-for-six reverse stock split which became effective on April 26, 2015 and for the spin-off of the REIT completed on April 24, 2015 (see Note 13).

Under the Amended and Restated 2006 Equity Incentive Plan (the “Incentive Plan”), we may issue a maximum of 35.024.3 million equity stock awards in the form of restricted stock, restricted stock units, stock appreciation rights or stock options. As of March 31, 2015,2016, the Incentive Plan had remaining capacity of approximately 13.35.9 million awards. As of March 31, 2015,2016, we had additional remaining capacity of approximately 1.50.1 million awards from a similar equity incentive plan acquiredassumed in the PAETECa prior acquisition.

Our Board of Directors approves 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 these employee and director groups as a key component of their annual incentive compensation plan and one-time grants may include time-based and performance-based awards. Time-based awards generally vest ratably over a service period of two or three years. Each recipient of the performance-based restricted stock units 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 20152016 operating targets for these performance based restricted stock units were approved by the Board of Directors in February 2015. Due to the pending spin-off, there were no grants of restricted stock and restricted stock units in the three month period ended March 31, 2015.2016. The standard annual grants to employees and directors will bewere made in the secondfirst quarter of 2015.2016.


22


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


6. Share-Based Compensation Plans, Continued:

The vesting periods and grant date fair value for restricted stock and restricted stock units issued was as follows for the three month period ended March 31, 2016:
(Number of shares in thousands, dollars in millions)  
Vest ratably over a three-year service period 1,293.3
Vest two years from date of grant, service based 53.2
Vest contingently at the end of a three-year performance period 1,293.3
Vest one year from date of grant, service based - granted to non-employee directors 106.0
Total granted 2,745.8
Grant date fair value $14.8

Restricted stock and restricted stock unit activity for the three month period ended March 31, 20152016 was as follows: 
 
(Thousands)
Underlying Number of
Shares
 
Weighted
Average Fair
Value
 
(Thousands)
Underlying Number of
Shares
 
Per Share
Weighted
Average Fair
Value
Non-vested at December 31, 2014 978.0
 $8.95
Non-vested at December 31, 2015 3,553.1
 $15.29
Granted —
 $—
 2,745.8
 $5.38
Vested (354.6) $9.30
 (1,128.9) $18.38
Forfeited (98.1) $8.38
 (85.1) $15.24
Non-vested at March 31, 2015 525.3
 $8.81
Non-vested at March 31, 2016 5,084.9
 $9.42

At March 31, 20152016, unrecognized compensation expense totaled $22.6$37.8 million and is expected to be recognized over the weighted average vesting period of 1.71.6 years. Unrecognized compensation expense is included in additional paid-in capital in the accompanying consolidated balance sheets and statements of shareholders’ and member equity. Share-based compensation expense for restricted stock and restricted stock units was $5.0$6.6 million for the three month period ended March 31, 20152016, as compared to $6.5$5.0 million for the same period in 20142015.


24


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


8. Share-Based Compensation Plans, Continued:

In addition to including amounts related to restricted stock and restricted units, share-based compensation expense presented in the accompanying consolidated statements of cash flow also includes amounts related to certain executive and management incentive compensation plans and the matching contribution to the employee savings plan for which payments to eligible participants are expected to be made in Windstream Holdings common stock. A summary of share-based compensation expense was as follows for the three month periodperiods ended March 31:31:
   Three Months Ended
(Millions) 2015
 2014
 2016
 2015
Restricted stock and restricted units $5.0
 $6.5
 $6.6
 $5.0
Employee savings plan (See Note 7) 5.6
 7.2
Employee savings plan (See Note 5) 6.5
 5.6
Executive and management incentive compensation plansExecutive and management incentive compensation plans 4.2
 —
 0.6
 4.2
Share-based compensation expense $14.8
 $13.7
 $13.7
 $14.8


23


9.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


7. 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 consolidated 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 2011 acquisition of PAETECWe also incurred investment banking fees, legal, accounting and other consulting fees related to the spin-off of certain network and real estate assets into an independent, publicly traded real estate investment trust (“REIT”). During the fourth quarter of 2015, we began a network optimization project designed to consolidate traffic onto network facilities operated by us and reduce the usage of other carriers’ networks, including service areas acquired in the acquisition of PAETEC Holding, Corp. (“PAETEC”). In undertaking this initiative, which we expect to complete during 2016, we incurred costs to migrate traffic to lower cost circuits and to terminate existing contracts prior to their expiration. Costs related to the network optimization project and the REIT spin-off primarily account for the merger and integration costs incurred for the periods presented.

Restructuring charges are primarily incurred as a result of evaluations of our operating structure. Among other things, these evaluations explore opportunities to provide greater flexibility in managing and financing existing and future strategic operations, 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.

During the first quarter of 2015,2016, we incurred restructuring charges of $3.3severance and other employee-related costs totaling $4.3 million related to the completion of several small workforce reductions. Additionally, weRestructuring charges in the first quarter of 2015 principally consist of $3.3 million of severance and other employee-related costs incurred charges ofin connection with completing several small workforce reductions and $3.1 million related to thea special shareholder meeting held on February 20, 2015 to approve thea one-for-six reverse stock split of Windstream Holdings’ common stock and the conversion of Windstream Corporation to Windstream Services.

On February 21, 2014, we announced a reduction in our workforce to increase operational efficiency. As a result, we eliminated approximately 400 positions on or before March 3, 2014, with about 175 of the eliminated positions resulting from a voluntary separation initiative. In connection with this workforce reduction, we incurred pre-tax restructuring charges of $12.1 million for the three month period ended March 31, 2014, primarily consisting of severance and other employee benefit costs.
The following is a summary of the merger, integration and restructuring charges recorded for the three month periods ended March 31:
    Three Months Ended
(Millions)     2015
 2014
Merger and integration costs:        
Information technology conversion costs     $3.5
 $7.1
Consulting and other costs     10.6
 0.8
Total merger and integration costs     14.1
 7.9
Restructuring charges     7.0
 12.4
Total merger, integration and restructuring charges   $21.1
 $20.3

25
(Millions)     2016
 2015
Merger and integration costs:        
Information technology conversion costs     $—
 $3.5
Costs related to REIT spin-off     —
 10.5
Network optimization and conversion costs     4.2
 —
Consulting and other costs     0.8
 0.1
Total merger and integration costs     5.0
 14.1
Restructuring charges     4.4
 7.0
Total merger, integration and restructuring
   charges
     $9.4
 $21.1


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


9. Merger, Integration and Restructuring Charges, Continued:

After giving consideration to tax benefits on deductible items, merger, integration and restructuring charges decreased net income $13.0$5.8 million for the three month period ended March 31,, 2015, 2016, as compared to $14.0$13.0 million for the same period in 2014.2015.

The following is a summary of the activity related to the liabilities associated with merger, integration and restructuring charges at March 31:31:
(Millions) 2015
 2016
Balance, beginning of period $11.2
 $5.1
Merger, integration and restructuring charges 21.1
 9.4
Cash outlays during the period (19.8) (9.2)
Balance, end of period $12.5
 $5.3

As of March 31, 2015,2016, unpaid merger, integration and restructuring liabilities consisted of $1.2$2.9 million primarily associated with the restructuring initiatives and $11.3$2.4 million related to merger and integration activities. Payments of these liabilities will be funded through operating cash flows.


24


10.NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


8. Other-Than-Temporary Impairment Loss on Investment in CS&L Common Stock:

In connection with the spin-off of certain telecommunications network assets, including our fiber and copper networks and other real estate, into an independent, publicly-traded REIT, Communications Sales & Leasing, Inc. (“CS&L”), completed on April 24, 2015, Windstream Services retained a passive ownership interest in approximately 19.6 percent of the common stock of CS&L. We intend to use all of the CS&L shares to retire additional Windstream Services debt within 24 months from the date of the spin-off, subject to market conditions. Shares of CS&L retained by Windstream Services are classified as available-for-sale and recorded at fair value with unrealized gains and losses reported in accumulated other comprehensive loss. No deferred income taxes are recorded with respect to the unrealized gains and losses due to the tax-free qualification of the spin-off.

We recorded an other-than-temporary impairment loss of $(181.9) million for the difference between the fair value of the CS&L common stock as of March 31, 2016 and our cost basis, which had been based on the market value of the shares on the date of spin-off. We recorded the other-than-temporarily impairment due to the duration in which the CS&L shares had traded at a market price below our initial cost basis.

Following the recognition of the other-than-temporary impairment loss, information pertaining to our investment in CS&L common stock at March 31, 2016 was as follows:
(Millions)Cost
Fair
Value
Carrying
Value
Unrealized
Gain (Loss)
CS&L common stock$653.8$653.8$653.8$—

Subsequent to March 31, 2016, the market price of the CS&L shares has increased such that as of May 4, 2016, the fair value of our investment has increased from $653.8 million to $686.4 million.

9. Accumulated Other Comprehensive Income:Loss: 

Accumulated other comprehensive incomeloss balances, net of tax, were as follows:
(Millions) March 31,
2015
 December 31,
2014
 March 31,
2016
 December 31,
2015
Pension and postretirement plans $13.6
 $14.5
 $(0.8) $2.8
Unrealized holding loss on available-for-sale securities —
 (286.5)
Unrealized holding (losses) gains on interest rate swaps:        
Designated portion (2.2) 3.1
 (5.7) (0.6)
De-designated portion (3.4) (5.5) 0.6
 (0.1)
Accumulated other comprehensive income $8.0
 $12.1
Accumulated other comprehensive loss $(5.9) $(284.4)

Changes in accumulated other comprehensive incomeloss balances, net of tax, were as follows:
(Millions) 
 (Losses) Gains on Interest
Rate Swaps
 
Pension and
Postretirement
Plans
 Total
Balance at December 31, 2014 $(2.4) $14.5
��$12.1
Other comprehensive loss before reclassifications (5.2) —
 (5.2)
Amounts reclassified from other accumulated comprehensive income (a) 2.0
 (0.9) 1.1
Balance at March 31, 2015 $(5.6) $13.6
 $8.0
(Millions) Unrealized Holding Loss on Available-for-Sale Securities 
 (Losses) Gains on Interest
Rate Swaps
 
Pension and
Postretirement
Plans
 Total
Balance at December 31, 2015 $(286.5) $(0.7) $2.8
 $(284.4)
Other comprehensive income (loss) before
   reclassifications
 104.6
 (5.1) —
 99.5
Amounts reclassified from other accumulated
   comprehensive loss (a)
 181.9
 0.7
 (3.6) 179.0
Balance at March 31, 2016 $—
 $(5.1) $(0.8) $(5.9)

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


2625


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


10.9. Accumulated Other Comprehensive Income,Loss, Continued:

Reclassifications out of accumulated other comprehensive incomeloss were as follows for the three month periods ended March 31:
 
(Millions)
Amount Reclassified from Accumulated
Other Comprehensive Income
  
(Millions)
Amount Reclassified from Accumulated
Other Comprehensive Loss
 
Details about Accumulated Other
Comprehensive Income Components
 Three Months Ended 
Affected Line Item in the
Consolidated Statements
of Income
 2015
 2014
 
Losses on interest rate swaps:     
Details about Accumulated Other Comprehensive Loss Components Three Months Ended 
Affected Line Item in the
Consolidated Statements
of Operations
2016
 2015
 
Available-for-sale securities:     
Other-than-temporary impairment loss
recognized in the period
 $181.9
 $—
 
Other-than-temporary impairment loss
   on investment in CS&L common stock
     
Interest rate swaps:     
Amortization of unrealized losses on
de-designated interest rate swaps
 $3.4
 $4.2
 Interest expense 1.2
 3.4
 Interest expense
 3.4
 4.2
 
Income from continuing
operations before income taxes
 1.2
 3.4
 Loss before income taxes
 (1.4) (1.6) Income taxes (0.5) (1.4) Income tax benefit
 2.0
 2.6
 Net income 0.7
 2.0
 Net (loss) income
     
Pension and postretirement plans:          
Plan curtailments —
 (9.5)(a) 
Plan curtailment (5.5) —
(a) 
Amortization of net actuarial loss 0.2
 —
(a)  0.1
 0.2
(a) 
Amortization of prior service credits (1.3) (1.7)(a)  (0.5) (1.3)(a) 
 (1.1) (11.2) 
Income from continuing
operations before income taxes
 (5.9) (1.1) Loss before income taxes
 0.2
 4.2
 Income taxes 2.3
 0.2
 Income tax benefit
 (0.9) (7.0) Net income (3.6) (0.9) Net (loss) income
Total reclassifications for the period,
net of tax
Total reclassifications for the period,
net of tax
 $1.1
 $(4.4) Net income $179.0
 $1.1
 Net (loss) income

(a)These accumulated other comprehensive incomeloss components are included in the computation of net periodic benefit income. Seeincome (see Note 7 for additional details.5).

26


11.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


10. (Loss) Earnings per Share:

All per share information presented has been retrospectively adjusted to reflect the effects of the one-for-six reverse stock split which became effective on April 26, 2015 (see Note 13).

We compute basic (loss) earnings per share by dividing net (loss) 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 (loss) earnings per share pursuant to the two-class method. Calculations of (loss) earnings per share under the two-class method exclude from the numerator any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to participating securities. The related participating securities are similarly excluded from the denominator.

Diluted (loss) earnings per share are computed by dividing net (loss) income applicable to common shares by the weighted average number of common shares adjusted to include the effect of potentially dilutive securities. Potentially dilutive securities include incremental shares issuable upon exercise of outstanding stock options and warrants. Diluted (loss) earnings per share exclude all potentially dilutive securities if their effect is anti-dilutive.
 

27


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


11. Earnings per Share, Continued:

We also issue performance-based restricted stock units as part of our share-based compensation plan. TheseCertain of 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, 20152016, the performance conditions for the outstanding restricted stock units have not yet been satisfied. Options and warrants granted in conjunction with the acquisition of PAETECpast acquisitions are included in the computation of dilutive earnings per share using the treasury stock method.

A reconciliation of net (loss) income and number of shares used in computing basic and diluted (loss) earnings per share was as follows for the three month periods ended March 31:
    Three Months Ended
(Millions, except per share amounts)     2015
 2014
Basic and diluted earnings per share:        
Numerator:        
Income from continuing operations     $5.3
 $16.0
Income from continuing operations allocable to participating
   securities
 (0.7) (1.3)
Net income attributable to common shares     $4.6
 $14.7
         
Denominator:        
Basic shares outstanding        
  Weighted average basic shares outstanding     100.8
 99.6
  Weighted average participating securities     (0.9) (0.6)
Weighted average shares outstanding for basic earnings
   per share
 99.9
 99.0
Diluted shares outstanding        
Weighted average shares outstanding for basic earnings per share 99.9
 99.0
  Effect of dilutive stock options     0.1
 0.1
Weighted average shares outstanding for diluted earnings
   per share
 100.0
 99.1
Basic and diluted earnings per share:        
Net income     
$.05
 
$.15
(Millions, except per share amounts)     2016
 2015
Basic and diluted (loss) earnings per share:        
Numerator:        
Net (loss) income     $(231.9) $5.3
Income allocable to participating securities     (0.5) (0.7)
Net (loss) income attributable to common
   shares
     $(232.4) $4.6
         
Denominator:        
Basic and diluted shares outstanding        
  Weighted average shares outstanding     96.4
 100.8
  Weighted average participating securities     (4.2) (0.9)
Weighted average basic and diluted shares
   outstanding
     92.2
 99.9
Basic and diluted (loss) earnings per share:        
Net (loss) income     
($2.52) 
$.05

Options to purchase shares of stock issuable under stock-based compensation plans that were excluded from the computation of diluted earnings per shareshares outstanding because the exercise prices were greater than the average market price of our common stock and, therefore, the effect would be anti-dilutive, totaled 0.10.5 million shares for both the three month periodsperiod ended March 31, 20152016 and 2014.2015, respectively.


2827


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


11. Segment Information:
Our business unit organizational structure is focused on our core customer relationships, and as a result, we operate and report the following four customer-based segments:

Consumer and Small Business - ILEC - We manage as one business our residential and small business customers who reside in markets in which we are the incumbent local exchange carrier (“ILEC”) due to the similarities with respect to service offerings, marketing strategies and customer service delivery. Products and services offered to these customers include traditional local and long-distance voice services and high-speed Internet services, which are delivered primarily over network facilities operated by us. We offer consumer video services primarily through a relationship with Dish Network LLC and we also own and operate cable television franchises in some of our service areas. During 2015, we launched Kinetic, a complete video entertainment offering in our Lincoln, Nebraska and Lexington, Kentucky markets, and we launched this service in Sugar Land, Texas in April 2016. We expect to roll out this new service to additional markets during the next few years.

Residential customers can bundle voice, high-speed Internet and video services, to provide one convenient billing solution and receive bundle discounts. Small Business - ILEC services offer a wide range of advanced Internet, voice, and web conferencing products. These services are equipped to deliver high-speed Internet with competitive speeds, value added services to enhance business productivity and options to bundle services for a global business solution to meet our small business customer needs.

Carrier - Our carrier operations consist of providing products and services to other communications services providers, including special access services, which provide network access and transport services to end users, and fiber-to-tower connections to support backhaul services to wireless carriers. We also offer on a wholesale basis voice and data transport services to other communications providers, including the resale of our services and the sale of unbundled network elements, which allow wholesale customers to provide voice and data services to their customers through the use of our network or in combination with their own networks.

Enterprise - Our enterprise operations consist of our business customer relationships that generate $1,500 or more in revenue per month. Products and services offered to these customers include integrated voice and data services, which deliver voice and broadband services over a single Internet connection, multi-site networking services which provide a fast and private connection between business locations, as well as a variety of other data services, including cloud computing and collocation and managed services as an alternative to traditional information technology infrastructure.

Small Business - CLEC - These operations consist of our business customer relationships that generate less than $1,500 in revenue per month and are located in services areas in which we are a competitive local exchange carrier (“CLEC”) and provide services over network facilities primarily leased from other carriers. Products and services provided to these customers include integrated voice and data services, advanced data and traditional voice and long-distance services, as well as value added services including online backup, managed web design and web hosting, and various e-mail services.

We evaluate performance of the segments based on segment income, which is computed as segment revenues and sales less segment operating expenses. As further discussed below, certain operating revenues and expenses are not assigned to our segments.

Segment revenues are based upon each customer’s classification to an individual segment and include all services provided to that customer. Certain operating revenues are derived from activities that are centrally-managed by us and, accordingly, these revenues are not included in any of our four segments presented below. These other operating revenues include revenue from federal and state universal service funds, CAF Phase II support, and funds received from federal access recovery mechanisms. We also generate other service revenues from providing switched access services, which include usage-based revenues from long-distance companies and other carriers for access to our network to complete long-distance calls, as well as reciprocal compensation received from wireless and other local connecting carriers for the use of network facilities. Other operating revenues also include certain surcharges assessed to our customers, including billings for our required contributions to federal and state USF programs. Revenues attributable to disposed businesses are not assigned to the segments and are also included in other service revenues for all periods prior to the dates of disposal. For the periods presented, the disposed operations consist of the sold data center and directory publishing businesses completed in December and April of 2015, respectively, as well as, the consumer CLEC business transferred to CS&L in connection with the REIT spin-off.


28


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


11. Segment Information, Continued:

Segment expenses include specific expenses incurred as a direct result of providing services and products to segment customers; selling, general and administrative expenses that are directly associated with specific segment customers or activities; and certain allocated expenses which include network expenses, facilities expenses and other expenses, such as vehicle and real estate-related expenses. We do not assign depreciation and amortization expense, merger and integration costs, restructuring charges, stock-based compensation and pension costs to our segments, because these expenses are centrally managed and are not monitored by or reported to the chief operating decision maker (“CODM”) by segment. Similarly, certain centrally-managed administrative functions, such as accounting and finance, information technology, legal and human resources, are not assigned to our segments. Interest expense and net loss on early extinguishment of debt have also been excluded from segment operating results because we manage our financing activities on a total company basis and have not assigned any long-term debt obligations to the segments. Other expense, net, other-than-temporary impairment of our investment in CS&L common stock, and income tax benefit are not monitored as a part of our segment operations and, therefore, these items also have been excluded from our segment operating results.

Asset information by segment is not monitored or reported to the CODM and therefore has not been presented. All of our customers are located in the United States and we do not have any single customer that provides more than 10 percent of our total consolidated revenues and sales.

The following table summarizes our segment results for the three month periods ended March 31:
(Millions)     2016
 2015
Consumer and Small Business - ILEC:        
Revenues and sales     $397.2
 $402.8
Costs and expenses     169.1
 163.2
Segment income     228.1
 239.6
Carrier:        
Revenues     163.2
 176.3
Costs and expenses     45.5
 46.1
Segment income     117.7
 130.2
Enterprise:        
Revenues and sales     513.1
 503.3
Costs and expenses     442.6
 451.4
Segment income     70.5
 51.9
Small Business - CLEC:        
Revenues     128.7
 146.6
Costs and expenses     87.4
 98.0
Segment income     41.3
 48.6
Total segment revenues and sales     1,202.2
 1,229.0
Total segment costs and expenses     744.6
 758.7
Total segment income     $457.6
 $470.3

The following table reconciles total segment revenue and sales to total consolidated revenue and sales for the three month periods ended March 31:
(Millions)     2016
 2015
Total segment revenues and sales     $1,202.2
 $1,229.0
Regulatory and other operating revenues and sales     171.2
 150.9
Revenue and sales related to disposed businesses     —
 38.7
Total consolidated revenues and sales     $1,373.4
 $1,418.6


29


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


11. Segment Information, Continued:

The following table reconciles segment income to consolidated net (loss) income for the three month periods ended March 31:
(Millions)     2016
 2015
Total segment income     $457.6
 $470.3
Revenues and sales related to disposed businesses     —
 38.7
Regulatory and other operating revenues and sales     171.2
 150.9
Depreciation and amortization     (304.8) (340.7)
Other unassigned operating expenses     (166.3) (173.7)
Operating expenses related to disposed businesses     —
 (25.6)
Dividend income on CS&L common stock     17.6
 —
Other expense, net     (1.2) (1.2)
Net loss on early extinguishment of debt     (35.4) —
Other-than-temporary impairment loss on
   investment in CS&L common stock
     (181.9) —
Interest expense     (219.7) (141.1)
Income tax benefit     31.0
 27.7
Net (loss) income     $(231.9) $5.3

12. Supplemental Guarantor Information:

Debentures and notes, without collateral, issued by Windstream Services, LLC
In connection with the issuance of the 7.875 percent senior notes due November 1, 2017, the 8.125 percent senior notes due September 1, 2018, 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 6.375 percent senior notes due August 1, 2023 (“the guaranteed notes”), certain of Windstream Services’ 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. All personal property assets and related operations of the Guarantors are pledged as collateral on the senior secured credit facility of Windstream Services. Certain Guarantors may be subject to restrictions on their ability to distribute earnings to Windstream Services. The remaining subsidiaries of Windstream Services (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. Windstream Holdings is not a guarantor of any Windstream Services debt instruments.

The following information presents condensed consolidating and combined statements of comprehensive income for the three month periods ended March 31, 20152016 and 2014,2015, condensed consolidating balance sheets as of March 31, 20152016 and December 31, 2014,2015, and condensed consolidating and combined statements of cash flows for the three month periods ended March 31, 20152016 and 20142015 of Windstream Services, the Guarantors and the Non-Guarantors. Investments consist of investments in net assets of subsidiaries held by Windstream Services and other subsidiaries, and have been presented using the equity method of accounting.


  Condensed Consolidating Statement of Comprehensive Income (Unaudited)
  Three Months Ended
March 31, 2015
(Millions) Windstream Services Guarantors 
Non-
Guarantors
 Eliminations Consolidated
Revenues and sales:          
Service revenues $—
 $248.1
 $1,139.5
 $(5.8) $1,381.8
Product sales —
 9.2
 27.6
 —
 36.8
Total revenues and sales —
 257.3
 1,167.1
 (5.8) 1,418.6
Costs and expenses:          
  Cost of services —
 90.5
 595.3
 (5.8) 680.0
  Cost of products sold —
 9.3
 22.6
 —
 31.9
  Selling, general and administrative —
 22.1
 202.3
 —
 224.4
  Depreciation and amortization 4.9
 74.4
 261.4
 —
 340.7
  Merger and integration costs —
 —
 14.1
 —
 14.1
  Restructuring charges —
 1.2
 5.8
 —
 7.0
Total costs and expenses 4.9
 197.5
 1,101.5
 (5.8) 1,298.1
Operating (loss) income (4.9) 59.8
 65.6
 —
 120.5
Earnings from consolidated subsidiaries 46.5
 15.1
 0.6
 (62.2) —
Other (expense) income, net (1.4) 0.2
 —
 —
 (1.2)
Intercompany interest income (expense) 32.4
 (13.1) (19.3) —
 —
Interest expense (128.9) (1.5) (10.7) —
 (141.1)
(Loss) income before income taxes (56.3) 60.5
 36.2
 (62.2) (21.8)
Income tax (benefit) expense (61.9) 20.8
 13.7
 —
 (27.4)
Net income $5.6
 $39.7
 $22.5
 $(62.2) $5.6
Comprehensive income $1.5
 $39.7
 $22.5
 $(62.2) $1.5

2930


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


12. Supplemental Guarantor Information, Continued:

 Condensed Consolidating Statement of Comprehensive Income (Unaudited) Condensed Consolidating Statement of Comprehensive Income (Loss) (Unaudited)
 Three Months Ended
March 31, 2014		 Three Months Ended
March 31, 2016
(Millions) Windstream Services Guarantors 
Non-
Guarantors
 Eliminations Consolidated Windstream Services Guarantors 
Non-
Guarantors
 Eliminations Consolidated
Revenues and sales:                    
Service revenues $—
 $259.6
 $1,164.3
 $(4.2) $1,419.7
 $—
 $253.6
 $1,093.2
 $(6.2) $1,340.6
Product sales —
 10.0
 35.2
 —
 45.2
 —
 28.6
 4.2
 —
 32.8
Total revenues and sales —
 269.6
 1,199.5
 (4.2) 1,464.9
 —
 282.2
 1,097.4
 (6.2) 1,373.4
Costs and expenses:         
          
Cost of services —
 88.8
 572.3
 (3.2) 657.9
 —
 99.3
 575.1
 (5.6) 668.8
Cost of products sold —
 9.5
 31.6
 —
 41.1
 —
 25.9
 3.0
 —
 28.9
Selling, general and administrative —
 22.7
 216.7
 (1.0) 238.4
 —
 38.4
 165.5
 (0.6) 203.3
Depreciation and amortization 5.6
 74.2
 259.1
 —
 338.9
 3.8
 74.1
 226.9
 —
 304.8
Merger and integration costs —
 —
 7.4
 —
 7.4
 —
 —
 5.0
 —
 5.0
Restructuring charges —
 2.2
 10.7
 —
 12.9
 —
 0.8
 3.6
 —
 4.4
Total costs and expenses 5.6
 197.4
 1,097.8
 (4.2) 1,296.6
 3.8
 238.5
 979.1
 (6.2) 1,215.2
Operating (loss) income (5.6) 72.2
 101.7
 —
 168.3
 (3.8) 43.7
 118.3
 —
 158.2
Earnings from consolidated subsidiaries 80.1
 12.3
 0.6
 (93.0) —
Other income (expense), net 0.5
 41.4
 (41.0) —
 0.9
Earnings (losses) from consolidated subsidiaries 5.4
 (23.2) (7.4) 25.2
 —
Dividend income on CS&L common stock 17.6
 —
 —
 —
 17.6
Other expense, net —
 —
 (1.2) —
 (1.2)
Net loss on early extinguishment of debt (35.4) —
 —
 —
 (35.4)
Other-than-temporary impairment loss on
investment in CS&L common stock
 (181.9) —
 —
 —
 (181.9)
Intercompany interest income (expense) 31.6
 (13.8) (17.8) —
 —
 24.8
 (10.0) (14.8) —
 —
Interest expense (130.7) (1.5) (9.7) —
 (141.9) (92.6) (37.4) (89.7) —
 (219.7)
(Loss) income before income taxes (24.1) 110.6
 33.8
 (93.0) 27.3
 (265.9) (26.9) 5.2
 25.2
 (262.4)
Income tax (benefit) expense (40.4) 38.0
 13.4
 —
 11.0
 (34.3) (1.4) 4.9
 —
 (30.8)
Net income $16.3
 $72.6
 $20.4
 $(93.0) $16.3
Comprehensive income $7.1
 $72.6
 $20.4
 $(93.0) $7.1
Net (loss) income $(231.6) $(25.5) $0.3
 $25.2
 $(231.6)
Comprehensive income (loss) $46.9
 $(25.5) $0.3
 $25.2
 $46.9




3031


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


12. Supplemental Guarantor Information, Continued:
  Condensed Consolidating Balance Sheet (Unaudited)
  As of March 31, 2015
(Millions) Windstream Services Guarantors 
Non-
Guarantors
 Eliminations Consolidated
Assets          
Current Assets:          
Cash and cash equivalents $16.7
 $1.0
 $56.3
 $—
 $74.0
Restricted cash 7.1
 —
 —
 —
 7.1
Accounts receivable (less allowance for doubtful
    accounts of $42.3)
 —
 140.6
 517.9
 —
 658.5
Notes receivable - affiliate —
 4.8
 —
 (4.8) —
 Affiliates receivable, net —
 1,052.3
 1,997.9
 (3,050.2) —
Inventories —
 38.4
 24.6
 —
 63.0
Deferred income taxes 57.6
 9.2
 24.9
 —
 91.7
Prepaid expenses and other 28.6
 20.0
 123.0
 —
 171.6
Total current assets 110.0
 1,266.3
 2,744.6
 (3,055.0) 1,065.9
Investments in consolidated subsidiaries 10,056.1
 980.8
 278.5
 (11,315.4) —
Notes receivable - affiliate —
 316.8
 —
 (316.8) —
Goodwill 1,649.5
 825.6
 1,877.7
 —
 4,352.8
Other intangibles, net 582.6
 345.4
 782.5
 —
 1,710.5
Net property, plant and equipment 9.5
 1,243.5
 4,062.0
 —
 5,315.0
Other assets 99.6
 18.0
 57.3
 —
 174.9
Total Assets $12,507.3
 $4,996.4
 $9,802.6
 $(14,687.2) $12,619.1
Liabilities and Equity          
Current Liabilities:          
Current maturities of long-term debt $92.4
 $—
 $0.1
 $—
 $92.5
Current portion of interest rate swaps 28.5
 —
 —
 —
 28.5
Accounts payable 1.1
 43.6
 287.3
 —
 332.0
Affiliates payable, net 3,201.9
 —
 —
 (3,050.2) 151.7
Notes payable - affiliate —
 —
 4.8
 (4.8) —
Advance payments and customer deposits —
 15.6
 198.9
 —
 214.5
Accrued taxes 0.1
 19.9
 64.3
 —
 84.3
Accrued interest 149.5
 3.9
 17.0
 —
 170.4
Other current liabilities 38.7
 13.8
 229.9
 —
 282.4
Total current liabilities 3,512.2
 96.8
 802.3
 (3,055.0) 1,356.3
Long-term debt 8,158.8
 99.6
 469.7
 —
 8,728.1
Notes payable - affiliate —
 —
 316.8
 (316.8) —
Deferred income taxes 669.7
 409.2
 749.9
 —
 1,828.8
Other liabilities 71.6
 46.1
 493.2
 —
 610.9
Total liabilities 12,412.3
 651.7
 2,831.9
 (3,371.8) 12,524.1
Commitments and Contingencies (See Note 6) 

 

 

 

 

Equity:          
Common stock —
 39.4
 81.9
 (121.3) —
Additional paid-in capital 87.0
 3,794.9
 4,002.0
 (7,796.9) 87.0
Accumulated other comprehensive income 8.0
 —
 13.6
 (13.6) 8.0
Retained earnings —
 510.4
 2,873.2
 (3,383.6) —
Total equity 95.0
 4,344.7
 6,970.7
 (11,315.4) 95.0
Total Liabilities and Equity $12,507.3
 $4,996.4
 $9,802.6
 $(14,687.2) $12,619.1
  Condensed Consolidating Statement of Comprehensive Income (Loss) (Unaudited)
  Three Months Ended
March 31, 2015
(Millions) Windstream Services Guarantors 
Non-
Guarantors
 Eliminations Consolidated
Revenues and sales:          
Service revenues $—
 $283.6
 $1,105.1
 $(6.9) $1,381.8
Product sales —
 32.2
 4.6
 —
 36.8
Total revenues and sales —
 315.8
 1,109.7
 (6.9) 1,418.6
Costs and expenses:         
Cost of services —
 114.6
 571.2
 (5.8) 680.0
Cost of products sold —
 27.7
 4.2
 —
 31.9
Selling, general and administrative —
 39.4
 186.1
 (1.1) 224.4
Depreciation and amortization 4.9
 83.6
 252.2
 —
 340.7
Merger and integration costs —
 —
 14.1
 —
 14.1
Restructuring charges —
 1.6
 5.4
 —
 7.0
Total costs and expenses 4.9
 266.9
 1,033.2
 (6.9) 1,298.1
Operating (loss) income (4.9) 48.9
 76.5
 —
 120.5
Earnings (losses) from consolidated subsidiaries 46.5
 (23.9) 0.1
 (22.7) —
Other (expense) income, net (1.4) 0.1
 0.1
 —
 (1.2)
Intercompany interest income (expense) 32.4
 (13.1) (19.3) —
 —
Interest expense (128.9) (11.1) (1.1) —
 (141.1)
(Loss) income before income taxes (56.3) 0.9
 56.3
 (22.7) (21.8)
Income tax (benefit) expense (61.9) 9.5
 25.0
 —
 (27.4)
Net income (loss) $5.6
 $(8.6) $31.3
 $(22.7) $5.6
Comprehensive income (loss) $1.5
 $(8.6) $31.3
 $(22.7) $1.5




3132


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


12. Supplemental Guarantor Information, Continued:
 Condensed Consolidating Balance Sheet (Unaudited) Condensed Consolidating Balance Sheet (Unaudited)
 As of December 31, 2014 As of March 31, 2016
(Millions) Windstream Services Guarantors 
Non-
Guarantors
 Eliminations Consolidated Windstream Services Guarantors 
Non-
Guarantors
 Eliminations Consolidated
Assets                    
Current Assets:                    
Cash and cash equivalents $—
 $2.1
 $51.7
 $(26.0) $27.8
 $23.7
 $0.7
 $50.2
 $—
 $74.6
Restricted cash 6.7
 —
 —
 —
 6.7
Accounts receivable (less allowance for doubtful
accounts of $43.4)
 —
 136.5
 499.0
 —
 635.5
Accounts receivable, net —
 212.9
 423.2
 —
 636.1
Notes receivable - affiliate —
 4.8
 —
 (4.8) —
 —
 4.8
 —
 (4.8) —
Affiliates receivable, net —
 1,057.7
 2,066.9
 (3,124.6) —
 —
 692.4
 2,025.1
 (2,717.5) —
Inventories —
 36.9
 26.8
 —
 63.7
 —
 67.8
 11.6
 —
 79.4
Deferred income taxes 67.4
 10.5
 27.5
 —
 105.4
Prepaid expenses and other 35.5
 20.4
 108.7
 —
 164.6
 29.2
 36.4
 84.3
 —
 149.9
Total current assets 109.6
 1,268.9
 2,780.6
 (3,155.4) 1,003.7
 52.9
 1,015.0
 2,594.4
 (2,722.3) 940.0
Investments in consolidated subsidiaries 10,001.3
 965.6
 255.6
 (11,222.5) —
 6,481.5
 340.3
 249.2
 (7,071.0) —
Notes receivable - affiliate —
 317.7
 —
 (317.7) —
 —
 313.2
 —
 (313.2) —
Goodwill 1,649.5
 825.6
 1,877.7
 —
 4,352.8
 1,636.7
 1,343.0
 1,233.9
 —
 4,213.6
Other intangibles, net 590.7
 355.2
 818.1
 —
 1,764.0
 543.9
 276.3
 637.0
 —
 1,457.2
Net property, plant and equipment 9.8
 1,269.4
 4,133.1
 —
 5,412.3
 8.0
 1,229.3
 4,018.4
 —
 5,255.7
Investment in CS&L common stock 653.8
 —
 —
 —
 653.8
Deferred income taxes —
 310.3
 215.0
 (525.3) —
Other assets 104.2
 17.1
 59.3
 —
 180.6
 12.8
 55.4
 22.7
 —
 90.9
Total Assets $12,465.1
 $5,019.5
 $9,924.4
 $(14,695.6) $12,713.4
 $9,389.6
 $4,882.8
 $8,970.6
 $(10,631.8) $12,611.2
Liabilities and Equity                    
Current Liabilities:                    
Current maturities of long-term debt $717.4
 $—
 $0.1
 $—
 $717.5
 $11.9
 $—
 $—
 $—
 $11.9
Current portion of interest rate swaps 28.5
 —
 —
 —
 28.5
Current portion of long-term lease obligations —
 46.0
 110.6
 —
 156.6
Accounts payable 2.1
 86.9
 314.3
 —
 403.3
 —
 74.6
 249.0
 —
 323.6
Affiliates payable, net 3,277.0
 —
 —
 (3,124.6) 152.4
 2,732.4
 —
 —
 (2,717.5) 14.9
Notes payable - affiliate —
 —
 4.8
 (4.8) —
 —
 —
 4.8
 (4.8) —
Advance payments and customer deposits —
 16.6
 198.1
 —
 214.7
 —
 28.4
 165.5
 —
 193.9
Accrued taxes 0.2
 23.8
 71.2
 —
 95.2
 0.6
 15.6
 55.4
 —
 71.6
Accrued interest 94.3
 2.1
 6.1
 —
 102.5
 113.4
 3.4
 1.3
 —
 118.1
Other current liabilities 32.3
 18.0
 278.6
 —
 328.9
 26.8
 38.0
 194.2
 —
 259.0
Total current liabilities 4,151.8
 147.4
 873.2
 (3,129.4) 2,043.0
 2,885.1
 206.0
 780.8
 (2,722.3) 1,149.6
Long-term debt 7,363.4
 99.6
 471.2
 —
 7,934.2
 5,333.6
 99.5
 —
 —
 5,433.1
Long-term lease obligations —
 1,442.8
 3,517.0
 —
 4,959.8
Notes payable - affiliate —
 —
 317.7
 (317.7) —
 —
 —
 313.2
 (313.2) —
Deferred income taxes 658.6
 418.8
 801.2
 —
 1,878.6
 780.2
 —
 —
 (525.3) 254.9
Other liabilities 66.5
 45.7
 520.6
 —
 632.8
 53.0
 23.2
 399.9
 —
 476.1
Total liabilities 12,240.3
 711.5
 2,983.9
 (3,447.1) 12,488.6
 9,051.9
 1,771.5
 5,010.9
 (3,560.8) 12,273.5
Commitments and Contingencies (See Note 6) 

 

 

 

 
Commitments and Contingencies (See Note 13) 

 

 

 

 

Equity:                    
Common stock —
 39.4
 81.9
 (121.3) —
 —
 39.4
 81.9
 (121.3) —
Additional paid-in capital 212.7
 3,794.9
 4,002.0
 (7,796.9) 212.7
 584.7
 3,128.2
 848.0
 (3,976.2) 584.7
Accumulated other comprehensive income 12.1
 —
 14.5
 (14.5) 12.1
Retained earnings —
 473.7
 2,842.1
 (3,315.8) —
Accumulated other comprehensive loss (5.9) —
 (0.8) 0.8
 (5.9)
(Accumulated deficit) retained earnings (241.1) (56.3) 3,030.6
 (2,974.3) (241.1)
Total equity 224.8
 4,308.0
 6,940.5
 (11,248.5) 224.8
 337.7
 3,111.3
 3,959.7
 (7,071.0) 337.7
Total Liabilities and Equity $12,465.1
 $5,019.5
 $9,924.4
 $(14,695.6) $12,713.4
 $9,389.6
 $4,882.8
 $8,970.6
 $(10,631.8) $12,611.2


3233


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


12. Supplemental Guarantor Information, Continued:
  Condensed Consolidating Statement of Cash Flows (Unaudited)
  Three Months Ended
March 31, 2015
(Millions) Windstream Services Guarantors 
Non-
Guarantors
 Eliminations Consolidated
Cash Provided from Operations:          
Net cash provided from operations $64.7
 $38.1
 $141.3
 $—
 $244.1
Cash Flows from Investing Activities:          
Additions to property, plant and equipment (0.3) (29.5) (159.5) —
 (189.3)
Changes in restricted cash (0.4) —
 —
 —
 (0.4)
Grant funds received for broadband
    stimulus projects
 7.4
 —
 —
 —
 7.4
Network expansion funded by Connect America
    Fund - Phase I
 —
 (1.4) (6.9) —
 (8.3)
Other, net (4.1) 0.1
 1.9
 —
 (2.1)
Net cash provided from (used in)
    investing activities
 2.6
 (30.8) (164.5) —
 (192.7)
Cash Flows from Financing Activities:          
Distributions to Windstream Holdings, Inc. (151.8) —
 —
 —
 (151.8)
Repayments of debt and swaps (325.4) —
 —
 —
 (325.4)
Proceeds of debt issuance 490.0
 —
 —
 —
 490.0
Intercompany transactions, net (56.6) (5.1) 35.7
 26.0
 —
Payments under capital lease obligations —
 (4.2) (7.0) —
 (11.2)
Other, net (6.8) 0.9
 (0.9) —
 (6.8)
Net cash (used in) provided from
   financing activities
 (50.6) (8.4) 27.8
 26.0
 (5.2)
Increase (decrease) in cash and cash equivalents 16.7
 (1.1) 4.6
 26.0
 46.2
Cash and Cash Equivalents:          
Beginning of period —
 2.1
 51.7
 (26.0) 27.8
End of period $16.7
 $1.0
 $56.3
 $—
 $74.0
  Condensed Consolidating Balance Sheet (Unaudited)
  As of December 31, 2015
(Millions) Windstream Services Guarantors 
Non-
Guarantors
 Eliminations Consolidated
Assets          
Current Assets:          
Cash and cash equivalents $—
 $1.1
 $33.5
 $(3.3) $31.3
Accounts receivable, net —
 218.6
 425.3
 —
 643.9
Notes receivable - affiliate —
 4.8
 —
 (4.8) —
Affiliates receivable, net —
 619.1
 2,435.4
 (3,054.5) —
Inventories —
 69.1
 10.4
 —
 79.5
Prepaid expenses and other 321.8
 32.4
 64.6
 (298.2) 120.6
Total current assets 321.8
 945.1
 2,969.2
 (3,360.8) 875.3
Investments in consolidated subsidiaries 6,332.3
 320.4
 242.7
 (6,895.4) —
Notes receivable - affiliate —
 314.1
 —
 (314.1) —
Goodwill 1,636.7
 1,343.0
 1,233.9
 —
 4,213.6
Other intangibles, net 554.3
 282.8
 667.6
 —
 1,504.7
Net property, plant and equipment 8.4
 1,241.3
 4,030.1
 —
 5,279.8
Investment in CS&L common stock 549.2
 —
 —
 —
 549.2
Deferred income taxes —
 301.2
 215.3
 (516.5) —
Other assets 14.2
 56.3
 25.0
 —
 95.5
Total Assets $9,416.9
 $4,804.2
 $9,383.8
 $(11,086.8) $12,518.1
Liabilities and Equity          
Current Liabilities:          
Current maturities of long-term debt $5.9
 $—
 $—
 $—
 $5.9
Current portion of long-term lease obligations —
 44.4
 108.3
 —
 152.7
Accounts payable —
 92.9
 337.2
 —
 430.1
Affiliates payable, net 3,069.6
 —
 —
 (3,054.5) 15.1
Notes payable - affiliate —
 —
 4.8
 (4.8) —
Advance payments and customer deposits —
 26.3
 167.6
 —
 193.9
Accrued taxes 0.3
 11.9
 370.1
 (298.2) 84.1
Accrued interest 75.3
 1.9
 1.2
 —
 78.4
Other current liabilities 42.6
 47.5
 216.8
 —
 306.9
Total current liabilities 3,193.7
 224.9
 1,206.0
 (3,357.5) 1,267.1
Long-term debt 5,065.1
 99.5
 —
 —
 5,164.6
Long-term lease obligations —
 1,455.2
 3,545.2
 —
 5,000.4
Notes payable - affiliate —
 —
 314.1
 (314.1) —
Deferred income taxes 803.9
 —
 —
 (516.5) 287.4
Other liabilities 47.8
 25.1
 419.3
 —
 492.2
Total liabilities 9,110.5
 1,804.7
 5,484.6
 (4,188.1) 12,211.7
Commitments and Contingencies (See Note 13) 

 

 

 

 
Equity:          
Common stock —
 39.4
 81.9
 (121.3) —
Additional paid-in capital 600.3
 3,128.2
 848.0
 (3,976.2) 600.3
Accumulated other comprehensive (loss) income (284.4) —
 2.8
 (2.8) (284.4)
(Accumulated deficit) retained earnings (9.5) (168.1) 2,966.5
 (2,798.4) (9.5)
Total equity 306.4
 2,999.5
 3,899.2
 (6,898.7) 306.4
Total Liabilities and Equity $9,416.9
 $4,804.2
 $9,383.8
 $(11,086.8) $12,518.1







3334


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


12. Supplemental Guarantor Information, Continued:
 Condensed Consolidating Statement of Cash Flows (Unaudited) Condensed Consolidating Statement of Cash Flows (Unaudited)
 Three Months Ended
March 31, 2014		 Three Months Ended
March 31, 2016
(Millions) Windstream Services Guarantors 
Non-
Guarantors
 Eliminations Consolidated Windstream Services Guarantors 
Non-
Guarantors
 Eliminations Consolidated
Cash Provided from Operations:          
Net cash provided from operations $66.7
 $103.5
 $150.1
 $—
 $320.3
Cash Flows from Operating Activities:          
Net cash provided from (used in) operating
activities
 $235.8
 $60.9
 $(169.2) $—
 $127.5
Cash Flows from Investing Activities:                    
Additions to property, plant and equipment (0.4) (10.1) (142.5) —
 (153.0) (0.2) (57.2) (206.4) —
 (263.8)
Broadband network expansion funded by
stimulus grants
 —
 (0.3) (6.8) —
 (7.1)
Changes in restricted cash (0.9) —
 —
 —
 (0.9)
Grant funds received for broadband
stimulus projects
 11.4
 —
 —
 —
 11.4
Grant funds received from Connect America Fund
- Phase I
 —
 9.4
 16.6
 —
 26.0
Net cash provided from (used in)
investing activities
 10.1
 (1.0) (132.7) —
 (123.6)
Proceeds from sale of property —
 1.0
 5.2
 —
 6.2
Net cash used in investing activities (0.2) (56.2) (201.2) —
 (257.6)
Cash Flows from Financing Activities:                    
Distributions to Windstream Holdings, Inc. (150.7) —
 —
 —
 (150.7) (44.1) —
 —
 —
 (44.1)
Repayments of debt and swaps (331.6) —
 —
 —
 (331.6) (985.3) —
 —
 —
 (985.3)
Proceeds of debt issuance 325.0
 —
 —
 —
 325.0
 1,278.0
 —
 —
 —
 1,278.0
Debt issuance costs (10.7) —
 —
 —
 (10.7)
Intercompany transactions, net 97.4
 (102.1) 4.7
 —
 —
 (441.9) 4.8
 433.8
 3.3
 —
Payments under long-term lease obligations —
 (10.8) (26.0) —
 (36.8)
Payments under capital lease obligations —
 —
 (7.8) —
 (7.8) —
 —
 (19.8) —
 (19.8)
Other, net (9.8) 0.9
 (0.9) —
 (9.8) (7.9) 0.9
 (0.9) —
 (7.9)
Net cash used in financing activities (69.7) (101.2) (4.0) —
 (174.9)
Increase in cash and cash equivalents 7.1
 1.3
 13.4
 —
 21.8
Net cash (used in) provided from financing
activities
 (211.9) (5.1) 387.1
 3.3
 173.4
Increase (decrease) in cash and cash equivalents 23.7
 (0.4) 16.7
 3.3
 43.3
Cash and Cash Equivalents:                    
Beginning of period 13.7
 0.7
 33.8
 —
 48.2
 —
 1.1
 33.5
 (3.3) 31.3
End of period $20.8
 $2.0
 $47.2
 $—
 $70.0
 $23.7
 $0.7
 $50.2
 $—
 $74.6







3435


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


12. Supplemental Guarantor Information, Continued:

Debentures and notes, issued by PAETEC Holding Corporation

In connection with the acquisition of PAETEC on November 30, 2011, Windstream Services acquired the PAETEC 2018 Notes (“the guaranteed notes”). Windstream Services and all former wholly-owned subsidiaries of PAETEC (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 Windstream Services. The remaining subsidiaries (the “Non-Guarantors”) of Windstream Services are not guarantors of these guaranteed notes.

The following information presents condensed consolidating and combined statements of comprehensive income for the three month periods ended March 31, 2015 and 2014, condensed consolidating balance sheets as of March 31, 2015 and December 31, 2014, condensed consolidating and combined statements of cash flows for the three month periods ended March 31, 2015 and 2014 of Windstream Services, the Guarantors and the Non-Guarantors. Investments consist of investments in net assets of subsidiaries held by Windstream Services and other subsidiaries, and have been presented using the equity method of accounting.
  Condensed Consolidating Statement of Cash Flows (Unaudited)
  Three Months Ended
March 31, 2015
(Millions) Windstream Services Guarantors 
Non-
Guarantors
 Eliminations Consolidated
Cash Flows from Operating Activities:          
Net cash provided from (used in) operating
   activities
 $64.7
 $(49.6) $229.0
 $—
 $244.1
Cash Flows from Investing Activities:          
Additions to property, plant and equipment (0.3) (30.6) (158.4) —
 (189.3)
Grant funds received for broadband
   stimulus projects
 7.4
 —
 —
 —
 7.4
Network expansion funded by Connect America
   Fund - Phase I
 —
 (1.4) (6.9) —
 (8.3)
Changes in restricted cash (0.4) —
 —
 —
 (0.4)
Other, net (4.1) 0.1
 1.9
 —
 (2.1)
Net cash provided from (used in)
   investing activities
 2.6
 (31.9) (163.4) —
 (192.7)
Cash Flows from Financing Activities:          
Distributions to Windstream Holdings, Inc. (151.8) —
 —
 —
 (151.8)
Repayments of debt and swaps (325.4) —
 —
 —
 (325.4)
Proceeds of debt issuance 490.0
 —
 —
 —
 490.0
Intercompany transactions, net (56.6) 83.0
 (52.4) 26.0
 —
Payments under capital lease obligations —
 (4.2) (7.0) —
 (11.2)
Other, net (6.8) 0.9
 (0.9) —
 (6.8)
Net cash (used in) provided from financing
   activities
 (50.6) 79.7
 (60.3) 26.0
 (5.2)
Increase (decrease) in cash and cash equivalents 16.7
 (1.8) 5.3
 26.0
 46.2
Cash and Cash Equivalents:          
Beginning of period —
 3.8
 50.0
 (26.0) 27.8
End of period $16.7
 $2.0
 $55.3
 $—
 $74.0


  Condensed Consolidating Statement of Comprehensive Income (Unaudited)
  Three Months Ended
March 31, 2015
(Millions) Windstream Services PAETEC Issuer Guarantors 
Non-
Guarantors
 Eliminations Consolidated
Revenues and sales:            
Service revenues $—
 $—
 $485.1
 $897.5
 $(0.8) $1,381.8
Product sales —
 —
 26.2
 10.8
 (0.2) 36.8
Total revenues and sales —
 —
 511.3
 908.3
 (1.0) 1,418.6
Costs and expenses:            
Cost of services —
 —
 336.2
 344.4
 (0.6) 680.0
Cost of products sold —
 —
 21.0
 11.2
 (0.3) 31.9
Selling, general and administrative —
 —
 123.8
 100.7
 (0.1) 224.4
Depreciation and amortization 4.9
 —
 102.8
 233.0
 —
 340.7
  Merger and integration costs —
 —
 —
 14.1
 —
 14.1
  Restructuring charges —
 —
 2.3
 4.7
 —
 7.0
Total costs and expenses 4.9
 —
 586.1
 708.1
 (1.0) 1,298.1
Operating (loss) income (4.9) —
 (74.8) 200.2
 —
 120.5
Earnings (losses) from consolidated
    subsidiaries
 46.5
 (40.6) (0.3) —
 (5.6) —
Other (expense) income, net (1.4) —
 0.1
 0.1
 —
 (1.2)
Intercompany interest income (expense) 32.4
 —
 —
 (32.4) —
 —
Interest (expense) income (128.9) (9.7) 0.2
 (2.7) —
 (141.1)
(Loss) income before income taxes (56.3) (50.3) (74.8) 165.2
 (5.6) (21.8)
Income tax (benefit) expense (61.9) (3.7) (28.7) 66.9
 —
 (27.4)
Net income (loss) $5.6
 $(46.6) $(46.1) $98.3
 $(5.6) $5.6
Comprehensive income (loss) $1.5
 $(46.6) $(46.1) $98.3
 $(5.6) $1.5


3536


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
____


12. Supplemental Guarantor Information, Continued:
13. Commitments and Contingencies:
  Condensed Consolidating Statement of Comprehensive Income (Unaudited)
  Three Months Ended
March 31, 2014
(Millions) Windstream Services PAETEC Issuer Guarantors 
Non-
Guarantors
 Eliminations Consolidated
Revenues and sales:            
Service revenues $—
 $—
 $486.5
 $934.4
 $(1.2) $1,419.7
Product sales —
 —
 30.5
 14.4
 0.3
 45.2
Total revenues and sales —
 —
 517.0
 948.8
 (0.9) 1,464.9
Costs and expenses:            
Cost of services —
 —
 305.3
 353.4
 (0.8) 657.9
Cost of products sold —
 —
 27.8
 13.0
 0.3
 41.1
Selling, general and administrative —
 —
 125.8
 113.0
 (0.4) 238.4
Depreciation and amortization 5.6
 —
 101.8
 231.5
 —
 338.9
  Merger and integration costs —
 —
 —
 7.4
 —
 7.4
  Restructuring charges —
 —
 4.4
 8.5
 —
 12.9
Total costs and expenses 5.6
 —
 565.1
 726.8
 (0.9) 1,296.6
Operating (loss) income (5.6) —
 (48.1) 222.0
 —
 168.3
Earnings (losses) from consolidated
    subsidiaries
 80.1
 (25.7) (0.1) 0.1
 (54.4) —
Other income, net 0.5
 —
 0.3
 0.1
 —
 0.9
Intercompany interest income (expense) 31.6
 —
 —
 (31.6) —
 —
Interest (expense) income (130.7) (9.6) 0.1
 (1.7) —
 (141.9)
(Loss) income before income taxes (24.1) (35.3) (47.8) 188.9
 (54.4) 27.3
Income tax (benefit) expense (40.4) (3.7) (18.4) 73.5
 —
 11.0
Net income (loss) $16.3
 $(31.6) $(29.4) $115.4
 $(54.4) $16.3
Comprehensive income (loss) $7.1
 $(31.6) $(29.4) $115.4
 $(54.4) $7.1
On February 9, 2015, a putative stockholder filed a Shareholder Class Action Complaint in the Delaware Court of Chancery (the “Court”), captioned Doppelt v. Windstream Holdings, Inc., et al., C.A. No. 10629-VCN, against the Company and its Board of Directors.  This complaint was accompanied by a motion for a preliminary injunction seeking to enjoin the spin-off. The Court, ruling from the bench on February 19, 2015 - the day before a special meeting of stockholders was scheduled to vote on a reverse stock split and amended governing documents (the “Proposals”) - denied plaintiff’s motion for a preliminary injunction, reasoning that much of the information sought by plaintiff had been disclosed in public filings available on the United States Securities and Exchange Commission’s website, the Windstream Holdings’ board of directors was in no way conflicted, and while approval of the Proposals would facilitate the spin-off, approval was not necessary to effect the spin-off. On March 16, 2015, plaintiff, joined by a second putative Windstream stockholder, filed an Amended Shareholder Class Action Complaint alleging breaches of fiduciary duty by the Company and its Board concerning Windstream’s disclosures and seeking to rescind the spin-off and unspecified monetary damages. On February 5, 2016, the Court granted in part and denied in part defendants’ motion to dismiss the amended complaint. The Court dismissed Windstream, and plaintiffs’ demand to rescind the spin-off, but otherwise denied the motion. 

In addition, numerous copyright holders represented by RightsCorp have asserted that our customers have utilized our services to allegedly illegally download and share alleged copyrighted material via peer-to-peer or “filesharing” programs. These holders maintain that Windstream is responsible for alleged infringement because after notification, Windstream did not shut off service to customers alleged to be repeat infringers, and, further, that Windstream may not claim safe harbor pursuant to the Digital Millennium Copyright Act of 1998. 
36
We believe that we have valid defenses to both the lawsuit and the alleged infringement claim, and we plan to vigorously defend the pursuit of both matters. While the ultimate resolution of the matters is not currently predictable, if there are adverse rulings against Windstream in either of these two matters, either ruling could constitute a material adverse outcome on the future consolidated results of our income, cash flows, or financial condition.

We are party to various legal proceedings, including certain lawsuits claiming infringement of patents relating to various aspects of our business. In certain of the patent matters, other industry participants are also parties, and we may have claims of indemnification against vendors/suppliers. The ultimate resolution of these legal proceedings cannot be determined at this time. However, based on current circumstances, management does not believe such proceedings, individually or in the aggregate, will have a material adverse effect on the future consolidated results of our income, cash flows or financial condition.
Finally, management is currently not aware of any environmental matters, individually or in the aggregate, that would have a material adverse effect on our consolidated financial condition or results of our operations.
14. Subsequent Event:

During April 2016, Windstream Services repurchased in the open market for $93.4 million in cash, including accrued and unpaid interest, $116.7 million aggregate principal amount of its senior unsecured notes, consisting of $49.9 million of its 2021 Notes, $18.3 million of its 2022 Notes, and $48.5 million of its 2023 Notes.


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


12. Supplemental Guarantor Information, Continued:

  Condensed Consolidating Balance Sheet (Unaudited)
  As of March 31, 2015
(Millions) Windstream Services PAETEC Issuer Guarantors 
Non-
Guarantors
 Eliminations Consolidated
Assets            
Current Assets:            
Cash and cash equivalents $16.7
 $—
 $2.6
 $54.7
 $—
 $74.0
Restricted cash 7.1
 —
 —
 —
 —
 7.1
Accounts receivable (less allowance for
   doubtful accounts of $42.3)
 —
 —
 304.6
 355.0
 (1.1) 658.5
Affiliates receivable, net —
 351.0
 —
 4,180.7
 (4,531.7) —
Inventories —
 —
 16.8
 46.2
 —
 63.0
Deferred income taxes 57.6
 —
 —
 75.2
 (41.1) 91.7
Prepaid expenses and other 28.6
 —
 34.9
 106.1
 2.0
 171.6
Total current assets 110.0
 351.0
 358.9
 4,817.9
 (4,571.9) 1,065.9
Investments in consolidated subsidiaries 10,056.1
 —
 0.6
 —
 (10,056.7) —
Goodwill 1,649.5
 643.8
 —
 2,059.5
 —
 4,352.8
Other intangibles, net 582.6
 —
 387.2
 740.7
 —
 1,710.5
Net property, plant and equipment 9.5
 —
 669.0
 4,636.5
 —
 5,315.0
Deferred income taxes —
 218.1
 83.3
 —
 (301.4) —
Other assets 99.6
 —
 16.6
 58.7
 —
 174.9
Total Assets $12,507.3
 $1,212.9
 $1,515.6
 $12,313.3
 $(14,930.0) $12,619.1
Liabilities and Equity            
Current Liabilities:            
Current maturities of long-term debt $92.4
 $—
 $—
 $0.1
 $—
 $92.5
Current portion of interest rate swaps 28.5
 —
 —
 —
 —
 28.5
Accounts payable 1.1
 —
 95.5
 235.4
 —
 332.0
Affiliates payable, net 3,201.9
 —
 1,475.9
 —
 (4,526.1) 151.7
Advance payments and customer deposits —
 —
 80.7
 133.8
 —
 214.5
Accrued taxes 0.1
 —
 22.6
 61.1
 0.5
 84.3
Accrued interest 149.5
 14.8
 1.7
 4.4
 —
 170.4
Other current liabilities 38.7
 4.9
 73.0
 208.1
 (42.3) 282.4
Total current liabilities 3,512.2
 19.7
 1,749.4
 642.9
 (4,567.9) 1,356.3
Long-term debt 8,158.8
 467.9
 —
 101.4
 —
 8,728.1
Deferred income taxes 669.7
 —
 —
 1,460.5
 (301.4) 1,828.8
Accumulated losses in excess of investments
    in consolidated subsidiaries
 —
 250.9
 —
 —
 (250.9) —
Other liabilities 71.6
 1.6
 53.1
 484.6
 —
 610.9
Total liabilities 12,412.3
 740.1
 1,802.5
 2,689.4
 (5,120.2) 12,524.1
Commitments and Contingencies
  (See Note 6)
 

 

 

 

 

 

Equity:            
Common stock —
 —
 —
 67.7
 (67.7) —
Additional paid-in capital 87.0
 842.0
 0.7
 6,017.1
 (6,859.8) 87.0
Accumulated other comprehensive income 8.0
 —
 —
 19.6
 (19.6) 8.0
Accumulated (deficit) retained earnings —
 (369.2) (287.6) 3,519.5
 (2,862.7) —
Total equity 95.0
 472.8
 (286.9) 9,623.9
 (9,809.8) 95.0
Total Liabilities and Equity $12,507.3
 $1,212.9
 $1,515.6
 $12,313.3
 $(14,930.0) $12,619.1


37


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


12. Supplemental Guarantor Information, Continued:
  Condensed Consolidating Balance Sheet (Unaudited)
  As of December 31, 2014
(Millions) Windstream Services PAETEC Issuer Guarantors 
Non-
Guarantors
 Eliminations Consolidated
Assets            
Current Assets:            
Cash and cash equivalents $—
 $—
 $4.6
 $49.2
 $(26.0) $27.8
Restricted cash 6.7
 —
 —
 —
 —
 6.7
Accounts receivable (less allowance for
    doubtful accounts of $43.4)
 —
 —
 286.1
 350.5
 (1.1) 635.5
Affiliates receivable, net —
 346.6
 —
 4,187.7
 (4,534.3) —
Inventories —
 —
 19.4
 44.3
 —
 63.7
Deferred income taxes 67.4
 —
 —
 76.5
 (38.5) 105.4
Prepaid expenses and other 35.5
 —
 30.9
 96.5
 1.7
 164.6
Total current assets 109.6
 346.6
 341.0
 4,804.7
 (4,598.2) 1,003.7
Investments in consolidated subsidiaries 10,001.3
 —
 0.9
 —
 (10,002.2) —
Goodwill 1,649.5
 643.8
 —
 2,059.5
 —
 4,352.8
Other intangibles, net 590.7
 —
 413.6
 759.7
 —
 1,764.0
Net property, plant and equipment 9.8
 —
 697.1
 4,705.4
 —
 5,412.3
Deferred income taxes —
 219.0
 63.7
 —
 (282.7) —
Other assets 104.2
 —
 16.8
 59.6
 —
 180.6
Total Assets $12,465.1
 $1,209.4
 $1,533.1
 $12,388.9
 $(14,883.1) $12,713.4
Liabilities and Equity            
Current Liabilities:            
Current maturities of long-term debt $717.4
 $—
 $—
 $0.1
 $—
 $717.5
Current portion of interest rate swaps 28.5
 —
 —
 —
 —
 28.5
Accounts payable 2.1
 —
 101.9
 299.3
 —
 403.3
Affiliates payable, net 3,277.0
 —
 1,430.4
 —
 (4,555.0) 152.4
Advance payments and customer deposits —
 —
 78.5
 136.2
 —
 214.7
Accrued taxes 0.2
 —
 25.2
 69.4
 0.4
 95.2
Accrued interest 94.3
 3.7
 1.8
 2.7
 —
 102.5
Other current liabilities 32.3
 4.9
 83.0
 248.3
 (39.6) 328.9
Total current liabilities 4,151.8
 8.6
 1,720.8
 756.0
 (4,594.2) 2,043.0
Long-term debt 7,363.4
 469.4
 —
 101.4
 —
 7,934.2
Deferred income taxes 658.6
 —
 —
 1,502.7
 (282.7) 1,878.6
Accumulated losses in excess of investments
    in consolidated subsidiaries
 —
 210.4
 —
 —
 (210.4) —
Other liabilities 66.5
 1.7
 53.0
 511.6
 —
 632.8
Total liabilities 12,240.3
 690.1
 1,773.8
 2,871.7
 (5,087.3) 12,488.6
Commitments and Contingencies
  (See Note 6)
 

 

 

 

 

 

Equity:            
Common stock —
 —
 —
 67.7
 (67.7) —
Additional paid-in capital 212.7
 842.0
 0.7
 6,017.1
 (6,859.8) 212.7
Accumulated other comprehensive income 12.1
 —
 —
 20.5
 (20.5) 12.1
Accumulated (deficit) retained earnings —
 (322.7) (241.4) 3,411.9
 (2,847.8) —
Total equity 224.8
 519.3
 (240.7) 9,517.2
 (9,795.8) 224.8
Total Liabilities and Equity $12,465.1
 $1,209.4
 $1,533.1
 $12,388.9
 $(14,883.1) $12,713.4

38


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


12. Supplemental Guarantor Information, Continued:
  Condensed Consolidating Statement of Cash Flows (Unaudited)
  Three Months Ended
March 31, 2015
(Millions) Windstream Services 
PAETEC
 Issuer
 Guarantors 
Non-
Guarantors
 Eliminations Consolidated
Cash Provided from Operations:            
Net cash provided from operations $64.7
 $4.4
 $11.7
 $163.5
 $(0.2) $244.1
Cash Flows from Investing Activities:            
Additions to property, plant and equipment (0.3) —
 (42.4) (146.6) —
 (189.3)
Changes in restricted cash (0.4) —
 —
 —
 —
 (0.4)
Grant funds received for broadband
    stimulus projects
 7.4
 —
 —
 —
 —
 7.4
Network expansion funded by Connect
   America Fund - Phase I
 —
 —
 —
 (8.3) —
 (8.3)
Other, net (4.1) —
 —
 2.0
 —
 (2.1)
Net cash provided from (used in)
    investing activities
 2.6
 —
 (42.4) (152.9) —
 (192.7)
Cash Flows from Financing Activities:            
Distributions to Windstream Holdings, Inc. (151.8) —
 —
 —
 —
 (151.8)
Repayments of debt and swaps (325.4) —
 —
 —
 —
 (325.4)
Proceeds of debt issuance 490.0
 —
 —
 —
 —
 490.0
Intercompany transactions, net (56.6) (4.4) 29.8
 5.0
 26.2
 —
Payments under capital lease obligations —
 —
 (1.1) (10.1) —
 (11.2)
Other, net (6.8) —
 —
 —
 —
 (6.8)
Net cash (used in) provided from
    financing activities
 (50.6) (4.4) 28.7
 (5.1) 26.2
 (5.2)
Increase (decrease) in cash and cash
   equivalents
 16.7
 —
 (2.0) 5.5
 26.0
 46.2
Cash and Cash Equivalents:            
Beginning of period —
 —
 4.6
 49.2
 (26.0) 27.8
End of period $16.7
 $—
 $2.6
 $54.7
 $—
 $74.0

39


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


12. Supplemental Guarantor Information, Continued:
  Condensed Consolidating Statement of Cash Flows (Unaudited)
  Three Months Ended
March 31, 2014
(Millions) Windstream Services 
PAETEC
 Issuer
 Guarantors 
Non-
Guarantors
 Eliminations Consolidated
Cash Provided from Operations:            
Net cash provided from operations $66.7
 $5.1
 $2.8
 $245.7
 $—
 $320.3
Cash Flows from Investing Activities:            
Additions to property, plant and equipment (0.4) —
 (36.2) (116.4) —
 (153.0)
Broadband network expansion funded by
    stimulus grants
 —
 —
 —
 (7.1) —
 (7.1)
Changes in restricted cash (0.9) —
 —
 —
 —
 (0.9)
Grant funds received for broadband
   stimulus projects
 11.4
 —
 —
 —
 —
 11.4
Grant funds received from Connect America
   Fund - Phase I
 —
 —
 —
 26.0
 —
 26.0
Net cash provided from (used in)
    investing activities
 10.1
 —
 (36.2) (97.5) —
 (123.6)
Cash Flows from Financing Activities:            
Distributions to Windstream Holdings, Inc. (150.7) —
 —
 —
 —
 (150.7)
Repayments of debt and swaps (331.6) —
 —
 —
 —
 (331.6)
Proceeds of debt issuance 325.0
 —
 —
 —
 —
 325.0
Intercompany transactions, net 97.4
 (5.1) 32.2
 (124.5) —
 —
Payments under capital lease obligations —
 —
 (2.0) (5.8) —
 (7.8)
Other, net (9.8) —
 —
 —
 —
 (9.8)
Net cash (used in) provided from
    financing activities
 (69.7) (5.1) 30.2
 (130.3) —
 (174.9)
Increase (decrease) in cash and cash
   equivalents
 7.1
 —
 (3.2) 17.9
 —
 21.8
Cash and Cash Equivalents:            
Beginning of period 13.7
 —
 7.8
 26.7
 —
 48.2
End of period $20.8
 $—
 $4.6
 $44.6
 $—
 $70.0


40


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


13. Subsequent Events:

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, which will continue to be operated by the REIT. Pursuant to the plan of distribution and immediately prior to the effective time of the spin-off, we contributed the 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 the REIT 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 carry 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. As part of the Exchange Agreement with the Investment Banks, Windstream incurred approximately $35.4 million of costs related to the exchange of the Windstream Services’ debt securities.

The debt-for-debt exchange was 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 $21.5 million. 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 opportunistically during a twelve month period following the spin-off, subject to market conditions, to retire additional Windstream Services debt.

The number of Windstream Holdings’ common shares outstanding did not change as a result of the spin-off. For employees and directors remaining with Windstream, restricted stock awarded pursuant to Windstream’s 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 will remain subject to vesting and other terms and conditions as prescribed by Windstream’s 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.


41


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
____


13. Subsequent Events, Continued:

Amendment to Senior Secured Credit Facility - In connection with the spin-off, on April 24, 2015, Windstream Services amended its senior secured credit facility to extend the maturity of its revolving credit facility to April 20, 2020. Otherwise, the borrowing capacity under the amended revolving credit agreement was unchanged and provides for borrowings up to an aggregate principal amount of $1,250.0 million.

Redemption of Long-Term Debt - On April 24, 2015, Windstream Services called for redemption on May 27, 2015, 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 up to the redemption date. A notice of redemption was sent to all currently registered holders of the 2018 Notes by the trustee under the indenture governing the notes. Also on April 24, 2015, PAETEC Holding, LLC, a direct, wholly-owned subsidiary of Windstream Services, called for redemption on May 27, 2015, 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 up to the redemption date. A notice of redemption was sent to all currently registered holders of the 2018 PAETEC Notes. Windstream expects to use a portion of the $1.035 billion cash payment received from CS&L to redeem these two debt obligations.

Master Lease Agreement - On April 24, 2015, Windstream Holdings entered into a long-term triple-net master lease with CS&L to lease back the telecommunications network assets. Under terms of the master lease, Windstream Holdings has the exclusive right to use the telecommunications network assets for an initial term of 15 years with up to four, five-year renewal options. CS&L has the right, but not the obligation, upon Windstream’ s request, to fund capital expenditures of Windstream in an aggregate amount of up to $250.0 million for a maximum period of five years. If CS&L exercises this right, the lease payments under the master lease will be adjusted at a rate of 8.125 percent of the capital expenditures funded by CS&L during the first two years and at a floating rate based on CS&L’s cost of capital thereafter. Additionally, if CS&L agrees to fund the entire $250.0 million, the initial term of the master lease will be increased from 15 years to 20 years and the number of renewal terms will be reduced from four renewal terms of five years each to three renewal terms of five years each. Windstream Holdings is required to pay all property taxes, insurance, and repair or maintenance costs associated with the leased property. The master lease provides for an annual rent of $650.0 million paid in equal monthly installments in advance and is fixed for the first three years. The effective interest rate on the long-term lease obligation is 10.15 percent. Thereafter, rent will increase on an annual basis at a base rent escalator of 0.5 percent. Future lease payments due under the agreement reset to fair market rental rates upon Windstream Holdings’ execution of the renewal options. Due to various forms of continuing involvement, including Windstream Services or its subsidiaries, remaining the legal counterparty to the various easements, permits and pole attachments related to the telecommunications network assets, we will account for the transaction as a failed sale-leaseback for financial reporting purposes. As a result, the net book value of the network assets transferred to CS&L will continue to be reported in our consolidated balance sheet and will be fully depreciated over the initial lease term of 15 years. We will record a long-term lease obligation of approximately $5.1 billion equal to the sum of the minimum future annual lease payments over the 15-year lease term discounted to the present value based on Windstream Services’ incremental borrowing rate. As annual lease payments are made, a portion of the payment will decrease the long-term lease obligation with the balance of the payment charged to interest expense using the effective interest method.

Amendment to Certificate of Incorporation and Reverse Stock Split - On April 24, 2015, Windstream Holdings filed a certificate of amendment to its restated certificate of incorporation with the secretary of state of the State of Delaware. The certificate of amendment effected the previously approved reverse stock split of Windstream Holdings outstanding common stock at a ratio of one-for-six (the “reverse stock split”). As a result of the reverse stock split, effective April 26, 2015, Windstream Holdings’ authorized share capital was reduced to 200,000,000 shares, consisting of 33,333,333 shares of preferred stock, par value $.0001 per share, and 166,666,667 shares of common stock, par value $.0001 per share. At the time of the reverse stock split, the number of issued and outstanding shares of common stock of Windstream Holdings was reduced to approximately 100,900,000 shares. Following the completion of the reverse stock split, Windstream expects to pay an annual dividend of $.60 per share.

Pre-Spin-off/Pre-Reverse Stock Split Pro Rata Dividend - On April 24, 2015, we made a cash distribution of $.0659 per share to our stockholders of record on April 10, 2015, which was equivalent to a pro-rated $.25 per share quarterly dividend.

Initial Post Spin-off Dividend - On May 5, 2015, we declared a cash dividend of $.1104 per share on our common stock, which is equivalent of a prorated per share quarterly dividend for the period beginning April 25, 2015 and ending June 30, 2015, which is payable on July 15, 2015 to shareholders of record on June 30, 2015.



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Table of Contents


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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context indicates otherwise, the terms “Windstream,” “we,” “us” or “our” refer to Windstream Holdings, Inc. and its subsidiaries, including Windstream Services, LLC, and the term “Windstream Services” refers to Windstream Services, LLC and its subsidiaries.

The following sections provide an overview of our results of operations and highlight key trends and uncertainties in our business. Certain statements constitute forward-looking statements. See “Forward-Looking Statements” at the end of this discussion for additional factors relating to such statements, and see “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 20142015, filed with the Securities and Exchange Commission (“SEC”) on February 24, 201525, 2016, for a discussion of certain risk factors applicable to our business, financial condition and results of operations.

ORGANIZATIONAL STRUCTURE
 
Windstream Holdings, Inc. (“Windstream Holdings”) is a publicly traded holding company and the parent of Windstream Services, LLC (“Windstream Services”). Effective February 28, 2015, Windstream Corporation was converted to a limited liability company. As a result, all of the issued and outstanding common stock of Windstream Corporation held by Windstream Holdings was converted into a 100 percent interest in Windstream Services. Windstream Holdings common stock trades on the Nasdaq Global Select Market (“NASDAQ”) under the ticker symbol “WIN”. All shares of Windstream Services common stock are held by Windstream Holdings and do not trade on any stock market.owns a 100 percent interest in Windstream Services. 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 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.

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 directly incurred by Windstream Holdings principally consisting of audit, legal and board of director fees, NasdaqNASDAQ listing fees, other shareholder-related costs, income taxes, common stock activity, and payables from Windstream Services to Windstream Holdings. For the three month periods ended March 31, 20152016 and 2014,2015, the amount of pretax expenses directly incurred by Windstream Holdings were approximately $0.6$0.5 million and $0.5$0.6 million, respectively, or $0.3 million on an after-tax basis for both periods presented. Unless otherwise indicated, the following discussion of our business strategy, trends and results of operations pertain to both Windstream Holdings and Windstream Services.
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, which will continue to be operated by the REIT. Pursuant to the plan of distribution and immediately prior to the effective time of the spin-off, we contributed the 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 in the form of a tax-free dividend. In connection with the distribution, CS&L borrowed approximately $2.140 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”).
On April 24, 2015, following the completion of the spin-off transaction, Windstream transferred the CS&L Securities and cash to two 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 Tranche A3, A4 and B4 of

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Windstream Services’ senior credit facility and $752.2 million aggregate principal amount of borrowings outstanding under the revolving line of credit in Windstream Services’ senior credit facility held by the investment banks.
On April 24, 2015, Windstream Services called for redemption on May 27, 2015, all of its $400.0 million aggregate principal amount of 8.125 percent senior unsecured notes due September 1, 2018, 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 up to the redemption date. Also on April 24, 2015, PAETEC Holding, LLC, a direct, wholly-owned subsidiary of Windstream Services, called for redemption on May 27, 2015, all $450.0 million of its outstanding aggregate principal amount of 9.875 percent notes due 2018, 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 up to the redemption date. Windstream expects to use a portion of the $1.035 billion cash payment received from CS&L to redeem these two debt obligations.

As of the spin-off date, excluding restricted shares issued to 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 opportunistically during a twelve month period following the spin-off, subject to market conditions, to retire additional Windstream Services debt.
Master Lease Agreement

On April 24, 2015, Windstream Holdings entered into a long-term triple-net master lease with CS&L to lease back the telecommunications network assets. Under the terms of the master lease, Windstream Holdings has the exclusive right to use the telecommunications network assets for an initial term of 15 years with up to four, five-year renewal options and Windstream Holdings is required to pay all property taxes, insurance, and repair or maintenance costs associated with the leased property. The master lease provides for an annual rent of $650.0 million paid in equal monthly installments in advance and is fixed for the first three years. The effective interest rate on the long-term lease obligation is 10.15 percent. Thereafter, rent will increase on an annual basis at a base rent escalator of 0.5 percent. Future lease payments due under the agreement reset to fair market rental rates upon Windstream Holdings’ execution of the renewal options. Due to various forms of continuing involvement, including Windstream Services remaining the legal counterparty to the various easements, permits and pole attachments related to the telecommunications network assets, we will account for the transaction as a failed sale-leaseback for financial reporting purposes. As a result, the net book value of the network assets transferred to CS&L will continue to be reported in our consolidated balance sheet and will be fully depreciated over the initial lease term of 15 years. We will record a long-term lease obligation of approximately $5.1 billion equal to the sum of the minimum future annual lease payments over the 15-year lease term discounted to the present value based on Windstream Services’ incremental borrowing rate. As annual lease payments are made, a portion of the payment will decrease the long-term lease obligation with the balance of the payment charged to interest expense using the effective interest method.
REVERSE STOCK SPLIT

At a special meeting held on February 20, 2015, Windstream shareholders approved a proposal regarding an amendment to our restated certificate of incorporation to effect a reclassification (reverse stock split) of Windstream Holdings common stock, whereby (i) each outstanding six (6) shares of common stock would be combined into and become one (1) share of common stock and (ii) to decrease the number of authorized shares of common stock proportionately.
On April 24, 2015, Windstream Holdings filed a certificate of amendment to its restated certificate of incorporation with the secretary of state of the State of Delaware. The certificate of amendment effected the previously approved reverse stock split of Windstream Holdings outstanding common stock at a ratio of one-for-six (the “reverse stock split”). As a result of the reverse stock split, effective April 26, 2015, Windstream Holdings’ authorized share capital was reduced to 200.0 million shares, consisting of 33.3 million shares of preferred stock, par value $.0001 per share, and 166.7 million shares of common stock, par value $.0001 per share and the number of issued and outstanding shares of common stock of Windstream Holdings was reduced to approximately 100.8 million shares.
See Note 13 for additional information regarding the subsequent events.
OVERVIEW

Our business strategy is focused on maximizing growth opportunities with our enterprise business customers while optimizing our cost structure and maintaining the stabilityWe are a leading provider of our consumer and small business operations with the goal of generating solid and sustainable cash flows over the long-term to build shareholder value. In implementing our business strategy, we continue to invest in capital initiatives designed to drive improvements inadvanced network performance and to enhance our ability to provide advanced solutions to our business customers and increase broadband speeds and capacity in our consumer markets.


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We provide advanced communications and technology solutions includingfor consumers, businesses, enterprise organizations and carrier partners across the United States. We provide data, cloud solutions, unified communications and managed services to small business and cloud computing, to businesses nationwide. In addition to businessenterprise clients. We also offer bundled services, we offerincluding broadband, security solutions, voice and video servicesdigital television to consumers in primarily rural markets.consumers. We have operations in 48 states and the District of Columbia,supply core transport solutions on a local and long-haul fiberfiber-optic network spanning approximately 121,000125,000 miles, a robust business sales division and 27 data centers offering managed services and cloud computing.

STRATEGYthe sixth largest fiber network in the nation.

Our business strategyvision is focused on maximizing growth opportunities with our enterprise business customers while optimizing our cost structure and maintaining the stability of our consumer and small business operations with the goal of generating solid and sustainable cash flows over the long-term to build shareholder value. In implementing our business strategy, we continue to invest in capital initiatives designed to drive improvements in network performance and to enhance our ability to provide advanced solutions toa best-in-class customer experience through a world-class network. Our “network first” strategy entails leveraging our business customersexisting infrastructure and increase broadband speeds and capacity in our consumer markets. We continue to transition revenue streams away from traditional consumer voice services to our strategic growth areas of business services and consumer broadband. The diversification of our revenue streams is key to our success in accelerating revenue growth opportunities as we combat the effects of revenue declines from consumer customer losses and wholesale revenue declines due to intercarrier compensation reform.

The expansion of our fiber transport network through capital investment has enhanced our ability to provide wireless transport, or backhaul services. As cellular customers consume more wireless data, wireless carriers need more bandwidth on the wireline transport network. To accommodate wireless carriers’ additional bandwidth needs, we have made significant investments in our network, including fiber-to-the-tower deployments designed to increase capacity and replace copper facilities servicing wireless towers. We expect wireless data usage to continue to increase, which will drive the need for additional wireless backhaul capacity.

On the consumer front, we are continuing to make investments to increase broadband speeds and capacity throughout our territories. Although new customer growth is slowing as the market becomes more heavily penetrated, we expect increases in real-time streaming video and traditional Internet usage to motivate customers to upgrade to faster broadband speeds with a higher price. We also actively promote value-added Internet services, such as security and online back-up, to take advantage of the broadband speeds we offer. During 2014, we launched Kinetic, a complete video entertainment offering in our Lincoln, Nebraska market and expect to roll out this new service in eight additional markets during the next few years. Our consumer business remains under pressure due to competition from wireless carriers, cable television companies and other companies using emerging technologies. In response to this competitive pressure, we are focused on stabilizing our consumer business through expansion and upgrade of our broadband network and service offerings.

We believe that we are well positioned to grow our business by investing in our network, offering advanced products and solutions, targeting enterprise business customers and controlling costs through our disciplined approach to capital and expense management. In leveraging these strengths, we expect to continuethe latest technologies to create significant value for both our customers and our shareholders. Our business unit organizational structure is focused on our four core customer groups: Consumer and Small Business - ILEC, Carrier, Enterprise, and Small Business - CLEC, as further defined below. This organizational structure aligns all aspects of the customer relationship (sales, service delivery, and customer service) to improve accountability to the customer and sharpen our operational focus.

Dividend Policy     We differentiate our business customers between enterprise and small business primarily based on the monthly recurring revenue generated from the customer with enterprise customers comprising those relationships that generate $1,500 or more in monthly recurring revenue and small business customers comprising those relationships that generate less than $1,500 per month. Our small business customer base is further disaggregated between those customers located in service areas in which we are the incumbent local exchange carrier (“ILEC”) and provide services over network facilities operated by us and those customers located in service areas in which we are a competitive local exchange carrier (“CLEC”) and provide services over network facilities primarily leased from other carriers. Under our organizational structure, we combined our Consumer and Small Business - ILEC operations due to similarities between these customers with respect to service offerings, marketing strategies and customer service delivery, as both of these businesses are focused on broadband revenue growth driven by our continued investment in our broadband network.
Prior
38



We have a focused operational strategy for each business segment with the overall objective to improve our consolidated operational and financial results and reach our goal of stabilizing and growing adjusted OIBDA, which is defined as operating income plus depreciation and amortization, adjusted to exclude the completionimpact of the spin-offrestructuring charges, pension expense and reverse stock split, on April 24, 2015, we made a cash distribution of $.0659 per share to our stockholders of record on April 10, 2015, which was equivalent to a pro-rated $.25 per share quarterly dividend. Following the completion of the spin-off and the reverse stock split, Windstream expects to pay an annual dividend of $.60 per share, paid on a quarterly basis.share-based compensation.

Our dividend practice can be changed at any time at the discretionoperational strategy for each of our board of directors. Accordingly, we cannot assure you we will continue paying dividends at the post-spin adjusted rate. business segments are as follows:
See “Risk Factors” in Item 1A of Part I“Segment Operating Results” for further discussion of our Annual Report on Form 10-K for the year ended December 31, 2014, for additional information concerning our dividend practice.business segments.

EXECUTIVE SUMMARY

Key strategic initiatives during the three month period ended March 31, 2015, included:

continuedOur operational focus on revenue growth opportunities in our business service and consumer broadband areas; and

continued focus on operational efficiency and cost management strategies.

Each of these initiatives reflected our ongoing efforts to become the premier enterprise communications and services provider. Our 2015 operational focusfor 2016 is on enhancing our high-speed Internet capabilities, increasing the profitability of our enterprise business, and expanding our carrier network.network, and effectively managing our costs. During the first quarter of 2016, we achieved the following related to these initiatives:

Grew our Enterprise contribution margin by approximately $19 million or 36 percent, compared to the same period in 2015. Maintained stable contribution margins in our other businesses through strong expense management.

Consolidated operating income increased by approximately $38 million or 32 percent.

Continued our commitment to invest in innovative technologies that address our customers’ current and future needs by launching 1-Gigabit Internet service in four market areas including Lincoln, Nebraska; Lexington, Kentucky; Sugar Land, Texas and several areas surrounding Charlotte, North Carolina. We also launched Kinetic, our next-generation television service, in Sugar Land, Texas.

Issued $600.0 million in a new secured term loan and repurchased in the open market $154.2 million of long-term debt and repurchased $441.1 million of long-term debt due in 2017, significantly improving our debt maturity profile. Through the monetization of our retained ownership interest in CS&L, we are positioned to retire additional long-term debt.

Returned value to our shareholders through the payment of our quarterly dividend and completion of our $75 million share repurchase program, which resulted in the retirement of approximately 12.6 million shares.


4539



We are enhancing our high-speed Internet capabilities with Very high-bit-rate Digital Subscriber Line Generation 2 (“VDSL2”)bonding technology, which provides greater speed availability on our existing network. Presently, we can offer 10 Megabits per second (“Mbps”) to almost 60 percent of our addressable lines. Following the deployment of the VDSL2 bonding technology, we will be able to deliver Internet speeds of 24 Mbps and above to more than 50 percent of our addressable lines.

BUSINESS TRENDS

The following discussion highlights key trends affecting our business:

Business communications services:DemandOur consolidated operating results for advanced communications services is expected to drive growth in revenues from business customers. To meet this demand, we continue to expand our capabilities in integrated voice and data services, which deliver voice and broadband services over a single Internet connection. We also offer multi-site networking services which provide a fast and private connection between business locations as well as a variety of other data services. We leverage our national network to offer more complex and customized solutions to our customers. While offering sales growth opportunities, the shift to more complex solutions requiring additional customization can lead to longer installation times. We view this as a strategic growth area, but we are subject to competition from other carriers and cable companies, which could suppress growth and result in lower operating margins. Business locations decreased 28,900, or 4.8 percent, during the twelve month period ended March 31, 2015 primarily due to business closures and competition. We combat competition by offering personalized service to our business customers through advanced customized solutions, an integrated sales approach, and dedicated representatives. See “Competition” in Item 1 of Part I of our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on February 24, 2015, for more details.

Data center services: Many businesses are moving towards cloud computing and managed services as an alternative to a traditional information technology (“IT”) infrastructure. Our data centers are capable of delivering those services, and we continue to invest in data center expansion in order to meet the growing demand for these types of services. In addition to cloud computing and managed services, our data centers offer colocation services, in which we provide a safe, secure environment for storage of servers and networking equipment.

Carrier access: As wireless data usage grows, wireless carriers need additional bandwidth on the wireline network to accommodate the additional wireless traffic. We have made significant success-based capital investments to provide backhaul services to wireless carriers. These investments include building out fiber to new wireless towers and replacing copper facilities with fiber facilities to wireless towers we already serve. We will continue to make success-based capital investments to offer additional wireless backhaul services to wireless carriers; however, these investments have decreased substantially as we have reached the vast majority of existing towers within our targeted area. In the near term, carrier access revenues will be adversely impacted by declining demand for dedicated copper-based circuits, as wireless carriers continue to migrate traffic to fiber-based connections.

Consumer high-speed Internet: As of March 31, 2015, we provided high-speed Internet service to approximately 75 percent of primary residential lines in service. The number of high-speed Internet customers we serve will continue to be impacted by the effects of competition from other service providers and increased penetration in the marketplace as the number of households without high-speed Internet service continues to shrink. As a result, consumer high-speed Internet connections decreased 38,000, or 3.2 percent, during the twelve month period ended March 31, 2015. To offset the effects of competition, we believe growing customer demand for faster speeds and value-added services, such as online security and back-up, will drive growth in consumer high-speed Internet revenues. We continue to focus on increasing our broadband speeds available to customers. As of March 31, 2015, we could deliver speeds up to 3 Mbps to all of our addressable lines, and speeds up to 6 Mbps, 12 Mbps, and 24 Mbps are available to approximately 80 percent, 54 percent, and 19 percent of our addressable lines, respectively.

Consumer voice line losses: Voice and switched access revenues will continue to be adversely impacted by future declines in voice lines due to competition from cable companies, wireless carriers and providers using other emerging technologies. To combat competitive pressures, we continue to emphasize our bundled products and services. Our consumers can bundle voice, high-speed Internet and video services, providing one convenient billing solution and bundle discounts. We believe that product bundles positively impact customer retention, and the associated discounts provide our customers the best value for their communications and entertainment needs. As of March 31, 2015, all of our voice lines had wireless competition and approximately 70 percent of our voice lines had fixed-line voice competition. Consumer voice lines decreased 104,200, or 6.1 percent, during the twelve month period ended March 31, 2015, primarily due to the effects of competition.

Operational efficiencies: To secure our bottom line against evolving revenue streams and a shift in our revenue mix that has resulted in a higher proportion of lower margin revenues, we are committed to aggressive cost management strategies that emphasize operational efficiencies. During the three month period ended March 31, 2014, we2016 were favorably impacted by additional subsidy revenues received from the Connect America Fund (“CAF”) Phase II, growth in enterprise revenues, reflecting increased demand for data and integrated services, lower depreciation and amortization expense, and dividend income earned on Windstream’s retained 19.6 percent ownership interest in Communications Sales & Leasing, Inc. (“CS&L”). Conversely, operating results for the three month period of 2016 were adversely impacted by additional interest expense attributable to the long-term lease obligation under the master lease agreement with CS&L, net loss incurred on the early extinguishment of long-term debt and an other-than-temporary impairment loss on our investment in CS&L common stock. Reductions in small business, carrier and switched access revenues due to customer losses from business closures and competition, declining demand for copper-based circuits to towers and the adverse effects of intercarrier compensation reform, respectively, also impacted our operating results in the three month period of 2016, when compared to the same period of 2015. Year-over-year comparisons of revenues and expenses also reflect the disposal of certain businesses completed a workforce reduction to increase operational efficiency by eliminating approximately 400 positions, including 175 resulting from a voluntary separation initiative.

46in 2015, as further discussed below.



We anticipate annualized savings of approximately $20.0 million as a result. During 2015, we will remain focused on improvements in our cost structure through network grooming and continued declines in the cost of providing services resulting from operational efficiencies and billing system conversions that will further reduce costs.

ORGANIZATION ANDCONSOLIDATED RESULTS OF OPERATIONS

We provide a wide range of telecommunication services, from advanced data solutions for businesses to basic voice services. Our sales, marketing and customer support teams are structured based upon the type of customer they serve. We deliver these services over owned or leased network facilities. Our corporate support teams, such as finance and accounting, human resources and legal, support our operations as a whole.

The following table reflects the consolidated operating results of Windstream Holdings as of:for the three months ended March 31:
    Three Months Ended
March 31,
(Millions)     2015
 2014
Revenues and sales:        
Service revenues:        
Enterprise and small business     $740.9
 $748.1
Consumer     312.2
 313.0
Carrier     176.5
 189.8
Wholesale     98.3
 113.8
Other     53.9
 55.0
Total service revenues     1,381.8
 1,419.7
Product sales     36.8
 45.2
Total revenues and sales     1,418.6
 1,464.9
Costs and expenses:        
Cost of services (exclusive of depreciation and amortization
included below) (a)		     680.0
 657.9
Cost of products sold     31.9
 41.1
Selling, general and administrative (a)     225.0
 238.9
Depreciation and amortization     340.7
 338.9
Merger and integration costs     14.1
 7.9
Restructuring charges     7.0
 12.4
Total costs and expenses     1,298.7
 1,297.1
Operating income     119.9
 167.8
Other (expense) income, net     (1.2) 0.9
Interest expense     (141.1) (141.9)
(Loss) income before income taxes     (22.4) 26.8
Income tax (benefit) expense     (27.7) 10.8
Net income     $5.3
 $16.0
          Increase (Decrease)
(Millions)     2016
 2015
 Amount
 %
Revenues and sales:            
Service revenues     $1,340.6
 $1,381.8
 $(41.2) (3)
Product sales     32.8
 36.8
 (4.0) (11)
Total revenues and sales     1,373.4
 1,418.6
 (45.2) (3)
Costs and expenses:            
Cost of services (a)     668.8
 680.0
 (11.2) (2)
Cost of products sold     28.9
 31.9
 (3.0) (9)
Selling, general and administrative     203.8
 225.0
 (21.2) (9)
Depreciation and amortization     304.8
 340.7
 (35.9) (11)
Merger and integration costs     5.0
 14.1
 (9.1) (65)
Restructuring charges     4.4
 7.0
 (2.6) (37)
Total costs and expenses     1,215.7
 1,298.7
 (83.0) (6)
Operating income     157.7
 119.9
 37.8
 32
Dividend income on CS&L common stock     17.6
 —
 17.6
 *
Other income, net     (1.2) (1.2) —
 *
Net loss on early extinguishment of debt     (35.4) —
 (35.4) *
Other-than-temporary impairment loss on
   investment in CS&L common stock (b)
     (181.9) —
 (181.9) *
Interest expense     (219.7) (141.1) (78.6) 56
Loss before income taxes     (262.9) (22.4) (240.5) *
Income tax benefit     (31.0) (27.7) (3.3) 12
Net (loss) income     $(231.9) $5.3
 $(237.2) *
* Not meaningful

(a)Prior year amounts for cost of servicesExcludes depreciation and selling, general and administrative have been adjusted to reflect the proper classification of certain operating expenses. See Note 1 for additional information.amortization included below.



47



The following table reflects the consolidated operating metrics of Windstream Holdings as of March 31:
(Thousands) 2015
 2014
Business Operating Metrics:    
     Customer locations    
          Enterprise 218.7
 212.2
          Small business 350.4
 385.8
     Total customer locations (a) 569.1
 598.0
Total business customers 347.6
 378.7
Carrier special access circuits 80.2
 93.4
     
Consumer Operating Metrics:    
     Voice lines 1,599.0
 1,703.2
     High-speed Internet 1,132.4
 1,170.4
     Digital television customers 378.8
 398.9
     Total consumer connections 3,110.2
 3,272.5

(a)(b)Business customer locations include each individual customer location to which we provide service and exclude carrier special access circuits. Business customer locations are segmented between Enterprise locations which represent customer relationships that generate $750 or more in revenue per month and Small business locations which represent customer relationships that generate less than $750 in revenue per month.See Note 8 for further discussion of this impairment loss.

A detailed discussion and analysis of our consolidated operating results is presented below.

Enterprise and Small Business Service Revenues

Enterprise and small business service revenues include revenues from integrated voice and data services, advanced data and traditional voice and long-distance services provided to enterprise and small business customers. We expect enterprise and small business service revenues to be favorably impacted by increasing demand for integrated data and voice services, multi-site networking and data center services.

We experience competition in the enterprise and small business channel primarily from other carriers, including traditional telephone companies and competitive providers. Cable companies are also a source of competition, primarily for small business customers, but they have begun to compete for larger customers by expanding their product and sales capabilities.

For the three month period ended March 31, 2015, business locations decreased by approximately 6,600 compared to a decrease of 7,700 for the same period in 2014. Our growth in enterprise customer locations is outpaced by losses in small business customer locations, primarily due to business closures and competition from cable companies. However, our enterprise locations are driving growth in overall revenue through sales of integrated voice and data services, data center and managed services, and advanced data services such as multi-site networking.

While opportunities for growth from enterprise and small business services continue, competition as well as general economic conditions may impact future revenue growth. In addition, traditional business voice and long-distance service revenues continue to decline due to competition and migration to more advanced integrated voice and data services.


4840



The following table reflectspresents the primary drivers of year-over-yearthe changes in enterprise and small business service revenues:revenues for the three months ended March 31, 2016 compared to the same period a year ago:
    Three Months Ended
March 31, 2015
(Millions)     
Increase
(Decrease)
 %    
Due to increase in data and integrated services and high speed
   Internet revenues (a)
     $9.5
  
Due to increase in data center and managed services revenues (b)     3.7
  
Due to decrease in traditional voice, long distance and miscellaneous
   revenues (c)
     (20.4)  
Net decrease in enterprise and small business service revenues     $(7.2) (1)%
      Increase (Decrease)
(Millions)     Amount
 %
Increase in Enterprise revenues (a)     $15.7
  
Decrease in Consumer and Small Business - ILEC
   revenues (b)
     (4.9)  
Decrease in Carrier revenues (c)     (13.1)  
Decrease in Small Business - CLEC revenues (d)     (17.9)  
Net decrease in segment service revenues     (20.2)  
Increase in regulatory and other revenues (e)     17.7
  
Decrease attributable to disposed businesses (f)     (38.7)  
Net decrease in service revenues     $(41.2) (3)

(a)Increase in data and integrated services revenues was primarily due to the continued demand for advanced data services and customer migration to our integratedpartially offset by a decrease in traditional voice and data services, previously discussed.long-distance revenues due to lower usage and the adverse effects of competition.

(b)IncreaseThe decrease was primarily in data centerSmall Business - ILEC revenues and managed services revenues; which include cloud computing, colocation, dedicated server and disaster recovery solutions for business customers; reflected increased demand and incremental sales of these services.
(c)Decrease in traditional voice and long-distance service revenues was primarily attributable to lower usage adverse effects of competitionfor voice and long- distance services and the migration of existingdecline in customers to integrated services and bundled offerings. The decline was partially offset by incremental revenues attributable to the access recovery charge (“ARC”) of $3.9 million in the three month period ended March 31, 2015, primarily due to an increase in the monthly rate effective July 1, 2014. The ARC is a monthly charge established by the FCC designed to mitigate revenue reductions from intercarrier compensation reform.
Consumer Service Revenues

Consumer service revenues are generated from the provision of high-speed Internet, voice and video services to consumers. We expect the trend of consumer voice line loss to continue as a result of competition from wireless carriers, cable companies and other providers using emerging technologies. For the three month period ended March 31, 2015, consumer voice lines decreased by approximately 15,600 compared to a decrease of 19,100 for the same period in 2014. Demand for faster broadband speeds and Internet-related services, such as virus protection and online data backup services, are expected to favorably impact consumer high-speed Internet revenues, offsetting some of the decline in consumer voice revenues.

For the three month period ended March 31, 2015, consumer high-speed Internet customers increased by approximately 800 compared to a decrease of 500 for the same period in 2014. As of March 31, 2015, we provided high-speed Internet service to approximately 75 percent of primary residential lines in service and approximately 77 percent of our total voice lines had high-speed Internet competition, primarily from cable service providers. We do not expect significant additional cable expansions into our service areas during 2015, but we could experience some increased competition from high-speed Internet offerings of wireless competitors. The number of high-speed Internet customers we serve will continue to be impacted by the effects of competition from other service providers and increased penetration in the marketplace as the number of households without high-speed Internet service continues to shrink.
To combat competitive pressures in our markets, we emphasize our bundled service strategy and enhancements to our network to offer faster Internet speeds. Service bundles provide discounts and other incentives for customers to bundle their voice, long distance, high-speed Internet and video services and have positively impacted our operating trends.

49



The following table reflects the primary drivers of year-over-year changes in consumer service revenues:
  
   Three Months Ended
March 31, 2015
(Millions)     Increase
(Decrease)		 %    
Due to increase in high-speed Internet revenues (a)     $2.9
  
Due to decrease in voice, long distance and miscellaneous
   revenues (b)
     (3.7)  
Net decrease in consumer revenues     $(0.8) — %

(a)Increase in high-speed Internet revenues was primarily due to the continued migrationimpacts of customers to higher speeds, increased sales of value added services and targeted price increases, partially offset by a decline in high-speed Internet customers, as previously discussed.competition.

(b)(c)Decrease in voice service revenues was primarily attributabledue to the decline in voice lines, partially offset by the affects of targeted price increases.declining demand for dedicated copper-based circuits, as carriers continue to migrate traffic to fiber-based connections.

Carrier Service Revenues

Carrier service revenues include revenues from other carriers for special access circuits and fiber connections. As wireless data usage grows and fourth generation (“4G”) networks are expanded, we expect to provide special access services to support the capacity needs of wireless carriers. Fiber-to-the-tower initiatives are designed to accommodate network capacity requirements for wireless carriers as a result of growing wireless data usage. In the near term, carrier access revenues will be adversely impacted by declining demand for dedicated copper-based circuits, as wireless carriers continue to migrate traffic to fiber-based connections.

Carrier service revenues also includes voice and data services sold to other carriers on a wholesale basis.

The following table reflects the primary drivers of year-over-year changes in carrier service revenues:
    Three Months Ended
March 31, 2015
(Millions)     Increase
(Decrease)		 %    
Due to increase in voice, long distance and other revenues     $2.8
  
Due to decrease in carrier access revenues (a)     (16.1)  
Net decrease in carrier service revenues     $(13.3) (7)%

(a)(d)Carrier access revenuesDecrease was primarily consist of monthly recurring charges for dedicated circuits and fiber-to-the-tower connections. The decrease in these revenues was attributabledue to a decline in special access charges for dedicated copper-based circuitsthe number of customers served as carriers accelerated migration to fiber-based networks, partially offset by incremental revenues derived from our fiber-to-the-tower connections, as previously discussed.a result of business closures and competition.

Wholesale Service Revenues

Wholesale service revenues include switched access revenues and federal Universal Service Fund (“USF”) revenues. Switched access revenues include usage sensitive revenues from long distance companies and other carriers for access to our network in connection with the completion of long distance calls, as well as reciprocal compensation received from wireless and other local connecting carriers for the use of our network facilities. USF revenues are government subsidies designed to partially offset the cost of providing wireline services in high-cost areas, as further discussed in the “Regulatory Matters” section.

Revenues from these services are expected to decline due to voice line losses and continued reductions in switched access rates.


50



The following table reflects the primary drivers of year-over-year changes in wholesale service revenues:
  
   Three Months Ended
March 31, 2015
(Millions)     Increase
(Decrease)		 %    
Due to decrease in state USF revenues     $(1.9)  
Due to decrease in federal USF revenues (a)     (5.1)  
Due to decrease in switched access revenues (b)     (8.5)  
Net decrease in wholesale revenues     $(15.5) (14)%
(a)(e)Federal USFRegulatory revenues primarily consists ofinclude switched access revenues, attributable tofederal and state Universal Service Fund (“USF”) revenues, CAF Phase II support, and funds received from the access recovery mechanism (“ARM”). Switched access revenues include usage sensitive revenues from long-distance companies and other carriers for access to our network in connection with the completion of long-distance calls, as well as reciprocal compensation received from wireless and other local connecting carriers for the use of our network facilities. USF revenues are government subsidies designed to partially offset the cost of providing wireline services in high-cost areas. CAF Phase II funding is administered by the FCC for the purpose of expanding and supporting broadband service in rural areas and effectively replaces frozen USF support.support in those states in which we elected to receive the CAF Phase II funding. The ARM is additional federal universal service support available to help mitigate revenue losses from intercarrier compensation reform not covered by the ARC, previously discussed. The decline in the three month period ended March 31, 2015 is mostly attributable to a decrease in the ARM monthly rate effective July 1, 2014.

(b)Decrease in switched access revenues was primarily due to the impact of intercarrier compensation reform and a continued decline in network demand. As previously discussed, the ARC and ARM are designed to help mitigate the revenue losses resulting from intercarrier compensation reform.recovery charge (“ARC”). See Regulatory Matters for further discussion.

Other Service Revenues

Other service revenues include USF surcharge revenues, revenues from other miscellaneous services, wholesale reseller revenues generated from the master services agreement with CS&L, and consumer revenues generated in markets where we lease the connection to the customer premise. We no longer offer new consumer service

The increase in those areasregulatory and as a result, consumerother revenues have declined as existing customers disconnect their service. As previously discussed, we transferred substantially all of this consumer businesswas primarily due to the REITCAF Phase II incremental funding received to enhance broadband services in connection with the spin-off of certain networkour more rural markets partially offset by reductions in switched access revenues and real estate assets completed on April 24, 2015. Other service revenues decreased $1.1 million, or 2 percent , in the three month period ended March 31, 2015 comparedARM support due to the same periodimpacts of intercarrier compensation reform.

(f)Represents revenues attributable to the data center and directory publishing businesses sold in December and April of 2015, respectively, as well as the consumer CLEC business transferred to CS&L in connection with the spin-off completed on April 24, 2015.

See “Segment Operating Results” for a further discussion of changes in 2014.Enterprise, Consumer and Small Business - ILEC, Carrier, and Small Business - CLEC revenues.


41



Product Sales

Product sales consist of sales of various types of communications equipment to our customers. BusinessWe also sell network equipment to contractors on a wholesale basis. Enterprise product sales includes high-end data and communications equipment which facilitate the delivery of advanced data and voice services to our businessenterprise customers. Consumer product sales include high-speed Internet modems, home networking equipment, computers and phones. We also sell network equipmentSales of high-speed Internet modems to contractors onconsumers have declined as a wholesale basis.result of our implementation of a modem rental program.

The following table reflectspresents the primary drivers of year-over-yearthe changes in product sales:sales for the three months ended March 31, 2016 compared to the same period a year ago:
  
   Three Months Ended
March 31, 2015
(Millions)     Increase
(Decrease)		 %    
Due to increase in contractor sales     $0.9
  
Due to decrease in consumer product sales     (4.1)  
Due to decrease in business product sales     (5.2)  
Net decrease in product sales     $(8.4) (19)%
      Increase (Decrease)
(Millions)     Amount
 %
Increase in contractor sales     $2.6
  
Decrease in consumer product sales     (0.7)  
Decrease in enterprise product sales     (5.9)  
Net decrease in product sales     $(4.0) (11)


51



Cost of Services

Cost of services expense primarily consists of charges incurred for network operations, interconnection, bad debt and business taxes. Network operations charges include salaries and wages, materials, contractor costs, IT support and costs to lease certain network facilities. Interconnection consists of charges incurred to access the public switched network and transport traffic to the Internet, including charges paid to other carriers for access points where we do not own the primary network infrastructure. Other expense consists of third-party costs for ancillary voice and data services, business and financial services, bad debt and business taxes.

The following table reflectspresents the primary drivers of year-over-yearthe changes in cost of services:services for the three months ended March 31, 2016 compared to the same period a year ago:
  
   Three Months Ended
March 31, 2015
(Millions)     Increase
(Decrease)		 %    
Due to increase in interconnection expense (a)     $14.1
  
Due to increase in postretirement and pension (b)     4.3
  
Due to increase in Federal USF expenses (c)     1.7
  
Due to increase in other expense     1.1
  
Due to increase in network operations     0.9
  
Net increase in cost of services     $22.1
 3%
      Increase (Decrease)
(Millions)     Amount
 %
Increase in interconnection expense (a)     $8.6
  
Increase in network operations (b)     7.1
  
Increase in federal USF expenses (c)     3.2
  
Decrease in other expense     (0.2)  
Decrease in postretirement and pension (d)     (2.4)  
Decrease in medical insurance (e)     (6.4)  
Decrease attributable to disposed businesses     (21.1)  
Net decrease in cost of services     $(11.2) (2)
 
(a)Increase in interconnection expense was attributable to increased purchases of circuits due to the growth in data customers, as well as higher capacity circuits to service existing customers and increase the transport capacity of our network, partially offset by rate reductions and cost improvements from the continuation of network efficiency projects.network.

(b)Increase in postretirementnetwork operations was primarily due to engineering, contract labor and pension expense primarily resulted from a curtailment gain recognized during the first quarter of 2014 relatedovertime costs incurred to the elimination of medical and prescription subsidies for certain active employees. The curtailment gain reduced cost of services by $5.1 million in the three month period ended March 31, 2014. See Note 7 for additional information.deploy premium high-speed Internet service to our customers.

(c)
Increase in federal USF contributions was driven by an increase in the USF contribution factor for the three month period ended March 31,, 2015, 2016, compared to the same period a year ago.

(d)Decrease in postretirement and pension expense primarily resulted from a curtailment gain recognized during the three month period ended March 31, 2016 related to the elimination of medical and prescription subsidies for certain active employees. See Note 5 for additional information.


42



(e)Decrease in medical insurance was primarily due to a reduction in healthcare benefit costs driven primarily by fewer employees and plan design changes.

Cost of Products Sold

Cost of products sold represents the cost of equipment sales to customers. The changechanges in cost of products sold waswere generally consistent with the changechanges in product sales.

The following table reflectspresents the primary drivers of year-over-yearthe changes in cost of products sold:sold for the three months ended March 31, 2016 compared to the same period a year ago:
  
   Three Months Ended
March 31, 2015
(Millions)     Increase
(Decrease)		 %    
Due to increase in sales to contractors     $0.8
  
Due to decrease in product sales to consumers     (2.1)  
Due to decrease in product sales to business customers     (7.9)  
Net decrease in cost of products sold     $(9.2) (22)%
      Increase (Decrease)
(Millions)     Amount
 %
Increase in sales to contractors     $2.7
  
Decrease in product sales to consumers     (0.9)  
Decrease in product sales to enterprise customers     (4.8)  
Net decrease in cost of products sold     $(3.0) (9)
 

52



Selling, General and Administrative (“SG&A”)

SG&A expenses result from sales and marketing efforts, advertising, IT support, costs associated with corporate and other support functions and professional fees. These expenses include salaries, wages and employee benefits not directly associated with the provisioning of services.

The following table reflectspresents the primary drivers of year-over-yearthe changes in SG&A expenses:expenses for the three months ended March 31, 2016 compared to the same period a year ago:
  
   Three Months Ended
March 31, 2015
(Millions)     Increase
(Decrease)		 %    
Due to increase in postretirement and pension (a)     $4.2
  
Due to decrease in employee medical expenses     (2.5)  
Due to decrease in salaries and other benefits (b)     (4.5)  
Due to decrease in other costs     (5.2)  
Due to decrease in sales and marketing expenses (c)     (5.9)  
Net decrease in SG&A and other expenses     $(13.9) (6)%
      Increase (Decrease)
(Millions)     Amount
 %
Decrease in postretirement and pension     $(0.9)  
Decrease in sales and marketing expenses     (2.2)  
Decrease attributable to disposed businesses     (4.4)  
Decrease in salaries and other benefits (a)     (5.0)  
Decrease in other costs     (8.7)  
Net decrease in SG&A     $(21.2) (9)
 
(a)Increase in postretirement and pension expense primarily resulted from a curtailment gain recognized during the first quarter of 2014 related to the elimination of medical and prescription subsidies for certain active employees. The curtailment gain reduced SG&A expenses by $4.4 million in the three month period ended March 31, 2014. See Note 7 for additional information.
(b)Decrease was primarily the result of a workforce reduction to increase operational efficiency completed during the three month period ended March 31, 2014.
(c)Decrease in sales and marketing expenses was primarily due to reduced headcount in our Enterprise segment to increase operating efficiency and restructure our sales and customer service workforce to improve the expansion of enterprise marketing campaigns during the first quarter of 2014 designed to generate sales leads and promote brand awareness.overall customer experience.
Depreciation and Amortization Expense

Depreciation and amortization expense includes the depreciation of property, plant and equipment and the amortization of intangible assets.

The following table reflectspresents the primary drivers of year-over-yearthe changes in depreciation and amortization expense:expense for the three months ended March 31, 2016 compared to the same period a year ago:
  
   Three Months Ended
March 31, 2015
(Millions)     Increase
(Decrease)		 %    
Due to increase in depreciation expense (a)     $9.8
  
Due to decrease in amortization expense (b)     (8.0)  
Net increase in depreciation and amortization expense     $1.8
 1%
      Increase (Decrease)
(Millions)     Amount
 %
Decrease in amortization expense (a)     $(7.0)  
Decrease attributable to disposed businesses     (11.3)  
Decrease in depreciation expense (b)     (17.6)  
Net decrease in depreciation and amortization expense     $(35.9) (11)
 
(a)Increase in depreciation expense was primarily due to additions to property, plant and equipment.

43



(b)(a)Decrease in amortization expense reflected the use of the sum-of-the-years-digits method for customer lists. The effect of using an accelerated amortization method results in an incremental decline in expense each yearperiod as the intangible assets amortize.


53
(b)Decrease in depreciation expense was primarily due to the effects of fully depreciating at the end of 2015 a large number of assets acquired in conjunction with acquisitions we completed during late 2010 and 2011.



Merger, Integration and Restructuring Costs

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 consolidated results of operations. These costs include transaction costs, such as accounting;accounting, legal and broker fees; severance and related costs; IT and network conversion; rebranding; and consulting fees. Our 2011 acquisition of PAETEC Holding Corp. (“PAETEC”)We also incurred investment banking fees, legal, accounting and other consulting fees related to the spin-off of certain network and real estate assets into an independent, publicly traded real estate investment trust (“REIT”). During the fourth quarter of 2015, we began a network optimization project designed to consolidate traffic onto network facilities operated by us and reduce the usage of other carriers’ networks, including service areas acquired in the acquisition of PAETEC Holding, Corp. (“PAETEC”). In undertaking this initiative, which we expect to complete during 2016, we incurred costs to migrate traffic to lower cost circuits and to terminate existing contracts prior to their expiration. Costs related to the network optimization project and the REIT spin-off primarily account for the merger and integration costs incurred for the periods presented.

Restructuring charges are generallyprimarily incurred as a result of evaluations of our operating structure. Among other things, these evaluations explore opportunities to provide greater flexibility in managing and financing existing and future strategic operations, 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.

During the first quarter of 2015,2016, we incurred restructuring charges of $3.3severance and other employee-related costs totaling $4.3 million related to the completion of several small workforce reductions. Additionally, weRestructuring charges in the first quarter of 2015 principally consist of $3.3 million of severance and other employee-related costs incurred charges ofin connection with completing several small workforce reductions and $3.1 million related to thea special shareholder meeting held on February 20, 2015 to approve thea one-for-six reverse stock split of Windstream Holdings’ common stock and the conversion of Windstream Corporation to Windstream Services, LLC.

On February 21, 2014, we announced a reduction in workforce to increase operational efficiency. As a result, we eliminated approximately 400 positions on or before March 3, 2014, with about 175 of the eliminated positions resulting from a voluntary separation initiative. In connection with this workforce reduction, we incurred pre-tax restructuring charges of $12.1 million during the first quarter of 2014, primarily consisting of severance and other employee benefit costs.Services.

Set forth below is a summary of merger, integration and restructuring costs for the three month periodperiods ended March 31:
(Millions)     2016
 2015
Merger and integration costs:        
Information technology conversion costs (a)     $—
 $3.5
Costs related to REIT spin-off     —
 10.5
Network optimization and conversion costs     4.2
 —
Consulting and other costs     0.8
 0.1
Total merger and integration costs     5.0
 14.1
Restructuring charges     4.4
 7.0
Total merger, integration and restructuring costs     $9.4
 $21.1
    Three Months Ended
(Millions)     2015
 2014
Merger and integration costs:        
Information technology conversion costs (a)     $3.5
 $7.1
Consulting and other costs (b)     10.6
 0.8
Total merger and integration costs     14.1
 7.9
Restructuring charges (c)     7.0
 12.4
Total merger, integration and restructuring costs     $21.1
 $20.3

(a)Information technology conversion costs incurred primarily consisted of redundant IT platform integrations designed to improve processes and drive efficiencies.

(b)Includes costs incurred related to the spin-off of certain telecommunications network assets into an independent, publicly traded REIT. See Note 13 to the consolidated financial statements for additional information related to the transaction.

(c)Restructuring charges for the first quarter of 2015 are primarily due to small workforce reductions and the special shareholder meeting, as discussed above. For the same period in 2014, restructuring charges relate to the workforce reduction completed in the first quarter of 2014, also discussed above, as well as other restructuring activities.

Summary of Liability Activity Related to Both Merger and Integration Costs and Restructuring Charges

As of March 31, 2015,2016, we had unpaid merger, integration and restructuring liabilities totaling $12.5$5.3 million, which consisted of $1.2$2.9 million associated with restructuring initiatives and $11.3$2.4 million related to merger and integration activities, which are included in other current liabilities in the accompanying consolidated balance sheet. Payments of these liabilities will be funded through operating cash flows (see Note 9)7).


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Operating Income

Operating income decreased $47.9increased $37.8 million, or 28.532 percent, during the three month period ended March 31, 20152016, as compared to the same period in 2014.2015. The decreaseincrease was primarily due to growth in Enterprise revenues, reflecting increased demand for data and integrated services, additional CAF Phase II subsidy revenues and lower depreciation and amortization expense. These changes were partially offset by reductions in enterprise and small business, carrier and wholesaleswitched access revenues as a result of declining voicedue to customer losses from business closures and long-distance revenues attributable to lower usage,competition, declining demand for dedicated copper-based circuits to towers and the adverse effects of intercarrier compensation reform, respectively.

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Other (Expense) Income, Net Loss on Early Extinguishment of Debt

Set forth below is a summaryThe net loss on early extinguishment of other (expense) income, netdebt was as follows for the three month period ended March 31:
    Three Months Ended
(Millions)     2015
 2014
Interest income     $0.8
 $0.8
Other income, net     0.3
 0.1
Ineffectiveness of interest rate swaps     (2.3) —
Other (expense) income, net     $(1.2) $0.9
(Millions)     2016
Loss on early extinguishment from partial repurchases of 2017 Notes     $(48.5)
Gain on early extinguishment from partial repurchases of 2021, 2022 and 2023 Notes     13.1
Net loss on early extinguishment of debt     $(35.4)

Windstream Services repurchased a portion of its 2017 Notes during the first quarter of 2016. The partial repurchase was accounted for as an extinguishment, and accordingly, Windstream Services recognized a pre-tax loss of $(48.5) million.

Windstream Services repurchased in the open market certain of its senior unsecured notes representing an aggregate principal amount of $154.2 million. The partial repurchase was accounted for under the extinguishment method of accounting, and as a result, Windstream Services recognized a pretax gain of $13.1 million.

Interest Expense

Set forth below is a summary of interest expense for the three month periodperiods ended March 31:
   Three Months Ended
(Millions) 2015
 2014
 2016
 2015
Senior secured credit facility, Tranche A $4.3
 $4.3
 $—
 $4.3
Senior secured credit facility, Tranche B 17.5
 17.6
 6.0
 17.5
Senior secured credit facility, revolving line of credit 6.0
 5.4
 4.7
 6.0
Senior unsecured notes 94.5
 96.0
 79.1
 94.5
Notes issued by subsidiaries 11.3
 11.2
 1.7
 11.3
Interest expense - long-term lease obligations:    
Telecommunications network assets 126.9
 —
Real estate contributed to pension plan 1.5
 1.7
Impacts of interest rate swaps 6.6
 7.4
 2.8
 6.6
Interest on capital and other lease obligations 2.4
 1.1
Interest on capital leases and other 0.6
 0.7
Less capitalized interest expense (1.5) (1.1) (3.6) (1.5)
Total interest expense $141.1
 $141.9
 $219.7
 $141.1

Interest expense increased $78.6 million, or 56 percent, for the three month period ended March 31, 2016, as compared to the same period in 2015. The increase in 2016 was primarily due to the additional interest associated with the long-term lease obligation under the master lease with CS&L. The increase was partially offset by reduced interest costs due to the retirement of amounts outstanding under Tranches A3, A4 and B4 of Windstream Services’ senior secured credit facility through the completion of the debt-for-debt exchange in conjunction with the REIT spin-off and the pay-off of the remaining balance of Tranche B4 and, to a lesser extent, the redemption of the 2018 Notes and PAETEC 2018 notes using a portion of the $1.035 billion cash payment received from CS&L in the REIT spin-off.


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Income Taxes

During the first quarter of 2015,2016, we recognized an income tax benefit of $27.7$31.0 million, as compared to an income tax expensebenefit of $10.8$27.7 million for the same period in 2014.2015. The income tax benefit recorded in the first quarter of 2016 reflected the loss before taxes and additionaloffset by discrete tax expense of $69.6 million for a nondeductible impairment charge related to our investment in CS&L. Our effective tax rate was 11.8 percent for the three month period ended March 31, 2016 as compared to 123.7 percent in the same period in 2015. The effective rate for the three month period ended March 31, 2016 was impacted by the effect of the discrete item discussed above. Comparatively, the effective rate for the three month period ended March 31, 2015 was primarily driven by discrete income tax benefits of $22.4 million to adjust our deferred taxes for the effects of the reorganization of certain of our subsidiaries, including Windstream Services, to limited liability companies completed during the first quarter of 2015. Our effectiveThese discrete income tax rate was 123.7 percent for the three month period ended March 31,benefits were solely related to 2015 as comparedand had no impact to 40.3 percent in the same period in 2014. The effective rate for the three month period ended March 31, 2015 is primarily driven by the discrete items discussed above.our 2016 income tax expense.

For 2015,2016, our annualized effective income tax rate is expected to range between 38.0 percent and 39.0 percent, excluding one-time discrete items. Changes in our relative profitability, as well as recent and proposed changes to federal and state tax laws may cause the rate to change from historical rates. In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate, which is based on our expected annual income, statutory rates and tax planning opportunities. Significant or unusual items are separately recognized in the quarter in which they occur.

SEGMENT OPERATING RESULTS

Our business unit organizational structure is focused on our core customer relationships, and as a result, we operate and report the following four customer-based segments:

Consumer and Small Business - ILEC - We manage as one business our residential and small business customers who reside in markets in which we are the ILEC due to the similarities with respect to service offerings, marketing strategies and customer service delivery. Products and services offered to these customers include traditional local and long-distance voice services and high-speed Internet services, which are delivered primarily over network facilities operated by us. We offer consumer video services primarily through a relationship with Dish Network LLC and we also own and operate cable television franchises in some of our service areas. We have launched Kinetic, a complete video entertainment offering in our Lincoln, Nebraska, Lexington, Kentucky and Sugar Land, Texas markets. We expect to roll out this new service to additional markets during the next few years. Residential customers can bundle voice, high-speed Internet and video services, to provide one convenient billing solution and receive bundle discounts. Small Business - ILEC services offer a wide range of advanced Internet, voice, and web conferencing products. These services are equipped to deliver high-speed Internet with competitive speeds, value added services to enhance business productivity and options to bundle services for a global business solution to meet our small business customer needs.

Carrier - Our Carrier operations consist of providing products and services to other communications services providers, including special access services, which provide network access and transport services to end users, and fiber-to-tower connections to support backhaul services to wireless carriers. We also offer on a wholesale basis voice and data transport services to other communications providers, including the resale of our services and the sale of unbundled network elements, which allow wholesale customers to provide voice and data services to their customers through the use of our network or in combination with their own networks.
Enterprise - Our enterprise operations consist of our business customer relationships that generate $1,500 or more in revenue per month. Products and services offered to these customers include integrated voice and data services, which deliver voice and broadband services over a single Internet connection, multi-site networking services which provide a fast and private connection between business locations, as well as a variety of other data services, including cloud computing and collocation and managed services as an alternative to traditional information technology infrastructure.

Small Business - CLEC - These operations consist of our business customer relationships that generate less than $1,500 in revenue per month and are located in service areas in which we are a CLEC and provide services over network facilities primarily leased from other carriers. Products and services provided to our Small Business - CLEC customers include integrated voice and data services, advanced data and traditional voice and long-distance services as well as value added services including online backup, managed web design and web hosting, and various e-mail services.


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Our segment operating results presented below are based on how we assess operating performance and internally report financial information. We evaluate performance of the segments based on segment income, which is computed as segment revenues and sales less segment operating expenses. Segment revenues are based upon each customer’s classification to an individual segment and include all services provided to that customer. Certain operating revenues are derived from activities that are centrally-managed by us and, accordingly, these revenues are not included in the operating results of segments. These other operating revenues include revenue from federal and state universal service funds, CAF Phase II support, and funds received from federal access recovery mechanisms. We also generate other service revenues from providing switched access services, which include usage-based revenues from long-distance companies and other carriers for access to our network to complete long-distance calls, as well as reciprocal compensation received from wireless and other local connecting carriers for the use of network facilities. Other operating revenues also include certain surcharges assessed to our customers, including billings for our required contributions to federal and state USF programs. Revenues attributable to the sold data center and directory publishing businesses, as well as the consumer CLEC business transferred to CS&L are not assigned to the segments and are also included in other service revenues for all periods prior to the dates of disposal.

Segment expenses include specific expenses incurred as a direct result of providing services and products to segment customers; selling, general and administrative expenses that are directly associated with specific segment customers or activities; and certain allocated expenses which include network expenses, facilities expenses and other expenses, such as vehicle and real estate-related expenses. We do not assign depreciation and amortization expense, merger and integration costs, restructuring charges, stock-based compensation and pension costs to our segments, because these expenses are centrally managed and are not monitored by or reported to the chief operating decision maker by segment. Similarly, certain centrally-managed administrative functions, such as accounting and finance, information technology, legal and human resources, are not assigned to our segments. Interest expense and net loss on early extinguishment of debt have also been excluded from segment operating results because we manage our financing activities on a total company basis and have not assigned any long-term debt obligations to the segments. Other expense, net, other-than-temporary impairment of our investment in CS&L common stock, and income tax benefit are not monitored as a part of our segment operations and, therefore, these items have been excluded from our segment operating results.

See Note 11 to the consolidated financial statements for a reconciliation of total segment revenues and sales to consolidated revenues and sales and segment income to consolidated net (loss) income.


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CONSUMER AND SMALL BUSINESS - ILEC SEGMENT

As of March 31, 2016, the Consumer and Small Business - ILEC segment includes approximately 1.6 million residential and small business customers. This segment generated $397 million in revenue and $228 million in segment income, or contribution margin, during the first quarter of 2016.
Strategy

Within Consumer and Small Business - ILEC, we are focused on expanding and enhancing our broadband capabilities to generate solid and sustainable cash flows.

We expect to grow revenue by continuing to increase broadband speeds and capacity throughout our territories. Project Excel, which began in late 2015, accelerates our plans to upgrade and modernize our broadband network by year-end 2016. This program upgrades our fiber-fed infrastructure with Very high-bit-rate Digital Subscriber Line Generation 2 (“VDSL2”) electronics to enable faster broadband speeds and enhances our backhaul capabilities to address future capacity demands and improve network reliability. Upon completion of Project Excel, 25 megabits per second (“Mbps”) speeds will be available to 54 percent of our broadband footprint and 50 Mbps speeds to 30 percent; which are very competitive offerings in our rural markets. These network upgrades will provide a great customer experience and, we believe will drive higher revenue per customer per month and allow us to increase market share.

As previously discussed, we launched 1-Gigabit Internet service in four market areas to deliver faster speeds to more of our customer base. Additionally, CAF Phase II funding will support and expand our broadband capabilities to an additional 470,000 locations.

We expect increases in real-time streaming video and traditional Internet usage to drive demand for faster broadband speeds and generate increased revenues as customers upgrade their services. We also sell value-added Internet services, such as security and online back-up, to leverage our broadband capabilities.

Consumer and Small Business - ILEC Segment Results of Operations

The following table reflects the Consumer and Small Business - ILEC segment results of operations for the three months ended March 31:
          Increase (Decrease)
(Millions)     2016
 2015
 Amount
 %
Revenues and sales:            
Service revenues:            
High-speed Internet bundles (a)     $261.1
 $255.8
 $5.3
 2
Voice-only (b)     39.0
 44.2
 (5.2) (12)
Voice and miscellaneous     11.6
 12.2
 (0.6) (5)
Total consumer     311.7
 312.2
 (0.5) —
Small business - ILEC (c)     85.1
 89.5
 (4.4) (5)
Total service revenues     396.8
 401.7
 (4.9) (1)
Product sales     0.4
 1.1
 (0.7) (64)
Total revenues and sales     397.2
 402.8
 (5.6) (1)
Cost and expenses (d)
     169.1
 163.2
 5.9
 4
Segment income     $228.1
 $239.6
 $(11.5) (5)


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(a)Increase in high-speed Internet bundle revenues was primarily due to the continued migration of customers to higher speeds, targeted price increases, and implementation of a modem rental program during 2015, partially offset by declines in high-speed Internet customers. Demand for faster broadband speeds are expected to favorably impact consumer high-speed Internet revenues, offsetting some of the decline in consumer voice revenues.

(b)Decrease in voice-only revenues was primarily attributable to the decline in households served due to the impacts of competition, partially offset by the effects of targeted price increases.

(c)Decrease was primarily attributable to lower usage for voice and long-distance services and the decline in customers due to the impacts of competition.

(d)The increase was primarily attributable to costs incurred to meet the FCC’s deadline of March 31, 2016 for broadband deployment to two-thirds of our required locations under CAF Phase I - Round 2.

The following table reflects the Consumer and Small Business - ILEC segment operating metrics as of March 31:
          Increase (Decrease)
(Thousands)     2016
 2015
 Amount
 %
Consumer Operating Metrics:            
Households served (a)     1,430.7
 1,516.5
 (85.8) (6)
High-speed Internet customers (b)     1,092.0
 1,132.4
 (40.4) (4)
Digital television customers (c)     350.1
 378.8
 (28.7) (8)
Small Business - ILEC customers (d)     144.3
 155.9
 (11.6) (7)

(a)The decrease in the number of consumer households served was primarily attributable to the effects of competition from wireless carriers, cable companies and other providers using emerging technologies. For the three month period ended March 31, 2016, consumer households served decreased by 15,100 compared to a decrease of 12,200 for the same period in 2015.

(b)The decrease in consumer high-speed Internet customers was primarily due to the effects of competition from other service providers and increased penetration in the marketplace, as the number of households without high-speed Internet service continues to shrink. As of March 31, 2016, we provided high-speed Internet service to approximately 76 percent of our primary residential lines in service and approximately 77 percent of our total voice lines had high-speed Internet competition, primarily from cable service providers. For the three month period ended March 31, 2016, consumer high-speed Internet customers decreased by 3,100 compared to an increase of 800 for the same period in 2015.

(c)For the three month period ended March 31, 2016, digital television customers decreased by 9,200 compared to a decrease of 6,500 for the same period in 2015.

(d)The decrease in small business customers was primarily due to business closures and competition from cable companies. For the three month period ended March 31, 2016, small business customers decreased by 2,500 compared to a decrease of 4,300 for the same period in 2015.

We expect the number of consumer households, consumer high-speed Internet customers, and small business customers in our ILEC footprint to continue to be impacted by the effects of competition.


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CARRIER SEGMENT

The Carrier segment leverages our nationwide network to provide 100 Gbps bandwidth and transport services to wholesale partners, including telecom companies, content providers, and cable and other network operators. The carrier business unit produced $163 million in revenue and $118 million in contribution margin for the first quarter of 2016.
Strategy

Our Carrier strategy is focused on expanding our network in strategic, high-traffic locations to drive new sales opportunities through the connection of our long-haul network to carrier hotels, international landing stations and data centers. We currently operate the sixth largest fiber network in the nation with approximately 125,000 route miles of fiber. Our fiber network links common interconnection points in tier one locations to our tier two and three markets, enabling our customers to reach their end users through unique and diverse routes. We have made significant investments in our network adding route miles and new access points. With further expansion of our fiber transport network through capital investment, we will enhance our ability to provide high bandwidth connectivity.

We have also expanded our sales team to target high growth areas including content, international and cable television providers.

We believe that we are well positioned to stabilize our Carrier business through investment in our network, offering advanced products and solutions, targeting carrier and wholesale customers and controlling costs through our disciplined approach to capital and expense management.

Carrier Segment Results of Operations

The following table reflects the Carrier segment results of operations for the three months ended March 31, 2016:
          Increase (Decrease)
(Millions)     2016
 2015
 Amount
 %
Revenues:            
Core carrier (a) (c)     $130.8
 $138.4
 $(7.6) (5)
Wholesale (b)     19.7
 19.7
 —
 —
Total core carrier and wholesale     150.5
 158.1
 (7.6) (5)
Wireless TDM (c)     12.7
 18.2
 (5.5) (30)
Total revenues     163.2
 176.3
 (13.1) (7)
Cost and expenses     45.5
 46.1
 (0.6) (1)
Segment income     $117.7
 $130.2
 $(12.5) (10)

(a)Core carrier revenues primarily include revenues from other carriers for special access circuits and fiber connections.

(b)Wholesale revenues represent voice and data services sold to other carriers on a wholesale basis.

(c)The decrease in these revenues was attributable to declines in special access charges for dedicated copper-based circuits as carriers migrate to fiber-based networks. We expect these revenues to be adversely impacted as carriers continue to migrate traffic to fiber-based connections.

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ENTERPRISE SEGMENT

Our Enterprise segment provides advanced communications services to enterprise customers. During the first quarter of 2016, the Enterprise segment generated $513 million in revenue and $71 million in contribution margin.
Strategy

The strategy for our Enterprise business is centered on growing revenue and increasing profitability. As one of the Country’s largest network providers, our nationwide presence and broad portfolio of customized solutions provide enterprise customers with a unique service model. We target enterprise customers generating between $5,000 to $100,000 in monthly revenue. This competitive differentiation combined with an agile sales and service model has enabled us to increase market share and grow revenue.

We believe we can drive meaningful improvements in our Enterprise margins by focusing on profitable growth, increasing sales on our own network facilities to reduce third party network access costs and improving of efficiency with system and process enhancements. We made progress on this goal in 2016 by increasing margins from 10% in the first quarter of 2015 to 14% in the first quarter of 2016 and we expect to make further improvements over the next 3 years.
To grow profitability, we are focused on selling the right products to the right customers by principally targeting mid-size customers, simplifying product offerings and managing profit margins at a customer account level. We expect to improve operating efficiencies and enhance the customer experience by further integrating our internal processes in sales, service delivery, customer care and repair.  In addition, we continue to follow an aggressive expense management and capital efficient strategy to drive reductions in network access costs, create on-network sales opportunities and improve our competitiveness in the market place.

Enterprise Service Revenues

The following table reflects the Enterprise segment results of operations for the three months ended March 31, 2016:
          Increase (Decrease)
(Millions)     2016
 2015
 Amount
 %
Revenues and sales:            
Service revenues:            
Voice and long distance (a)     $148.1
 $152.0
 $(3.9) (3)
Data and integrated services (b)     317.3
 298.7
 18.6
 6
Miscellaneous     26.0
 25.0
 1.0
 4
Total service revenues     491.4
 475.7
 15.7
 3
Product sales     21.7
 27.6
 (5.9) (21)
Total revenues and sales     513.1
 503.3
 9.8
 2
Cost and expenses (c)
     442.6
 451.4
 (8.8) (2)
Segment income     $70.5
 $51.9
 $18.6
 36

(a)Decrease in traditional voice and long-distance service revenues was primarily attributable to lower usage, adverse effects of competition and the migration of existing customers to integrated services and bundled offerings.

(b)Increase in data and integrated services revenues was primarily due to continued demand for advanced data services and customer migration to our integrated voice and data services.

(c)Decrease was primarily related to reductions in headcount to increase operating efficiency and restructure our sales and customer service workforce to improve the overall customer experience, partially offset by an increase in customer access costs directly related to the growth in enterprise data and integrated services revenues.

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The following table reflects the Enterprise segment operating metrics as of March 31:
          Increase (Decrease)
(Thousands)     2016
 2015
 Amount
 %
Enterprise customers     26.4
 26.2
 0.2
 1

Enterprise customers represent those customer relationships that generate $1,500 or more in revenue per month. Our enterprise customer base has remained relatively unchanged during 2016. For the three month period ended March 31, 2016, Enterprise customers increased by 100 compared to a decrease of 100 for the same period in 2015.

SMALL BUSINESS - CLEC SEGMENT
Our Small Business - CLEC segment consists of small business customers residing outside of our ILEC footprint. During the first quarter of 2016, this segment generated revenue of $129 million and contribution margin of $41 million.

Our Small Business - CLEC strategy is focused on retaining our most profitable customers, selling incremental services and locations to existing customers, targeting new sales in select markets, and managing customer-level profit margins to moderate revenue and contribution margin declines and maximize profitability. Operational efficiency and a highly disciplined sales and support model are cornerstones of our Small Business - CLEC strategy that should enable us to maximize cash flows generated from this business.

Products and services provided to our Small Business - CLEC customers include integrated voice and data services, advanced data and traditional voice and long-distance services. We also offer on-line back-up, remote IT, managed web design, web hosting and various email services to small business customers in our CLEC footprint.

Similar to our Small Business - ILEC operations, we experience competition from cable television companies and other communications carriers in areas served by our Small Business - CLEC segment.

Small Business - CLEC Service Revenues

The following table reflects the Small Business - CLEC segment results of operations for the three months ended March 31, 2016:
          Increase (Decrease)
(Millions)     2016
 2015
 Amount
 %
Service revenues (a)
     $128.7
 $146.6
 $(17.9) (12)
Cost and expenses (b)
     87.4
 98.0
 (10.6) (11)
Segment income     $41.3
 $48.6
 $(7.3) (15)

(a)The decrease was primarily due to the decline in customers discussed below, partially offset by targeted price increases. For 2016, we are focused on customer retention and selling incremental services to existing customers to enhance profitable revenue opportunities.

(b)The decrease was primarily due to a decrease in network access costs directly related to the decline in customers.


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The following table reflects the Small Business - CLEC segment operating metrics as of March 31:
          Increase (Decrease)
(Thousands)     2016
 2015
 Amount
 %
Small Business - CLEC Customers     86.4
 107.3
 (20.9) (19)

The decrease in small business customers was primarily due to business closures and competition from cable companies. For the three month period ended March 31, 2016, small business customers decreased by 4,800 compared to a decrease of 200 for the same period in 2015.

Regulatory Matters

We are subject to regulatory oversight by the FCC for particular interstate matters and state public utility commissions (“PUCs”) for certain intrastate matters. We are also subject to various federal and state statutes that direct such regulations. We actively monitor and participate in proceedings at the FCC and PUCs and engage federal and state legislatures on matters of importance to us.

From time to time federal and state legislation is introduced dealing with various matters that could affect our business. Most proposed legislation of this type never becomes law. Accordingly, it is difficult to predict what kind of legislation, if any, may be introduced and ultimately become law.


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Federal Regulation and Legislation

Intercarrier Compensation and USF Reform

OnIn November 18, 2011, the FCC released an order (“the Order”) that established a framework for reform of the intercarrier compensation system and the federal USF. The Order included two primary provisions:

the elimination of terminating switched access rates and other per-minute terminating charges between service providers by 2018, through annual reductions in the rates, mitigated in some cases by two recovery mechanisms; and

the provision of USF support for voice and broadband services.

In reforming the USF, the Order established the Connect America Fund (“CAF”),CAF, which included a short-term (“CAF Phase I”) and a longer-term (“CAF Phase II”) framework. CAF Phase I provides for continued legacy USF funding frozen at 2011 levels as well as the opportunity for incremental broadband funding to a number of unserved and underserved locations. In Round 2 of CAF Phase 1 incremental support, we were authorized to receive an additional $86.7 million in support for upgrades and new deployments of broadband service. Of the total amount of $86.7 million made available to us, we received $60.7 million in December 2013 and the remaining $26.0 million in the first quarter of 2014. Pursuant to commitments we made while the FCC was considering the rules for Round 2, we will match, on at least a dollar-for-dollar basis, the total amount of Round 2 funding received. In July 2016, we will report to the FCC our compliance with its March 2016 deadline for broadband deployment to two-thirds of our required locations for Round 2, and we expect to meet our match commitment for the program. The portion of capital expenditures funded by us are included in our capital expenditure totals for each period presented in the accompanying consolidated statements of cash flow.

The FCC recently established final rules for CAF Phase II funding based on a forward-looking cost model to further extend broadband to high-cost areas. In April ofAugust 2015, the FCC announcedWindstream accepted CAF Phase II support offers for right-of-first-refusal (“ROFR”) elections to price cap carriers. Windstream’s total offer17 of its 18 states where it is approximately $179.0an incumbent provider, totaling $175.0 million in annual funding which is an increase overcompared to our currentprevious annual funding of approximately $100.0 million. We are analyzing the state-by-state offers relativeSupport was retroactive to the capital expenditurebeginning of 2015 and will continue for six additional years. Windstream will be obligated to offer broadband service at 10/1 Mbps or better to approximately 400,000 eligible locations in high-cost areas in those 17 states. Windstream declined the statewide offer in just one state, New Mexico, where Windstream’s projected cost to comply with FCC deployment requirements and we must make elections bygreatly exceeded the end of August 2015. If we decline the ROFR election for any state, wefunding offer. We will still be eligible to participate in a competitive bidding process for CAF Phase II support in New Mexico, along with other interested eligible competitors,competitors; however, the rules for support in that state.the competitive bidding process are still under consideration by the FCC, and have not yet been finalized. In an order released in December 2014, the FCC stated that it expected to be prepared to conduct the competitive bidding process in 2016. The rules for that process are still under consideration by the FCC. At this time, we cannot predict what effects that the final CAF Phase II rules may have on our future consolidated revenues, expenses, or cash flows. The final rules impose additional capital expenditure requirements for broadband service expansion, which could have an adverse impact on our future liquidity. UntilWe will continue to receive annual USF funding in New Mexico frozen at 2011 levels until the implementation of CAF Phase II competitive bidding is complete, the annual “legacy” USF funding will continuecomplete.

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As a result, we expect to be frozen at 2011 levels. We were required to use one-third of the frozen legacy support to operate and build broadband networks in areas substantially unserved by an unsubsidized competitor in 2013. In 2014, this condition applied to two-thirds of the frozen legacy support, and in 2015 it increased to 100 percent. Our expectation is that our legacy federal USF support will continue to be approximately the same untilreceive CAF Phase II and frozen USF support as follows:
(Millions)2016
2017
2018
2019 and Thereafter
Total
CAF Phase II support$174.9
$174.9
$174.9
$524.7
$1,049.4
Transitional Frozen USF support12.6
7.7
2.8
—
23.1
New Mexico Frozen USF support4.6
2.3
—
—
6.9
Total$192.1
$184.9
$177.7
$524.7
$1,079.4

The above payouts include transitional support through mid-2018 in the six states in which the CAF Phase II support allocated to and elected by us is implemented.less than the amount we received in legacy USF high-cost support. These amounts also assume that we will deploy to 100 percent of the required locations in each state. On December 31, 2015, we elected the flexibility to deploy to at least 95 percent but less than 100 percent in five of the states in which we accepted CAF Phase II support. We will be able to decide how much, if any, of the flexibility we use.  If we avail ourselves of all of the flexibility, however, we would have to return a total of approximately $50.0 million by 2021. We expect the incremental CAF Phase II receipts to be sufficient to cover the program’s capital obligations and to provide significant opportunities for Windstream to enhance broadband services in our more rural markets.

As part of the Order’s reform of intercarrier compensation, the FCC established two recovery mechanisms that mitigate the revenue reductions resulting from the reduction and ultimate elimination of terminating access rates. First, the FCC established the ARC, a fee which may be assessed to some of our retail customers. Second, the ARM is a form of additional federal universal service support designed to allow carriers to recover some of the revenue reductions that cannot be recovered through assessment of the ARC. Carriers are required to use ARM support to build and operate broadband networks in areas substantially unserved by an unsubsidized competitor offering fixed voice and broadband service. Our ARM support is expected to decrease incrementally from $52.3 million in 2014 to an estimated $12.3 million in 2017, with a portion of the decrease offset by future increases in ARC revenues. Absent a change by the FCC to its current rules, the ARM will phase out annually in one-third increments, beginning in July 2017, and will be eliminated completely as of July 2019.

On April 25, 2012, the FCC decided that originating access rates for intrastate long distance traffic exchanged between an Internet-protocol network and the traditional telecommunications network should be subject to default rates equal to interstate originating access rates beginning on July 1, 2014. The FCC refused at that time to adopt a mechanism that would allow companies to recover the loss of originating access revenues resulting from the change. Our court challenge to this ruling was rejected in May 2014. We continue to assess the impacts of the FCC’s intercarrier compensation reform on our wholesale business activities.


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Set forth below is a summary of intercarrier compensation revenue and federal universal serviceUSF and CAF Phase II support included in wholesaleregulatory revenues within the consolidated statements of operations for the three month periodperiods ended March 31:31 :
    Three Months Ended
(Millions)     2015
 2014
Intercarrier compensation revenue     $35.7
 $44.2
Federal universal service support     $35.5
 $40.6

Broadband Stimulus

As part of the American Recovery and Reinvestment Act of 2009 (“ARRA”), approximately $7.2 billion was allocated for the purpose of expanding broadband services to unserved and underserved areas. The Rural Utilities Service (“RUS”), part of the United States Department of Agriculture, approved eighteen of our applications for these funds for projects totaling $241.7 million. The RUS will fund 75 percent of these approved grants, or $181.3 million, and we will fund the remainder of at least $60.4 million.

Selected information related to the broadband stimulus expenditures and receipts is as follows for the three month period ended March 31:
    Three Months Ended  
(Millions)     2015
 2014
 Inception to Date
Stimulus capital expenditures funded by RUS     $—
 $7.1
 $176.4
Stimulus capital expenditures funded by
    Windstream (a)
     1.6
 10.3
 142.3
Total stimulus capital expenditures     $1.6
 $17.4
 $318.7
Funds received from RUS     $7.4
 $11.4
 $158.3

(a)Stimulus capital expenditures funded by us are included in our capital expenditure totals for each period presented in the accompanying consolidated statements of cash flows. This total includes certain non-reimbursable charges for which we are responsible for the full amount of the cost.

Internet Network Regulation

On February 26, 2015, the FCC adopted new open Internet rules for fixed and mobile broadband Internet access services. The FCC’s previous open access regulatory regime had not caused a change in our existing procedures or operations, and we do not expect any need for change as a result of the new framework.
(Millions)     2016
 2015
Intercarrier compensation revenue     $35.9
 $46.1
Federal universal service and CAF Phase II support     $48.5
 $25.1

IntraMTA Switched Access Litigation

Several of our companies are defendants in approximately 25 lawsuits filed by Verizon and Sprint long distancelong-distance companies alleging that our companies may not bill them switched access charges for calls between wireline and wireless devices that originate and terminate within the same Major Trading Area. The complaints seek historical relief in the form of refunds and prospective relief concerning future billings. There are approximately 50 other such lawsuits against hundreds of defendants. All of the suits have been consolidated in a single federal court.district court, which dismissed the claims on November 17, 2015. In March 2016, the plaintiffs were denied permission from the district court to appeal the dismissal of their claims, which was required in this instance given certain procedural issues. The suits are continuing with respect to Verizon and Sprint’s state claims, as well as for defendants’ counterclaims (including those of Windstream) for return of all withholdings. The subject matter of the suits is also the subjecttopic of a pending petition for declaratory ruling before the FCC, to which the lawsuits may be referred. The outcome of the disputes is currently not predictable, given the uncertainty concerning the ultimate venue of the disputes and the amount of traffic being disputed.

Last-Mile Access

Windstream is actively engaged in policy advocacy in various FCC proceedings that address the rates, terms and conditions for access to the “last mile” facilities we need to serve retail business data service (i.e., special access) customers through our competitive companies. In 2015, we incurred approximately $1.4 billion in interconnection expense and most of that was attributable to last-mile access. For the vast majority of our customers, last mile facilities, the wires (“loops”) to a customer location from a central office, are not economic for Windstream to duplicate through its own investment and are not available from providers other than the incumbent carrier. Therefore, we often lease those connections from incumbent carriers as one of two distinct product types: either unbundled network elements (“UNEs”), which by law are not available in all areas but are subject to strict regulatory

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standards, or business data service inputs, widely available from incumbents but subject to more flexible regulatory standards. One such FCC proceeding addressing business data services involves a comprehensive review of business data service rules, begun in 2012 with an FCC order finding that the rules the FCC has had in place since 1999 were not working as intended. Another has been an FCC Wireline Competition Bureau investigation, commenced in October 2015, into whether the volume and term commitments and associated fees and penalties contained in specified incumbent special access pricing plans are anti-competitive, comport with applicable law or impede the forthcoming technology transition. While this investigation now is largely closed, the FCC’s consideration of appropriate regulation of rates, terms, and conditions is on-going, and we are not able to predict what the ultimate impact will be of the FCC’s determinations on these issues.
State Regulation and Legislation

We recognize revenue from the receipt of state universal service funding in a limited number of states in which we operate. For the three month period ended March 31, 2015,2016, we recognized $27.2$24.1 million, in state USF revenue, which included approximately $15.2$13.3 million, from the Texas USF. These payments are intended to provide support, apart from the federal USF receipts, for the high cost of operating in certain rural markets.

There are two high-cost programs of the Texas USF, one for large companies and another for small companies. In the three month period ended March 31, 2015,2016, we received $13.3$11.7 million from the large company program and $1.9$1.6 million from the small company program. Theprogram.The purpose of the Texas USF is to assist telecommunications carriers with providing basic local telecommunicationstelecommuni

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cations services at reasonable rates to customers in high cost rural areas and to qualifying low-income and disabled customers. By order of the Texas PUC, the Texas USF distributes support to eligible carriers serving areas identified as high cost, on a per-line basis. Texas USF support payments are based on the number of actual lines in service and therefore are subject to reductions when customers discontinue service or migrate to a competitive carrier. All service providers of telecommunications services in Texas contribute to the Texas USF through the payment of a monthly surcharge collected from their customers.

In 2013, the Texas Legislature passed a law that requires set reductions to providers’ state USF support over a period of years beginning in 2017 unless providers can demonstrate a “financial need” for continued support. On December 1, 2014, the Texas PUC adopted a financial needs test that allows providers to petition for continued support under a two-step process that takes into consideration the level of competition and the provider’s expenses. Petitions,On December 28, 2015, we filed a petition for our Texas affiliate’s large company support. On March 24, 2016, Windstream and the PUC staff jointly filed a settlement agreement stating that our petition satisfies the test necessary to continue support for all but two of our 177 exchanges in Texas. The agreement, which providers can begin filing in 2016, will be consideredwould preserve over $42 million of support, was preliminarily approved by the Texas PUCCommissioners at an Open Meeting on May 4, 2016. We expect a final order in a contested proceeding. The ultimate impactapproximately the next month. We also may file petitions next year for continuation of these reforms cannot be determined at this time.small company support.

In New Mexico, where we have historically received $8.4 million in annual support,the Public ServiceRegulation Commission (“PSC”PRC”) adopted modified USF rules in November 2014 that will resultresulted in reductionsa reduction in annual support this year.to $6.9 million in 2015. We have filed an appeal of the newthose rules with the New Mexico Supreme Court in 2015 and have a pending dispute beforein March 2016, the Court granted our appeal and remanded the matter to the PRC for further consideration. During the pendency of the appeal, the PRC adopted additional rule modifications that resulted in continued albeit more moderate reductions. We filed an appeal of the modified rules with the New Mexico Supreme Court in March 2016. In light of the Court remand and the pendency of the most recent appeal, it is difficult at this time to predict the financial impact. 

In Nebraska, where we received $5.3 million from the state high cost fund in 2015, the Public Service Commission (“PSC”) announced reforms during the third quarter of 2015, for price-cap carriers that will freeze 2016 support at 2015 levels - with 50 percent allocated to ongoing operations and 50 percent allocated to broadband projects that must be pre-approved by the PSC. In November 2015, the PSC regardingannounced that it planned to reconsider the proper calculation ofallocations, but in the interim, support underwill continue to flow based on the new rule. Barring successreforms, subject to true-ups if there is a change in these matters, we expect a negative impactthe allocation amounts. It is difficult to our support amounts but cannot determinepredict the impact, at this time.if any, that might result from the reconsideration proceeding.

Universal service reform is also possible in several other states including Nebraska, Oklahoma, Pennsylvania, and South Carolina. Annually, we receive $5.3$3.4 million from the Nebraska fund, $3.4 millionannually from the Oklahoma fund, $13.3 million from the Pennsylvania fund, and $2.1$2.0 million from the South Carolina fund. We cannot estimate at this time the financial impact that would result from changes, if any, to these other state funds.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on February 24, 2015, for more information regarding our federal and state regulatory matters.
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources

We rely largely on operating cash flows and long-term debt to provide for our liquidity requirements. We expect cash flows from operations will be sufficient to fund our ongoing working capital requirements, planned capital expenditures, scheduled debt principal and interest payments, lease payments due under the master lease agreement with CS&L, and dividend payments through the remainder of 2015.payments. We also have access to capital markets and available borrowing capacity under our revolving credit agreements.agreement. As previously discussed, we are positioned to retire additional long-term debt through the monetization of our retained 19.6 percent ownership interest in CS&L, which we expect to complete within 24 months from the date of the spin-off, subject to market conditions. Based on CS&L’s announced dividend practice to pay a quarterly dividend of $.60 per share, we expect to earn dividend income of approximately $17.6 million in each quarter that we continue to hold the CS&L common stock.

From time to time, we may seek transactions to optimize our capital structure, including entering into transactions to exchange debt for shares of CS&L common stock, repurchase or redeem our outstanding indebtedness (including by means of open market purchases, privately negotiated repurchases, tender offers and/or redemptions pursuant to the debt’s terms), or seek to refinance our outstanding debt or may otherwise seek transactions to reduce interest expense. Our unrestrictedability to consummate any such transaction will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Any of these transactions could impact our financial results. We cannot assure you if or when we will consummate any such transactions or the terms of any such transaction.

We have evaluated and we continue to evaluate possible acquisition and disposition transactions on an on-going basis. At any time we may be engaged in discussions or negotiations with respect to possible acquisitions and/or dispositions. We cannot assure you if or when we will consummate any such transaction or the terms of any such transaction.

Our cash position increased by $46.2$43.3 million to $74.0$74.6 million at March 31, 2015,2016, from $27.8$31.3 million at December 31, 2014,2015, as compared to an increase of $21.8$46.2 million during the same period in 2014.2015. Cash inflows in the three month period of 20152016 were primarily from operating activities and incremental borrowings under the revolving line of credit.debt proceeds. These inflows were partially offset by cash outflows for capital expenditures, dividend payments to shareholders and repayments of debt.debt, and repurchases of our common stock.

Historical Cash Flows

The following table summarizes our cash flow activities for the three month periodperiods ended March 31:
(Millions) 2015
 2014
 2016
 2015
Cash flows provided from (used in):        
Operating activities $243.8
 $319.8
 $127.2
 $243.8
Investing activities (192.7) (123.6) (257.6) (192.7)
Financing activities (4.9) (174.4) 173.7
 (4.9)
Increase in cash and cash equivalents $46.2
 $21.8
 $43.3
 $46.2


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Cash Flows - Operating Activities

Cash provided from operations is our primary source of funds. Cash flows from operating activities decreased by $76.0$116.6 million in the three month period ended March 31, 2015,2016, as compared to the same period in 2014.2015. The decrease iswas primarily attributable to lower earnings, as our operating results were negatively impacted byadditional interest expense of $126.9 million attributable to the master lease agreement with CS&L, decreases in voice, long-distance,small business, carrier access and switched access revenues and changes in working capital mostly driven by timing differences in the receipt of customer payments as well as payment of vendor payables.invoices.


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We are currently utilizing net operating loss carryforwards (“NOLs”) and other income tax initiatives to lower our cash income tax obligations during 2015.2016. As a result, we expect cash income tax payments to be less than $20.0 million in 2015. Significant increases2016.

Windstream Holdings’ board of directors adopted a shareholder rights plan designed to protect our NOLs from the effect of limitations imposed by federal and state tax rules following an ownership change. This plan was designed to deter an ownership change (as defined in our cash income tax obligations in years after 2015 could adversely impact our cash flowIRC Section 382) from operations, which in turn, may affectoccurring, and therefore protect our ability to maintainutilize our current dividend practice.federal and state net operating loss carry forwards in the future. The plan is not meant to be an anti-takeover measure and our board of directors has established a procedure to consider requests to exempt the acquisition of Windstream Holdings common stock from the rights plan, if such acquisition would not limit or impair the availability of our NOLs.

Cash Flows - Investing Activities

Cash used in investing activities primarily includes investments in our network to upgrade and expand our service offerings as well as spending on strategic initiatives. Cash used in investing activities increased $69.1$64.9 million in the three month period ended March 31, 2015,2016, as compared to the same period in 2014,2015, primarily due to increased capital expenditures, further discussed below. Cash flows from investing activities during the three month period ended March 31, 2014 also reflected $26.0 million in additional CAF support.

Capital expenditures were $189.3$263.8 million for the three month period ended March 31, 20152016 compared to $153.0$189.3 million for the same period in 2014,2015, an increase of $36.3$74.5 million. During the first quarterthree months of 2015,2016, the majority of our capital spend was directed toward fiber expansion and consumer broadband upgrades of our network. Network expansionCapital expenditures for the first quarter of 2016 also include $33.7 million of incremental spend related to Project Excel, a capital program begun in late 2015 that accelerates our plans to upgrade our broadband network by the end of 2016 funded by CAF totaled $8.3a portion of the proceeds from the sale of the data center business.

Excluding approximately $200.0 million in capital expenditures related to Project Excel, we expect total 2016 capital expenditures to range between $800.0 million to $850.0 million.

Cash Flows - Financing Activities

Cash provided from financing activities was a net inflow of $173.7 million for the three month period ended March 31, 2015. As previously discussed under “Regulatory Matters”, we committed to match on at least a dollar-for-dollar basis the total amount of support we received from the CAF of $86.7 million for upgrades and new deployments of broadband service. Capital expenditures related to CAF projects funded by us are included in additions to property, plant and equipment in the accompanying consolidated statements of cash flows. During the first three months of 2015, expenditures for broadband network expansion funded by stimulus grants declined $7.1 million2016 compared to the same perioda net use of 2014. The decrease reflects the winding down of the RUS stimulus program.

We expect that increases in wireless data usage and expansion of wireless 4G networks will continue through the end of 2015, which will provide more opportunities for our wireless backhaul services. Some of our largest customers have delayed the build out of certain fiber-to-the-tower contracts which we had planned to originally complete during 2014. We still expect to deploy fiber to these towers in the future, and as a result, we expect total 2015 capital expenditures to range between $825.0 million and $875.0 million.

Cash Flows - Financing Activities

Cash used in financing activities decreased by $169.5$4.9 million for the three month period ended March 31, 2015, as compared to the same period in 2014.

Debt repayments for both periods presented consisted2015. The change was primarily of repayments ofattributable to the additional borrowings under the revolving line ofsenior secured credit agreement. During the three month period ended March 31, 2015, we repaid $295.0 million of borrowings under the revolving line of credit agreement compared to $305.0 million during the first quarter of 2014.facility.

Proceeds from new issuances of long-term debt during the first quarterthree months of 20152016 were $1,278.0 million which consisted of new borrowings of $600.0 million under Tranche B6 of Windstream Services’ senior secured credit facility, which were issued at a discount, the proceeds of which were used to repurchase the 2017 Notes and other Windstream Services’ debt obligations, and the incurrence of new borrowings of $693.0 million under the revolving line of credit. Proceeds from new issuances of long-term debt were $490.0 million compared to $325.0 million during the same period in 2014first quarter of 2015 and consisted solely of new borrowings under the revolving line of credit for both periods presented.credit.

PriorDebt repayments for the three months ended March 31, 2016 totaled $985.3 million and primarily consisted of cash outlays totaling $573.8 million in connection with the repurchase of $441.1 million of aggregate principal amount 7.875 percent notes due November 1, 2017 (the “2017 Notes”) under a cash tender offer and open market repurchases of $154.2 million of aggregate principal amount of senior unsecured notes. During the first quarter of 2016, Windstream Services also repaid $405.0 million of borrowings under its revolving line of credit. Comparatively, debt repayments for the three month period of 2015 principally consisted of the repayment of $295.0 million of borrowings under the revolving line of credit.

During the first three months of 2016, dividends paid to shareholders were $14.9 million, which was a decrease of $136.6 million, as compared to the completion ofsame period in 2015, reflecting the spin-off and reverse stock split, on April 24, 2015,decline in our quarterly dividend rate following the REIT spin-off. On May 4, 2016, we madedeclared a cash distributiondividend of $.0659$.15 per share on our common stock which is payable on July 15, 2016, to our stockholdersshareholders of record on April 10, 2015, which was equivalent to a pro-rated $.25 per share quarterly dividend. Following the completion of the spin-off and the reverse stock split, Windstream expects to pay an annualJune 30, 2016.
Our dividend of $.60 per share, paid on a quarterly basis. This practice can be changed at any time at the discretion of theour board of directors, and is subject to the restricted payment capacity under Windstream Services’ debt covenants as further discussed below. DuringAccordingly, we cannot assure you we will continue paying dividends at the first quartercurrent quarterly rate of 2015, dividends paid to shareholders were $151.5 million, which was an increase$.15 per share. See “Risk Factors” in Item 1A of $1.3 million, as compared to the same period in 2014. On May 5, 2015, we declared a cash dividendPart I of $.1104 per shareour Annual Report on our common stock, which is equivalent of a prorated per share quarterly dividendForm 10-K for the period beginning April 25,year ended December 31, 2015, and ending June 30, 2015, which is payable on July 15, 2015, to shareholders of record on June 30, 2015.for additional information concerning our dividend practice.

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Debt and Dividend Capacity

Windstream Holdings has no debt obligations. All of our debt, including the facility described below, has been incurred by our subsidiaries (primarily Windstream Services). Windstream Holdings is neither a guarantor of nor subject to the restrictive covenants imposed by such debt.
 
As of March 31, 20152016, we had $8,820.6$5,445.0 million in long-term debt outstanding, including current maturities (see Note 3)2). As of March 31, 20152016, the amount available for borrowing under Windstream Services’ revolving line of credit was $409.2$638.9 million.
 
As further discussed in Note 13, through the completiona result of the debt-for-debt exchange, and the completion of the long-term debt tender offers, and other repayments, Windstream Services expects to decreasedecreased its long-term debt outstanding by approximately $3.4$3.5 billion. As of the spin-off date, Windstream retained a passive ownership interest of approximately 19.6 percent of the common stock of CS&L. Windstream intends to use all of its shares of CS&L opportunistically during a twelve month period followingto retire additional Windstream Services debt within 24 months from the date of the spin-off, subject to market conditions, to retire additional Windstream Services debt.conditions. In conjunction with the spin-off, on April 24, 2015, Windstream Services amended its senior secured credit facility to extend the maturity of its revolving credit facility to April 24, 2020. Otherwise, the borrowing capacity under the amended revolving credit agreement was unchanged and provides for borrowings up to an aggregate principal amount of $1,250.0 million.

As of March 31, 2015,2016, Windstream Services had in excess of $1 billionapproximately $596.1 million of restricted payment capacity as governed by its senior secured credit facility. Following the completion of the spin-off and amendment of the credit facility on April 24, 2015, Windstream Services’ credit agreement was amended to (i) reset the restricted payment capacity to $750 million and (ii) among other things, exclude the master lease payment as a future restricted payment. The restricted payment capacity may limit the amount of dividends Windstream Services may distribute to Windstream Holdings to fund future dividend payments to Windstream Holdings’ shareholders. Under terms of the credit facility, payments required under the master lease are deducted from OIBDA. Windstream Services builds additional capacity through cash generated from operations while dividend distributions to Windstream Holdings, and other certain restricted investments reduce the available restricted payments capacity. Windstream Services will continue to consider free cash flow accretive initiatives.

Debt Covenants and Amendments

The terms of the credit facility and indentures issued by Windstream Services include customary covenants that, among other things, require Windstream Services to maintain certain financial ratios and restrict its 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. 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.

Certain of Windstream Services’ debt agreements contain various covenants and restrictions specific to the subsidiary that is the legal counterparty to the agreement. Under its 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 Windstream Services’ outstanding voting stock, or breach of certain other conditions set forth in the borrowing agreements. At March 31, 20152016, Windstream Services was in compliance with all debt covenants and restrictions.


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Windstream Services’ senior secured credit facility and its indentures include maintenance covenants derived from certain financial measures that are not calculated in accordance with accounting principles generally accepted in the United States (“non-GAAP financial measures”). These non-GAAP financial measures are presented below for the sole purpose of demonstrating our compliance with Windstream Services’ debt covenants and were calculated as follows at March 31, 20152016:
(Millions, except ratios)  
Gross leverage ratio:  
Long term debt including current maturities$8,820.6
$5,445.0
Capital leases, including current maturities50.1
41.4
Total long term debt and capital leases$8,870.7
$5,486.4
Operating income, last twelve months$461.6
$549.1
Depreciation and amortization, last twelve months1,388.2
1,330.6
Other non-cash and non-recurring expense adjustments required by the credit facility and indentures (a)247.4
Other expense adjustments required by the credit facility and indentures (a)(468.0)
Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”)$2,097.2
$1,411.7
Leverage ratio (b)4.23
3.89
Maximum gross leverage ratio allowed4.50
4.50
Interest coverage ratio:  
Adjusted EBITDA$2,097.2
$1,411.7
Interest expense, last twelve months$571.0
$891.8
Adjustments required by the credit facility and indentures (c)(8.7)(509.8)
Adjusted interest expense$562.3
$382.0
Interest coverage ratio (d)3.73
3.70
Minimum interest coverage ratio allowed2.75
2.75
 
(a)Adjustments required by the credit facility and indentures primarily consist of the inclusion of the annual cash rental payment due under the master lease agreement with CS&L and the exclusion of pension and share-based compensation expense, non-recurring merger, integration and restructuring charges.

(b)The gross leverage ratio is computed by dividing total debt by adjusted EBITDA.

(c)Adjustments required by the credit facility and indentures primarily consist of the inclusion of capitalized interest and amortization of the discount on long-term debt, net of premiums.premiums, and the exclusion of the interest expense attributable to the long-term lease obligation under the master lease agreement with CS&L.

(d)The interest coverage ratio is computed by dividing adjusted EBITDA by adjusted interest expense.

Credit Ratings

As of March 31, 20152016, Moody’s Investors Service, Standard & Poor’s (“S&P”) Corporation and Fitch Ratings had granted the following senior secured, senior unsecured and corporate credit ratings:
Description Moody’s S&P Fitch
Senior secured credit rating (a) Ba2B1BB BB+BBB-
Senior unsecured credit rating (a) (c) B1B2 BB+ BBBB-
Corporate credit rating (b) Ba3B1B+ BB-BB
Outlook (b) Stable NegativeStable Stable

(a)Ratings assigned to Windstream Services.

(b)Corporate credit rating and outlook assigned to Windstream Services for Moody’s and Fitch, while S&P assigns corporate credit rating and outlook to Windstream Holdings, Inc.

(c)Following the spin-off transaction, on April 28, 2015, S&P upgraded Windstream Services’ unsecured debt rating from B to BB-.



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Factors that could affect our short and long-term credit ratings would include, but are not limited to, a material decline in our operating results, increased debt levels relative to operating cash flows resulting from future acquisitions, increased capital expenditure requirements, or changes to our dividend policy. If our credit ratings were to be downgraded, we might incur higher interest costs on future borrowings, and our access to the public capital markets could be adversely affected.

Our exposure to interest risk is further discussed in the Market Risk section below. A downgrade in our current short or long-term credit ratings would not accelerate scheduled principal payments of our existing long-term debt.

Off-Balance Sheet Arrangements

We do not use securitization of trade receivables, affiliation with special purpose entities, variable interest entities or synthetic leases to finance our operations. Additionally, we have not entered into any arrangement requiring us to guarantee payment of third party debt or to fund losses of an unconsolidated special purpose entity.

Contractual Obligations and Commitments

Set forthAs a result of the issuance of $600.0 million in a new secured term loan and the repurchases of $595.3 million of long-term debt completed in the first quarter of 2016, Windstream Services’ long-term debt obligations changed from December 31, 2015. The table below is a summary of our material contractualpresents Windstream Services’ long-term debt obligations and commitments as of March 31, 2015:2016 reflecting these changes:
 Obligations by Period Obligations by Period
(Millions) 
Less than
1 Year
 
1 - 3
Years
 
3 - 5
Years
 
More than
5 years
 Total 
Less than
1 Year
 
1 - 3
Years
 
3 - 5
Years
 
More than
5 years
 Total
Long-term debt, including current maturities (a) $912.5
 $1,646.8
 $2,689.6
 $3,551.3
 $8,800.2
 $11.9
 $393.3
 $2,429.0
 $2,685.7
 $5,519.9
Interest payments on long-term debt obligations (b) 525.2
 996.8
 695.2
 666.4
 2,883.6
 349.5
 669.6
 592.9
 383.0
 1,995.0
Total projected long-term debt and interest
payments
 $1,437.7
 $2,643.6
 $3,384.8
 $4,217.7
 $11,683.8
Total $361.4
 $1,062.9
 $3,021.9
 $3,068.7
 $7,514.9
 
(a)Excludes $20.4$(8.7) million of unamortized premiumsdiscounts (net of discounts)premiums) and $66.2 million of unamortized debt issuance costs included in long-term debt at March 31, 2015.2016.

(b)Variable rates on Tranches ATranche B5 and BB6 of the senior secured credit facility are calculated in relation to LIBOR, which was 0.170.44 percent at March 31, 2015.2016.

Otherwise,Except for the amounts presented above, there have been no significant changes in our other contractual obligations and commitments since December 31, 20142015, as set forth in our Annual Report on Form 10-K.

The following table presents a summary of our material contractual obligations and commitments on a pro forma basis to reflect the spin-off including: debt-for-debt exchange, redemption of notes, amendment and extension of Windstream Services revolving line of credit and payments due under the master lease agreement between Windstream Holdings and CS&L, as if the transactions had occurred as of March 31, 2015:
  Obligations by Period
(Millions) 
Less than
1 Year
 
1 - 3
Years
 
3 - 5
Years
 
More than
5 years
 Total
Long-term debt, including current maturities $5.9
 $1,111.8
 $564.9
 $3,832.8
 $5,515.4
Interest payments on long-term debt obligations 381.4
 749.8
 563.7
 671.3
 2,366.2
Long-term lease obligation 141.3
 329.1
 413.5
 4,247.9
 5,131.8
Interest payments on long-term lease obligation 508.7
 970.9
 896.2
 2,500.6
 4,876.4
Total projected long-term debt, interest
    payments, and other lease obligation
 $1,037.3
 $3,161.6
 $2,438.3
 $11,252.6
 $17,889.8


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Reconciliation of Non-GAAP Financial Measures

From time to time, we will reference certain non-GAAP measures in our filings. Management’s purpose for including these measures is to provide investors with measures of performance that management uses in evaluating the performance of the business. These non-GAAP measures should not be considered in isolation or as a substitute for measures of financial performance reported under GAAP. Following is a reconciliation of non-GAAP financial measures to the most closely related financial measure reported under GAAP referenced in this filing.

Operating income before depreciation and amortization to GAAP operating income:
   Three Months Ended
March 31,		   Three Months Ended
March 31,
(Millions) 2015
 2014
 % 2016
 2015
 %
Operating income $119.9
 $167.8
   $157.7
 $119.9
 
Depreciation and amortization 340.7
 338.9
   304.8
 340.7
 
OIBDA (a) $460.6
 $506.7
 (9)% $462.5
 $460.6
 —
 
(a)OIBDA is defined as operating income plus depreciation and amortization expense. We believe this measure provides investors with insight into the coretrue earnings capacity of providing communications and technologytelecommunications services to our customers.


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Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. In Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2014,2015, in our Annual Report on Form 10-K, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements. These critical accounting policies include recognizing revenue, evaluating the collectability of trade receivables, calculating depreciation and amortization expense, assessing goodwill for impairment, accounting for pension benefits, calculating depreciation and amortization expense, determining the fair values of derivative instruments, and accounting for current and deferred income taxes and related tax contingencies. There were no material changes to these critical accounting policies during the three month period ended March 31, 20152016.
Goodwill Impairment Assessment

During the first quarter of 2015, we completed our annual goodwill impairment analysis as of January 1, 2015 and concluded that goodwill for all three of our reporting units was not impaired as of that date, and accordingly, no further analysis was required. The fair value of each of our reporting units significantly exceeded its carrying amounts as of January 1, 2015 such that a hypothetical 10 percent decrease in the fair value of the reporting units would not have triggered additional impairment testing and analysis. Changes in the key assumptions used in the impairment analysis due to changes in market conditions could adversely affect the calculated fair value of goodwill, materially affecting the carrying value and our future consolidated operating results. See Note 2 for additional information about the testing methodology and results.
Recently Issued Authoritative Guidance

The following authoritative guidance, together with our evaluation of the related impact to the consolidated financial statements, is more fully described in Note 1.

Presentation of Debt Issuance Costs

Revenue Recognition


63Fair Value Measurement Disclosures

Pension Plan Investment Disclosures

Valuation of Inventory

Leases

Derivatives and Hedging

Employee Share-Based Payment Accounting

Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes, and future filings on Form 10-K, Form 10-Q and Form 8-K and future oral and written statements by us and our management may include, certain forward-looking statements. We claim the protection of the safe-harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for this Quarterly Report on Form 10-Q. Forward looking statements are subject to uncertainties that could cause actual future events and results to differ materially from those expressed in the forward-looking statements. Forward lookingForward-looking statements include, but are not limited to, statements about our expectation to return a portion of our cash flow to shareholders through our dividend, expectations regarding our expectation“network first” strategy to maintainimprove financial performance and increase market share, expectations regarding revenue trends and improving margins in our current dividend practice atbusiness segments, growth in adjusted OIBDA, the current rateamount that Windstream Services may reduce its debt by disposing of dividend,its equity stake in CS&L and its ability to improve its debt profile and reduce interest, expected levels of support from universal service funds or other government programs, expected rates of loss of voice linesconsumer households served or inter-carrier compensation, expected increases in high-speed Internet and business data connections, including increasing availability of higher Internet speeds, expectations regarding expanding IPTV and 1 Gbps services to more locations and expanding our carrier network, our expected ability to fund operations, expected required contributions to our pension plan, the amounts expectedcompletion and benefits from network investments related to be received from the Connect America Fund and the Rural Utilities Service to fund the deployment of broadband services and the expected benefits of those services and forecasted capital expenditure amounts related to these investments, anticipated benefits of Project Excel, anticipated capital expenditures and certain debt maturities from cash flows from operations, expected synergies and other benefits from completed acquisitions, expected effective federal income tax rates, and expected annualized savings from the management restructuring.rates. These and other forward-looking statements are based on estimates, projections, beliefs, and assumptions that we believe are reasonable but are not guarantees of future events and results. Actual future events and our results may differ materially from those expressed in these forward-looking statements as a result of a number of important factors.

Factors that could cause actual results to differ materially from those contemplated in our forward looking statements include, among others:

further adverse changes in economic conditions in the markets served by us;

the extent, timing and overall effects of competition in the communications business;

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our pending election to accept or reject state-wide offers under the FCC’s Connect America Fund, Phase 2, and the impact of such election on our future receipt of federal universal service funds and capital expenditures;

the impact of new, emerging or competing technologies;

for certain operations where we lease facilities from other carriers, adverse effects on the availability, quality of service, price of facilities and services provided by other carriers on which our services depend;

the uncertainty regarding the implementation of the FCC rules on intercarrier compensation adopted in 2011, and the potential for the adoption of further rules by the FCC or Congress on intercarrier compensation and/or universal service reform proposals that result in a significant loss of revenue to us;

unfavorable rulings by state public service commissions in proceedings regarding universal service funds, inter-carrier compensation or other matters that could reduce revenues or increase expenses;

material changes in the communications industry that could adversely affect vendor relationships with equipment and network suppliers and customer relationships with wholesale customers;

earnings on pension plan investments significantly below our expected long term rate of return for plan assets or a significant change in the discount rate;

unfavorable results of litigation or intellectual property infringement claims asserted against us;

changes to our current dividend practice which is subject to our capital allocation policy and may be changed at any time at the discretion of our board of directors;

our ability to make rent payments under the Master Leasemaster lease to CS&L, which may be affected by results of operations, changes in our cash requirements, cash tax payment obligations, or overall financial position;

unanticipated increases or other changes in our future cash requirements, whether caused by unanticipated increases in capital expenditures, increases in pension funding requirements, or otherwise;


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the availability and cost of financing in the corporate debt markets;

the potential for adverse changes in the ratings given to our debt securities by nationally accredited ratings organizations;

earnings on pension plan investments significantly below our expected long term rate of return for plan assets or a significant change in the discount rate or other actuarial assumptions;

unfavorable results of litigation or intellectual property infringement claims asserted against us;

the risks associated with non-compliance by us with regulations or statutes applicable to government programs under which we receive material amounts of end user revenue and government subsidies, or non-compliance by us, our partners, or our subcontractors with any terms of our government contracts;

the risks associated with the integration of acquired businesses or the ability to realize anticipated synergies, cost savings and growth opportunities;

the effects of federal and state legislation, and rules and regulations governing the communications industry;

continued loss of consumer voice lineshouseholds served and consumer high-speed Internet customers;

the impact of equipment failure, natural disasters or terrorist acts;

the effects of work stoppages by our employees or employees of other communications companies on whom we rely for service; and

those additional factors under “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2014,2015, and in subsequent filings with the Securities and Exchange Commission at www.sec.gov.

In addition to these factors, actual future performance, outcomes and results may differ materially because of more general factors including, among others, general industry and market conditions and growth rates, economic conditions, and governmental and public policy changes.

We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors that could cause our actual results to differ materially from those contemplated in the forward-looking statements should be considered in connection with information regarding risks and uncertainties that may affect our future results included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in our other filings with the Securities and Exchange Commission at www.sec.gov.


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Table of Contents


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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our market risks at March 31, 2015 are similar to the market risks discussed in our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission (“SEC”) on February 24, 2015. Market risk is comprised of three elements: interest rate risk, equity risk and foreign currency risk. As further discussed below,Following the completion of the spin-off of certain network and real estate assets, we are exposedhave exposure to market risk from changes in interest rates. Werates and from changes in marketable equity security prices. Because we do not own any marketable equity securities other than highly liquid cash equivalents, nor do we operate in foreign countries denominated in foreign currencies.currencies, we are not exposed to foreign currency risk. We have estimated our market risk using sensitivity analysis. The results of the sensitivity analysis are further discussed below. Actual results may differ from our estimates.

Interest Rate Risk

We are exposed to market risk through changes in interest rates, primarily as it relates to the variable interest rates we are charged under Windstream Services’ senior secured credit facility. Under our current policy, Windstream Services enters into interest rate swap agreements to obtain a targeted mixture of variable and fixed interest rate debt such that the portion of debt subject to variable rates does not exceed 25 percent of our total debt outstanding. For a detailed discussionIn connection with the spin-off, Windstream Services terminated seven of ourits ten interest rate swap agreements, see Note 4 to the consolidated financial statements.swaps.

We have established policies and procedures for risk assessment and the approval, reporting and monitoring of interest rate swap activity. We do not enter into interest rate swap agreements, or other derivative financial instruments, for trading or speculative purposes. Management periodically reviews our exposure to interest rate fluctuations and implements strategies to manage the exposure.

As of March 31, 2015,2016, Windstream Services has entered into tenthree pay fixed, receive variable interest rate swap agreements designated as cash flow hedges of the benchmark LIBOR interest rate risk created by the variable cash flows paid on Windstream Services’ senior secured credit facility. The maturities of the ten interest rate swaps range from June 17, 2016 tomature on October 17, 2019. The hedging relationships are expected to be highly effective in mitigating cash flow risks resulting from changes in interest rates. For additional information regarding our interest rate swap agreements, see Note 3 to the consolidated financial statements.

As of March 31, 20152016 and 2014,2015, the unhedged portion of Windstream Services’ variable rate senior secured credit facility was $1,648.3$1,089.7 million, and $1,527.0$1,648.3 million, or approximately 18.719.8 percent and 17.718.7 percent of Windstream Services’ total outstanding long-term debt excluding unamortized debt issuance costs, respectively. We have estimated our interest rate risk using a sensitivity analysis. For variable rate debt instruments, market risk is defined as the potential change in earnings resulting from a hypothetical adverse change in interest rates. A hypothetical increase of 100.0 basis points in variable interest rates would have reduced annual pre-tax earnings by approximately $16.5$10.9 million and $15.3$16.5 million for the three month periods ended March 31, 20152016 and 2014,2015, respectively. Actual results may differ from this estimate.

Equity Risk

In connection with the REIT spin-off, we retained a passive ownership interest in approximately 19.6 percent of the common stock of CS&L. This investment has been classified as an available-for-sale security recorded at fair value, which was $653.8 million at March 31, 2016. As further discussed in Note 13,8 to the unaudited consolidated financial statements, we recorded an other-than-temporary impairment loss of $(181.9) million on our investment in connection withCS&L common stock as of March 31, 2016.The fair value of the spin-off, Windstream Services terminated sevenCS&L common stock is based on the quoted market price of its interest rate swaps.the shares on the last day of the reporting period. Our investment in CS&L common stock has exposure to price risk, which is defined as the potential loss in fair value due to a hypothetical 10 percent adverse change in the quoted market price of the shares. A hypothetical 10 percent decrease in CS&L’s common stock price would have resulted in a decrease in the recorded value of our investment of approximately $65.4 million at March 31, 2016.



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Table of Contents


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

Item 4. Controls and Procedures
 
(a)Evaluation of disclosure controls and procedures.

The term “disclosure controls and procedures” (defined in Exchange Act Rule 13a-15(e)) refers to the controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Windstream Holdings’ and Windstream Services’ disclosure controls and procedures as of the end of the period covered by these quarterly reports (the “Evaluation Date”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such disclosure controls and procedures were effective.
   
(b)Changes in internal control over financial reporting.

The term “internal control over financial reporting” (defined in Exchange Act Rule 13a-15(f)) refers to the process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

1.Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

2.Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

3.Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in Windstream Holdings’ and Windstream Services’ internal control over financial reporting that occurred during the period covered by these quarterly reports, and they have concluded that there were no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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Table of Contents


WINDSTREAM HOLDINGS, INC.
WINDSTREAM SERVICES, LLC
FORM 10-Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings

On February 9, 2015, a putative stockholder filed a Shareholder Class Action Complaint in the Delaware Court of Chancery (the “Court”), captioned Doppelt v. Windstream Holdings, Inc., et al., C.A. No. 10629-VCN, against the Company and its Board of Directors.  This complaint was accompanied by a motion for a preliminary injunction seeking to enjoin the spin-off. The Court, ruling from the bench on February 19, 2015 - the day before a special meeting of stockholders was scheduled to vote on a reverse stock split and amended governing documents (the “Proposals”) - denied plaintiff’s motion for a preliminary injunction, reasoning that much of the information sought by plaintiff had been disclosed in public filings available on the United States Securities and Exchange Commission’s website, the Windstream Holdings’ board of directors was in no way conflicted, and while approval of the Proposals would facilitate the spin-off, approval was not necessary to effect the spin-off. On March 16, 2015, plaintiff, joined by a second putative Windstream stockholder, filed an Amended Shareholder Class Action Complaint alleging breaches of fiduciary duty by the Company and its Board concerning Windstream’s disclosures and seeking to rescind the spin-off and unspecified monetary damages. On February 5, 2016, the Court granted in part and denied in part defendants’ motion to dismiss the amended complaint. The Court dismissed Windstream, and plaintiffs’ demand to rescind the spin-off, but otherwise denied the motion. 

In addition, numerous copyright holders represented by RightsCorp have asserted that our customers have utilized our services to allegedly illegally download and share alleged copyrighted material via peer-to-peer or “filesharing” programs. These holders maintain that Windstream is responsible for alleged infringement because after notification, Windstream did not shut off service to customers alleged to be repeat infringers, and, further, that Windstream may not claim safe harbor pursuant to the Digital Millennium Copyright Act of 1998. 

We believe that we have valid defenses to both the lawsuit and the alleged infringement claim, and we plan to vigorously defend the pursuit of both matters. While the ultimate resolution of the matters is not currently predictable, if there are adverse rulings against Windstream in either of these two matters, either ruling could constitute a material adverse outcome on the future consolidated results of our income, cash flows, or financial condition.

We are party to various legal proceedings, including certain lawsuits claiming infringement of patents relating to various aspects of our business. In certain of the patent matters, other industry participants are also parties, and we may have claims of indemnification against vendors/suppliers. The ultimate resolution of these legal proceedings cannot be determined at this time. However, based on current circumstances, management does not believe such proceedings, individually or in the aggregate, will have a material adverse effect on the future consolidated results of our income, cash flows or financial condition.

In addition,Finally, management is currently not aware of any environmental matters, individually or in the aggregate, that would have a material adverse effect on our consolidated financial condition or results of our operations.

Item 1A. Risk Factors

There have been no material changes to the risk factors affecting our businesses that were discussed in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2014,2015, filed with the SEC on February 24, 201525, 2016.

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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

On August 5, 2015, our board of directors authorized a stock repurchase program of up to $75.0 million which was completed in February 2016. Under the repurchase plan, we repurchased shares, from time to time, on the open market. Information associated with this plan is included in the following table:
Period Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Share Purchase as Part of Publicly Announced Plans Maximum Dollar Value that May Yet Be Purchased Under the Plan (Millions)
January 1 - 31, 2016 2,837,925
 $5.59
 2,837,925
 $13.0
February 1 - 29, 2016 2,327,944
 5.59
 2,327,944
 $—
March 1 - 31, 2016 —
 —
 —
 $—
Total 5,165,869
 $5.59
 5,165,869
  

(1)Excludes 356,404 shares at and average price of $7.19 per share that were not part of our publicly announced share repurchase program. These shares represent shares which were withheld for tax payments due upon the vesting of employee restricted stock awards, and do not reduce the dollar value that may yet be purchased under our publicly announced share repurchase program. We intend to continue to satisfy statutory minimum tax withholding obligations in connection with the vesting of outstanding restricted stock through the withholding of shares.

Item 6. Exhibits

See the exhibits specified on the Index of Exhibits located at Page 70.68.

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, this registrant hasregistrants have duly caused this report to be signed on its behalf the undersigned, thereunto duly authorized.
 
WINDSTREAM HOLDINGS, INC. WINDSTREAM SERVICES, LLC
(Registrant) (Registrant)
   
/s/ Robert E. Gunderman /s/ Robert E. Gunderman
Robert E. Gunderman
Chief Financial Officer and Treasurer
(Principal Financial Officer)
 
Robert E. Gunderman
Chief Financial Officer and Treasurer
(Principal Financial Officer)
May 7, 20155, 2016 May 7, 20155, 2016



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WINDSTREAM HOLDINGS, INC.
WINDSTREAM SERVICES, LLC
FORM 10-Q
INDEX OF EXHIBITS

Form 10-Q
Exhibit No.
Description of Exhibits  
    
2.110.34Separation and Distribution Agreement,Tranche B-6 Incremental Amendment dated as of March 26, 2015, by and among Windstream Holdings, Inc., Windstream Services, LLC and Communications Sales & Leasing, Inc. (incorporated herein by reference to Exhibit 2.1 to Windstream Holdings, Inc’s and Windstream Services, LLC’s Form 8-K dated March 26, 2015).*
3.5State of Delaware Certificate of Formation of Windstream Services, LLC.(a)
4.21Seventh Supplemental Indenture29, 2016, to the 7.875% Senior Notes due 2017,Sixth Amended and Restated Credit Agreement originally dated as of March 2, 2015, among Windstream Services, LLC (as successor to Windstream Corporation), a Delaware limited liability company (the “Company”), Windstream Finance Corp., a Delaware corporation, together the Issuers, the guarantor subsidiaries of the Company,July 17, 2006, as amended and U.S. Bank National Association, as Trustee.(a)
4.22Second Supplemental Indenture to the 8.125% Senior Notes due 2018, dated as of March 2, 2015, among Windstream Services, LLC (as successor to Windstream Corporation), a Delaware limited liability company (the “Company”), Windstream Finance Corp., a Delaware corporation, together the Issuers, the guarantor subsidiaries of the Company, and U.S. Bank National Association, as Trustee.(a)
4.23Second Supplemental Indenture to the 7.75% Senior Notes due 2020, dated as of March 2, 2015, among Windstream Services, LLC (as successor to Windstream Corporation), a Delaware limited liability company (the “Company”), Windstream Finance Corp., a Delaware corporation, together the Issuers, the guarantor subsidiaries of the Company, and U.S. Bank National Association, as Trustee.(a)
4.24First Supplemental Indenture to the 7.50% Senior Notes due 2023, dated as of March 2, 2015, among Windstream Services, LLC (as successor to Windstream Corporation), a Delaware limited liability company (the “Company”), Windstream Finance Corp., a Delaware corporation, together the Issuers, the guarantor subsidiaries of the Company, and U.S. Bank National Association, as Trustee.(a)
4.25First Supplemental Indenture to the 7.75% Senior Notes due 2021, dated as of March 2, 2015, among Windstream Services, LLC (as successor to Windstream Corporation), a Delaware limited liability company (the “Company”), Windstream Finance Corp., a Delaware corporation, together the Issuers, the guarantor subsidiaries of the Company, and U.S. Bank National Association, as Trustee.(a)
4.26First Supplemental Indenture to the 7.50% Senior Notes due 2022, dated as of March 2, 2015, among Windstream Services, LLC (as successor to Windstream Corporation), a Delaware limited liability company (the “Company”), Windstream Finance Corp., a Delaware corporation, together the Issuers, the guarantor subsidiaries of the Company, and U.S. Bank National Association, as Trustee.(a)
4.27First Supplemental Indenture to the 6 3/8% Senior Notes due 2023, dated as of March 2, 2015, among Windstream Services, LLC (as successor to Windstream Corporation), a Delaware limited liability company (the “Company”), Windstream Finance Corp., a Delaware corporation, together the Issuers, the guarantor subsidiaries of the Company, and U.S. Bank National Association, as Trustee.(a)
4.28First Supplemental Indenture to the 7.75% Senior Notes due 2021, dated as of March 2, 2015, among Windstream Services, LLC (as successor to Windstream Corporation), a Delaware limited liability company (the “Company”), Windstream Finance Corp., a Delaware corporation, together the Issuers, the guarantor subsidiaries of the Company, and U.S. Bank National Association, as Trustee.(a)
10.29Operating Agreement of Windstream Services, LLC.(a)
10.30Master Lease, entered intorestated as of April 24, 2015, by and among CSL National, L.P.Windstream Services, LLC, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent and the other entities listed therein, as Landlord, and Windstream Holdings, Inc. as Tenantagents party thereto (incorporated herein by reference to Exhibit 10.1 to Windstream Holdings, Inc.’s Form 8-K dated April 27, 2015)March 30, 2016).*
10.31Tax Matters Agreement, entered into as of April 24, 2015, by and among Windstream Holdings, Inc., Windstream Services, LLC and Communications Sales & Leasing, Inc. (incorporated herein by reference to Exhibit 10.2 to Windstream Holdings, Inc.’s Form 8-K dated April 27, 2015).*
10.32Stockholder’s and Registration Rights Agreements, made as of April 24, 2015, by and between Windstream Services, LLC and Communications Sales & Leasing, Inc. (incorporated herein by reference to Exhibit 10.7 to Windstream Holdings, Inc.’s Form 8-K dated April 27, 2015).*

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WINDSTREAM HOLDINGS, INC.
WINDSTREAM SERVICES, LLC
FORM 10-Q
INDEX OF EXHIBITS, Continued

Form 10-Q
Exhibit No.
Description of Exhibits
31(a)Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(a)
   
31(b)Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(a)
   
32(a)Certifications of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(a)
   
32(b)Certifications of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(a)
   
101.INSXBRL Instance Document(a)
   
 101.SCHXBRL Taxonomy Extension Schema Document(a)
   
101.CALXBRL Taxonomy Extension Calculation Linkbase Document(a)
   
101.DEFXBRL Taxonomy Extension Definition Linkbase Document(a)
   
101.LABXBRL Taxonomy Extension Label Linkbase Document(a)
   
101.PREXBRL Taxonomy Extension Presentation Linkbase Document(a)


*Incorporated herein by reference as indicated.
(a)Filed herewith.


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