UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~June 30, 2020



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _____________



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.
Exact name of registrant as specified in its charter		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)

Securities registered pursuant to Section 12(b) of the Act: NONE

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.	☒	Yes	☐	No
Windstream Services, LLC	☒	Yes	☐	No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).



Windstream Holdings, Inc.	☒	Yes	☐	No
Windstream Services, LLC	☒	Yes	☐	No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:



Windstream Holdings, Inc.	Large accelerated filer	☐	Accelerated filer	☐
	Non-accelerated filer	☒	Smaller reporting company	☒
			Emerging growth company	☐

Windstream Services, LLC	Large accelerated filer	☐	Accelerated filer	☐
	Non-accelerated filer	☒	Smaller reporting company	☐
			Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.



Windstream Holdings, Inc.	☐
Windstream Services, LLC	☐

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	☒	No
Windstream Services, LLC	☐	Yes	☒	No

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.



Windstream Holdings, Inc.	☐	Yes	☐	No
Windstream Services, LLC	☐	Yes	☐	No

As of ~~June 5,~~July 27, 2020, ~~43,018,736~~43,016,811 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. 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.

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 Loss (Unaudited)	3
	Consolidated Balance Sheets (Unaudited)	4
	Consolidated Statements of Cash Flows (Unaudited)	5
	Consolidated Statement of Shareholders’ Deficit (Unaudited)	6
	Windstream Services, LLC Consolidated Financial Statements
	Consolidated Statements of Operations (Unaudited)	78
	Consolidated Statements of Comprehensive Loss (Unaudited)	89
	Consolidated Balance Sheets (Unaudited)	910
	Consolidated Statements of Cash Flows (Unaudited)	1011
	Consolidated Statement of Member Deficit (Unaudited)	1112
	Notes to Unaudited Interim Consolidated Financial Statements	1214
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3943
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6669
Item 4.	Controls and Procedures	6669

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	6971
Item 1A.	Risk Factors	7173
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	*
Item 3.	Defaults Upon Senior Securities	*
Item 4.	Mine Safety Disclosures	*
Item 5.	Other Information	71 *
Item 6.	Exhibits	7274

_____________


*	No reportable information under this item.

Table of Contents

WINDSTREAM HOLDINGS, INC.

WINDSTREAM SERVICES, LLC

FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

WINDSTREAM HOLDINGS, INC.

(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

Three Months Ended
March 31,
(Millions, except per share amounts) 2020
2019
Revenues and sales:
Service revenues $ 1,178.9
$ 1,302.2
Product and fiber sales 22.0
18.4
Total revenues and sales 1,200.9
1,320.6
Costs and expenses:
Cost of services (exclusive of depreciation and amortization
included below)
749.8
861.1
Cost of product and fiber sales 21.5
16.9
Selling, general and administrative 176.5
198.3
Depreciation and amortization 232.6
271.5
Goodwill impairment —
2,339.0
Restructuring and other charges 6.4
15.1
Total costs and expenses 1,186.8
3,701.9
Operating income (loss) 14.1
(2,381.3 )
Other income (expense), net 5.7
(1.0 )
Reorganization items, net (40.5 ) (104.9 )
Interest expense (contractual interest for the three months ended
March 31, 2020 and 2019 of $123.5 and $140.7, respectively)
(73.1 ) (91.9 )
Loss before income taxes (93.8 ) (2,579.1 )
Income tax (expense) benefit (7.8 ) 268.8
Net loss $ (101.6 ) $ (2,310.3 )
Basic and diluted loss per share:
Net loss
($2.38 )
($54.26 )



	Three Months Ended June 30,						Six Months Ended June 30,
(Millions, except per share amounts)	2020			2019			2020			2019
Revenues and sales:
Service revenues	$	1,164.6		$	1,270.2		$	2,343.5		$	2,572.4
Product and fiber sales	20.7			16.3			42.7			34.7
Total revenues and sales	1,185.3			1,286.5			2,386.2			2,607.1
Costs and expenses:
Cost of services (exclusive of depreciation and amortization included below)	751.8			852.1			1,501.6			1,713.2
Cost of product and fiber sales	21.7			15.2			43.2			32.1
Selling, general and administrative	161.5			185.9			338.0			384.2
Depreciation and amortization	219.9			276.0			452.5			547.5
Goodwill impairment	—			373.3			—			2,712.3
Restructuring and other charges	5.6			6.9			12.0			22.0
Total costs and expenses	1,160.5			1,709.4			2,347.3			5,411.3
Operating income (loss)	24.8			(422.9		)	38.9			(2,804.2		)
Other income (expense), net	1.7			(9.2		)	7.4			(10.2		)
Reorganization items, net	(114.4		)	(85.4		)	(154.9		)	(190.3		)
Interest expense (contractual interest of $117.1, $240.7, $130.3 and $236.5 for the three and six months ended June 30, 2020 and 2019, respectively)	(66.0		)	(80.8		)	(139.1		)	(172.7		)
Loss before income taxes	(153.9		)	(598.3		)	(247.7		)	(3,177.4		)
Income tax (expense) benefit	(8.5		)	54.2			(16.3		)	323.0
Net loss	$	(162.4	)	$	(544.1	)	$	(264.0	)	$	(2,854.4	)
Basic and diluted loss per share:
Net loss		($3.80	)		($12.76	)		($6.18	)		($66.98	)

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

Table of Contents

WINDSTREAM HOLDINGS, INC.

(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

Three Months Ended
March 31,
(Millions) 2020
2019
Net loss $ (101.6 ) $ (2,310.3 )
Other comprehensive loss:
Interest rate swaps:
Unrealized losses on designated interest rate swaps —
(3.2 )
Amortization of net unrealized gains on
de-designated interest rate swaps
(3.3 ) (1.2 )
Income tax benefit 0.9
1.1
Change in interest rate swaps (2.4 ) (3.3 )
Pension and postretirement plans:
Amounts included in net periodic benefit cost:
Amortization of prior service credits (0.3 ) (0.4 )
Income tax benefit —
0.1
Change in pension and postretirement plans (0.3 ) (0.3 )
Other comprehensive loss (2.7 ) (3.6 )
Comprehensive loss $ (104.3 ) $ (2,313.9 )



	Three Months Ended June 30,						Six Months Ended June 30,
(Millions)	2020			2019			2020			2019
Net loss	$	(162.4	)	$	(544.1	)	$	(264.0	)	$	(2,854.4	)
Other comprehensive loss:
Interest rate swaps:
Unrealized losses on designated interest rate swaps	—			—			—			(3.2		)
Amortization of net unrealized gains on de-designated interest rate swaps	(3.3		)	(3.0		)	(6.6		)	(4.2		)
Income tax benefit	0.8			0.8			1.7			1.9
Change in interest rate swaps	(2.5		)	(2.2		)	(4.9		)	(5.5		)
Pension and postretirement plans:
Change in net actuarial loss for employee benefit plans	(1.0		)	(0.2		)	(1.0		)	(0.2		)
Amounts included in net periodic benefit cost:
Amortization of net actuarial loss	0.1			—			0.1			—
Amortization of prior service credits	(0.3		)	(0.3		)	(0.6		)	(0.7		)
Income tax benefit	0.3			0.1			0.3			0.2
Change in pension and postretirement plans	(0.9		)	(0.4		)	(1.2		)	(0.7		)
Other comprehensive loss	(3.4		)	(2.6		)	(6.1		)	(6.2		)
Comprehensive loss	$	(165.8	)	$	(546.7	)	$	(270.1	)	$	(2,860.6	)

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

Table of Contents

WINDSTREAM HOLDINGS, INC.

(DEBTOR-IN-POSSESSION)

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


(Millions, except par value)	March 31, 2020			December 31, 2019			June 30, 2020			December 31, 2019
Assets
Current Assets:
Cash and cash equivalents	$	454.7		$	191.8		$	210.0		$	191.8
Restricted cash	7.8			7.8			7.8			7.8
Accounts receivable (net of allowance of $47.0 and $48.2, respectively)	521.1			574.7
Accounts receivable (net of allowance of $47.7 and $48.2, respectively)							527.8			574.7
Inventories	61.7			64.7			73.7			64.7
Prepaid expenses and other	239.4			197.7			233.5			197.7
Total current assets	1,284.7			1,036.7			1,052.8			1,036.7
Goodwill	61.4			61.4			61.4			61.4
Other intangibles, net	1,046.9			1,068.7			1,013.6			1,068.7
Net property, plant and equipment	3,652.7			3,620.8			3,713.7			3,620.8
Operating lease right-of-use assets	3,959.7			4,018.0			3,909.1			4,018.0
Other assets	82.8			82.9			81.1			82.9
Total Assets	$	10,088.2		$	9,888.5		$	9,831.7		$	9,888.5
Liabilities and Shareholders’ Deficit
Current Liabilities:
Current portion of long-term debt	$	900.0		$	500.0		$	900.0		$	500.0
Accounts payable	262.2			279.2			327.6			279.2
Advance payments	151.8			151.1			148.7			151.1
Accrued taxes	55.2			65.6			61.2			65.6
Other current liabilities	237.4			223.3			214.7			223.3
Total current liabilities	1,606.6			1,219.2			1,652.2			1,219.2
Other liabilities	23.2			23.6			24.7			23.6
Liabilities subject to compromise	10,638.2			10,720.1			10,500.0			10,720.1
Total liabilities	12,268.0			11,962.9			12,176.9			11,962.9
Commitments and Contingencies (See Note 12)
Shareholders’ Deficit:
Common stock, $.0001 par value, 75.0 shares authorized,
43.0 shares issued and outstanding	—			—			—			—
Additional paid-in capital	1,253.8			1,253.1			1,254.2			1,253.1
Accumulated other comprehensive income	19.9			22.6			16.5			22.6
Accumulated deficit	(3,453.5		)	(3,350.1		)	(3,615.9		)	(3,350.1		)
Total shareholders’ deficit	(2,179.8		)	(2,074.4		)	(2,345.2		)	(2,074.4		)
Total Liabilities and Shareholders’ Deficit	$	10,088.2		$	9,888.5		$	9,831.7		$	9,888.5

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

Table of Contents

WINDSTREAM HOLDINGS, INC.

(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended
March 31,
(Millions) 2020
2019
Cash Flows from Operating Activities:
Net loss $ (101.6 ) $ (2,310.3 )
Adjustments to reconcile net loss to net cash provided from operations:
Depreciation and amortization 232.6
271.5
Allowance for credit losses 4.4
9.7
Share-based compensation expense 0.6
2.0
Non-cash reorganization items, net (4.3 ) 45.7
Deferred income taxes 9.0
(268.2 )
Goodwill impairment —
2,339.0
Other, net (7.2 ) 20.3
Changes in operating assets and liabilities, net
Accounts receivable 52.4
(16.1 )
Prepaid expenses and other (40.6 ) (56.8 )
Accounts payable (23.5 ) 226.4
Accrued interest 0.4
(11.7 )
Accrued taxes (9.9 ) (2.6 )
Other current liabilities (12.9 ) (31.0 )
Other liabilities (0.1 ) (5.7 )
Other, net 2.4
6.0
Net cash provided from operating activities 101.7
218.2
Cash Flows from Investing Activities:
Additions to property, plant and equipment (232.4 ) (192.8 )
Other, net (1.8 ) (4.2 )
Net cash used in investing activities (234.2 ) (197.0 )
Cash Flows from Financing Activities:
Repayments of debt and swaps —
(372.4 )
Proceeds from debt issuance 400.0
455.0
Debt issuance costs —
(14.7 )
Payments under finance lease obligations (4.5 ) (9.8 )
Other, net (0.1 ) (0.6 )
Net cash provided from financing activities 395.4
57.5
Increase in cash, cash equivalents and restricted cash 262.9
78.7
Cash, Cash Equivalents and Restricted Cash:
Beginning of period 199.6
361.0
End of period $ 462.5
$ 439.7
Supplemental Cash Flow Disclosures:
Interest paid, net of interest capitalized $ 76.0
$ 103.3
Income taxes paid (refunded), net $ 0.1
$ (1.6 )
Reorganization items paid $ 35.5
$ 40.8
Right-of-use assets obtained in exchange for operating lease obligations $ 0.1
$ 4.0
Right-of-use assets obtained in exchange for finance lease obligations $ —
$ 3.9



	Six Months Ended June 30,
(Millions)	2020			2019
Cash Flows from Operating Activities:
Net loss	$	(264.0	)	$	(2,854.4	)
Adjustments to reconcile net loss to net cash provided from operations:
Depreciation and amortization	452.5			547.5
Allowance for credit losses	12.8			42.8
Share-based compensation expense	1.0			0.3
Non-cash reorganization items, net	(8.4		)	55.9
Deferred income taxes	21.7			(322.2		)
Goodwill impairment	—			2,712.3
DIP Facilities issuance costs expensed	—			23.4
Other, net	(12.4		)	14.4
Changes in operating assets and liabilities, net
Accounts receivable	35.0			(22.8		)
Prepaid expenses and other	(31.3		)	(82.3		)
Accounts payable	(46.5		)	197.2
Accrued interest	(0.2		)	(10.0		)
Accrued taxes	(2.7		)	(8.1		)
Other current liabilities	(28.0		)	(8.4		)
Other liabilities	(0.2		)	8.9
Other, net	(7.6		)	(0.6		)
Net cash provided from operating activities	121.7			293.9
Cash Flows from Investing Activities:
Additions to property, plant and equipment	(480.1		)	(407.4		)
Purchase of FCC spectrum licenses	(13.8		)	(10.3		)
Other, net	2.3			2.0
Net cash used in investing activities	(491.6		)	(415.7		)
Cash Flows from Financing Activities:
Repayments of debt and swaps	—			(372.4		)
Proceeds from debt issuance	400.0			655.0
Debt issuance costs	—			(23.4		)
Payments under finance lease obligations	(11.6		)	(27.2		)
Other, net	(0.3		)	(0.7		)
Net cash provided from financing activities	388.1			231.3
Increase in cash, cash equivalents and restricted cash	18.2			109.5
Cash, Cash Equivalents and Restricted Cash:
Beginning of period	199.6			361.0
End of period	$	217.8		$	470.5
Supplemental Cash Flow Disclosures:
Interest paid, net of interest capitalized	$	146.3		$	184.6
Income taxes paid, net	$	1.0		$	—
Reorganization items paid	$	82.4		$	76.2
Right-of-use assets obtained in exchange for operating lease obligations	0.6			$	5.5
Right-of-use assets obtained in exchange for finance lease obligations	—			$	3.9

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

Table of Contents

WINDSTREAM HOLDINGS, INC.

(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIT (UNAUDITED)


(Millions, except per share amounts)	Additional Paid-In Capital		Accumulated Other Comprehensive Income			Accumulated Deficit			Total			Additional Paid-In Capital		Accumulated Other Comprehensive Income			Accumulated Deficit			Total
Balance at December 31, 2019	$	1,253.1	$	22.6		$	(3,350.1	)	$	(2,074.4	)	$	1,253.1	$	22.6		$	(3,350.1	)	$	(2,074.4	)
Cumulative effect adjustments, net of tax:
Adoption of ASU 2016-13 (See Note 1)	—		—			(1.8		)	(1.8		)	—		—			(1.8		)	(1.8		)
Net loss	—		—			(101.6		)	(101.6		)	—		—			(101.6		)	(101.6		)
Other comprehensive loss, net of tax:
Change in pension and postretirement plans	—		(0.3		)	—			(0.3		)	—		(0.3		)	—			(0.3		)
Amortization of net unrealized gains on de-designated interest rate swaps	—		(2.4		)	—			(2.4		)	—		(2.4		)	—			(2.4		)
Comprehensive loss	—		(2.7		)	(101.6		)	(104.3		)	—		(2.7		)	(101.6		)	(104.3		)
Share-based compensation	0.6		—			—			0.6			0.6		—			—			0.6
Taxes withheld on vested restricted stock and other	0.1		—			—			0.1			0.1		—			—			0.1
Balance at March 31, 2020	$	1,253.8	$	19.9		$	(3,453.5	)	$	(2,179.8	)	$	1,253.8	$	19.9		$	(3,453.5	)	$	(2,179.8	)
Net loss												—		—			(162.4		)	(162.4		)
Other comprehensive loss, net of tax:
Change in pension and postretirement plans												—		(0.9		)	—			(0.9		)
Amortization of net unrealized gains on de-designated interest rate swaps												—		(2.5		)	—			(2.5		)
Comprehensive loss												—		(3.4		)	(162.4		)	(165.8		)
Share-based compensation												0.4		—			—			0.4
Balance at June 30, 2020												$	1,254.2	$	16.5		$	(3,615.9	)	$	(2,345.2	)

(Millions, except per share amounts)
Additional
Paid-In
Capital

Accumulated
Other
Comprehensive
Income
Accumulated Deficit Total
Balance at December 31, 2018 $ 1,250.4
$ 35.6
$ (3,205.3 ) $ (1,919.3 )
Cumulative effect adjustments, net of tax:
Adoption of ASU 2016-02 —
—
3,013.0
3,013.0
Net loss —
—
(2,310.3 ) (2,310.3 )
Other comprehensive loss, net of tax:
Change in pension and postretirement plans —
(0.3 ) —
(0.3 )
Amortization of net unrealized gains on de-designated
interest rate swaps
—
(0.9 ) —
(0.9 )
Changes in designated interest rate swaps —
(2.4 ) —
(2.4 )
Comprehensive loss —
(3.6 ) (2,310.3 ) (2,313.9 )
Share-based compensation 2.4
—
—
2.4
Taxes withheld on vested restricted stock and other (0.4 ) —
—
(0.4 )
Balance at March 31, 2019 $ 1,252.4
$ 32.0
$ (2,502.6 ) $ (1,218.2 )

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

Table of Contents

WINDSTREAM ~~SERVICES, LLC~~HOLDINGS, INC.

(DEBTOR-IN-POSSESSION)

CONSOLIDATED ~~STATEMENTS~~STATEMENT OF ~~OPERATIONS~~SHAREHOLDERS’ DEFICIT (UNAUDITED)

Three Months Ended
March 31,
(Millions) 2020
2019
Revenues and sales:
Service revenues $ 1,178.9
$ 1,302.2
Product and fiber sales 22.0
18.4
Total revenues and sales 1,200.9
1,320.6
Costs and expenses:
Cost of services (exclusive of depreciation and amortization
included below)
749.8
861.1
Cost of product and fiber sales 21.5
16.9
Selling, general and administrative 175.8
197.9
Depreciation and amortization 232.6
271.5
Goodwill impairment —
2,339.0
Restructuring and other charges 6.4
15.1
Total costs and expenses 1,186.1
3,701.5
Operating income (loss) 14.8
(2,380.9 )
Other income (expense), net 5.7
(1.0 )
Reorganization items, net (40.5 ) (104.9 )
Interest expense (contractual interest for the three months ended
March 31, 2020 and 2019 of $123.5 and $140.7, respectively)
(73.1 ) (91.9 )
Loss before income taxes (93.1 ) (2,578.7 )
Income tax (expense) benefit (7.9 ) 268.7
Net loss $ (101.0 ) $ (2,310.0 )



(Millions, except per share amounts)	Additional Paid-In Capital			Accumulated Other Comprehensive Income			Accumulated Deficit			Total
Balance at December 31, 2018	$	1,250.4		$	35.6		$	(3,205.3	)	$	(1,919.3	)
Cumulative effect adjustments, net of tax:
Adoption of ASU 2016-02	—			—			3,013.0			3,013.0
Net loss	—			—			(2,310.3		)	(2,310.3		)
Other comprehensive loss, net of tax:
Change in pension and postretirement plans	—			(0.3		)	—			(0.3		)
Amortization of net unrealized gains on de-designated interest rate swaps	—			(0.9		)	—			(0.9		)
Changes in designated interest rate swaps	—			(2.4		)	—			(2.4		)
Comprehensive loss	—			(3.6		)	(2,310.3		)	(2,313.9		)
Share-based compensation	2.4			—			—			2.4
Taxes withheld on vested restricted stock and other	(0.4		)	—			—			(0.4		)
Balance at March 31, 2019	$	1,252.4		$	32.0		$	(2,502.6	)	$	(1,218.2	)
Net loss	—			—			(544.1		)	(544.1		)
Other comprehensive loss, net of tax:
Change in pension and postretirement plans	—			(0.4		)	—			(0.4		)
Amortization of net unrealized gains on de-designated interest rate swaps	—			(2.2		)	—			(2.2		)
Comprehensive loss	—			(2.6		)	(544.1		)	(546.7		)
Share-based compensation	(1.6		)	—			—			(1.6		)
Taxes withheld on vested restricted stock and other	0.1			—			—			0.1
Balance at June 30, 2019	$	1,250.9		$	29.4		$	(3,046.7	)	$	(1,766.4	)

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

Table of Contents

WINDSTREAM SERVICES, LLC

(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE LOSS~~OPERATIONS (UNAUDITED)

Three Months Ended
March 31,
(Millions) 2020
2019
Net loss $ (101.0 ) $ (2,310.0 )
Other comprehensive loss:
Interest rate swaps:
Unrealized losses on designated interest rate swaps —
(3.2 )
Amortization of net unrealized gains on
de-designated interest rate swaps
(3.3 ) (1.2 )
Income tax benefit 0.9
1.1
Change in interest rate swaps (2.4 ) (3.3 )
Pension and postretirement plans:
Amounts included in net periodic benefit cost:
Amortization of prior service credits (0.3 ) (0.4 )
Income tax benefit —
0.1
Change in pension and postretirement plans (0.3 ) (0.3 )
Other comprehensive loss (2.7 ) (3.6 )
Comprehensive loss $ (103.7 ) $ (2,313.6 )



	Three Months Ended June 30,						Six Months Ended June 30,
(Millions)	2020			2019			2020			2019
Revenues and sales:
Service revenues	$	1,164.6		$	1,270.2		$	2,343.5		$	2,572.4
Product and fiber sales	20.7			16.3			42.7			34.7
Total revenues and sales	1,185.3			1,286.5			2,386.2			2,607.1
Costs and expenses:
Cost of services (exclusive of depreciation and amortization included below)	751.8			852.1			1,501.6			1,713.2
Cost of product and fiber sales	21.7			15.2			43.2			32.1
Selling, general and administrative	161.0			185.4			336.8			383.3
Depreciation and amortization	219.9			276.0			452.5			547.5
Goodwill impairment	—			373.3			—			2,712.3
Restructuring and other charges	5.6			6.9			12.0			22.0
Total costs and expenses	1,160.0			1,708.9			2,346.1			5,410.4
Operating income (loss)	25.3			(422.4		)	40.1			(2,803.3		)
Other income (expense), net	1.7			(9.2		)	7.4			(10.2		)
Reorganization items, net	(114.4		)	(85.4		)	(154.9		)	(190.3		)
Interest expense (contractual interest of $117.1, $240.7, $130.3 and $236.5 for the three and six months ended June 30, 2020 and 2019, respectively)	(66.0		)	(80.8		)	(139.1		)	(172.7		)
Loss before income taxes	(153.4		)	(597.8		)	(246.5		)	(3,176.5		)
Income tax (expense) benefit	(8.7		)	54.1			(16.6		)	322.8
Net loss	$	(162.1	)	$	(543.7	)	$	(263.1	)	$	(2,853.7	)

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

Table of Contents

WINDSTREAM SERVICES, LLC

(DEBTOR-IN-POSSESSION)

CONSOLIDATED ~~BALANCE SHEETS~~STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

(Millions) March 31,
2020
December 31,
2019
Assets
Current Assets:
Cash and cash equivalents $ 454.7
$ 191.8
Restricted cash 7.8
7.8
Accounts receivable (net of allowance of $47.0 and $48.2, respectively) 521.1
574.7
Inventories 61.7
64.7
Prepaid expenses and other 239.4
197.7
Total current assets 1,284.7
1,036.7
Goodwill 61.4
61.4
Other intangibles, net 1,046.9
1,068.7
Net property, plant and equipment 3,652.7
3,620.8
Operating lease right-of-use assets 3,959.7
4,018.0
Other assets 82.8
82.9
Total Assets $ 10,088.2
$ 9,888.5
Liabilities and Member Deficit
Current Liabilities:
Current portion of long-term debt $ 900.0
$ 500.0
Accounts payable 262.2
279.2
Advance payments 151.8
151.1
Accrued taxes 55.2
65.6
Other current liabilities 237.4
223.3
Total current liabilities 1,606.6
1,219.2
Other liabilities 23.2
23.6
Liabilities subject to compromise 10,638.2
10,720.1
Total liabilities 12,268.0
11,962.9
Commitments and Contingencies (See Note 12)

Member Deficit:
Additional paid-in capital 1,245.4
1,245.3
Accumulated other comprehensive income 19.9
22.6
Accumulated deficit (3,445.1 ) (3,342.3 )
Total member deficit (2,179.8 ) (2,074.4 )
Total Liabilities and Member Deficit $ 10,088.2
$ 9,888.5



	Three Months Ended June 30,						Six Months Ended June 30,
(Millions)	2020			2019			2020			2019
Net loss	$	(162.1	)	$	(543.7	)	$	(263.1	)	$	(2,853.7	)
Other comprehensive loss:
Interest rate swaps:
Unrealized losses on designated interest rate swaps	—			—			—			(3.2		)
Amortization of net unrealized gains on de-designated interest rate swaps	(3.3		)	(3.0		)	(6.6		)	(4.2		)
Income tax benefit	0.8			0.8			1.7			1.9
Change in interest rate swaps	(2.5		)	(2.2		)	(4.9		)	(5.5		)
Pension and postretirement plans:
Change in net actuarial loss for employee benefit plans	(1.0		)	(0.2		)	(1.0		)	(0.2		)
Amounts included in net periodic benefit cost:
Amortization of net actuarial loss	0.1			—			0.1			—
Amortization of prior service credits	(0.3		)	(0.3		)	(0.6		)	(0.7		)
Income tax benefit	0.3			0.1			0.3			0.2
Change in pension and postretirement plans	(0.9		)	(0.4		)	(1.2		)	(0.7		)
Other comprehensive loss	(3.4		)	(2.6		)	(6.1		)	(6.2		)
Comprehensive loss	$	(165.5	)	$	(546.3	)	$	(269.2	)	$	(2,859.9	)

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

Table of Contents

WINDSTREAM SERVICES, LLC

(DEBTOR-IN-POSSESSION)

CONSOLIDATED ~~STATEMENTS OF CASH FLOWS~~BALANCE SHEETS (UNAUDITED)

Three Months Ended
March 31,
(Millions) 2020
2019
Cash Flows from Operating Activities:
Net loss $ (101.0 ) $ (2,310.0 )
Adjustments to reconcile net loss to net cash provided from operations:
Depreciation and amortization 232.6
271.5
Allowance for credit losses 4.4
9.7
Share-based compensation expense 0.6
2.0
Non-cash reorganization items, net (4.3 ) 45.7
Deferred income taxes 9.0
(268.2 )
Goodwill impairment —
2,339.0
Other, net (7.2 ) 20.3
Changes in operating assets and liabilities, net
Accounts receivable 52.4
(16.1 )
Prepaid expenses and other (40.6 ) (56.8 )
Accounts payable (23.5 ) 226.4
Accrued interest 0.4
(11.7 )
Accrued taxes (9.9 ) (2.6 )
Other current liabilities (13.3 ) (30.7 )
Other liabilities (0.1 ) (5.7 )
Other, net 2.4
6.0
Net cash provided from operating activities 101.9
218.8
Cash Flows from Investing Activities:
Additions to property, plant and equipment (232.4 ) (192.8 )
Other, net (1.8 ) (4.2 )
Net cash used in investing activities (234.2 ) (197.0 )
Cash Flows from Financing Activities:
Distributions to Windstream Holdings, Inc. (0.2 ) (0.6 )
Repayments of debt and swaps —
(372.4 )
Proceeds from debt issuance 400.0
455.0
Debt issuance costs —
(14.7 )
Payments under finance lease obligations (4.5 ) (9.8 )
Other, net (0.1 ) (0.6 )
Net cash provided from financing activities 395.2
56.9
Increase in cash, cash equivalents and restricted cash 262.9
78.7
Cash, Cash Equivalents and Restricted Cash:
Beginning of period 199.6
361.0
End of period $ 462.5
$ 439.7
Supplemental Cash Flow Disclosures:
Interest paid, net of interest capitalized $ 76.0
$ 103.3
Income taxes paid (refunded), net $ 0.1
$ (1.6 )
Reorganization items paid $ 35.5
$ 40.8
Right-of-use assets obtained in exchange for operating lease obligations $ 0.1
$ 4.0
Right-of-use assets obtained in exchange for finance lease obligations $ —
$ 3.9



(Millions)	June 30, 2020			December 31, 2019
Assets
Current Assets:
Cash and cash equivalents	$	210.0		$	191.8
Restricted cash	7.8			7.8
Accounts receivable (net of allowance of $47.7 and $48.2, respectively)	527.8			574.7
Inventories	73.7			64.7
Prepaid expenses and other	233.5			197.7
Total current assets	1,052.8			1,036.7
Goodwill	61.4			61.4
Other intangibles, net	1,013.6			1,068.7
Net property, plant and equipment	3,713.7			3,620.8
Operating lease right-of-use assets	3,909.1			4,018.0
Other assets	81.1			82.9
Total Assets	$	9,831.7		$	9,888.5
Liabilities and Member Deficit
Current Liabilities:
Current portion of long-term debt	$	900.0		$	500.0
Accounts payable	327.6			279.2
Advance payments	148.7			151.1
Accrued taxes	61.2			65.6
Other current liabilities	214.7			223.3
Total current liabilities	1,652.2			1,219.2
Other liabilities	24.7			23.6
Liabilities subject to compromise	10,500.0			10,720.1
Total liabilities	12,176.9			11,962.9
Commitments and Contingencies (See Note 12)
Member Deficit:
Additional paid-in capital	1,245.5			1,245.3
Accumulated other comprehensive income	16.5			22.6
Accumulated deficit	(3,607.2		)	(3,342.3		)
Total member deficit	(2,345.2		)	(2,074.4		)
Total Liabilities and Member Deficit	$	9,831.7		$	9,888.5

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

Table of Contents

WINDSTREAM SERVICES, LLC

(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



	Six Months Ended June 30,
(Millions)	2020			2019
Cash Flows from Operating Activities:
Net loss	$	(263.1	)	$	(2,853.7	)
Adjustments to reconcile net loss to net cash provided from operations:
Depreciation and amortization	452.5			547.5
Allowance for credit losses	12.8			42.8
Share-based compensation expense	1.0			0.3
Non-cash reorganization items, net	(8.4		)	55.9
Deferred income taxes	21.7			(322.2		)
Goodwill impairment	—			2,712.3
DIP Facilities issuance cost expensed	—			23.4
Other, net	(12.4		)	14.4
Changes in operating assets and liabilities, net
Accounts receivable	35.0			(22.8		)
Prepaid expenses and other	(31.3		)	(82.3		)
Accounts payable	(46.5		)	197.2
Accrued interest	(0.2		)	(10.0		)
Accrued taxes	(2.7		)	(8.1		)
Other current liabilities	(27.8		)	(8.2		)
Other liabilities	(0.2		)	8.9
Other, net	(7.6		)	(0.6		)
Net cash provided from operating activities	122.8			294.8
Cash Flows from Investing Activities:
Additions to property, plant and equipment	(480.1		)	(407.4		)
Purchase of FCC spectrum licenses	(13.8		)	(10.3		)
Other, net	2.3			2.0
Net cash used in investing activities	(491.6		)	(415.7		)
Cash Flows from Financing Activities:
Distributions to Windstream Holdings, Inc.	(1.1		)	(0.9		)
Repayments of debt and swaps	—			(372.4		)
Proceeds from debt issuance	400.0			655.0
Debt issuance costs	—			(23.4		)
Payments under finance lease obligations	(11.6		)	(27.2		)
Other, net	(0.3		)	(0.7		)
Net cash provided from financing activities	387.0			230.4
Increase in cash, cash equivalents and restricted cash	18.2			109.5
Cash, Cash Equivalents and Restricted Cash:
Beginning of period	199.6			361.0
End of period	$	217.8		$	470.5
Supplemental Cash Flow Disclosures:
Interest paid, net of interest capitalized	$	146.3		$	184.6
Income taxes paid, net	$	1.0		$	—
Reorganization items paid	$	82.4		$	76.2
Right-of-use assets obtained in exchange for operating lease obligations	$	0.6		$	5.5
Right-of-use assets obtained in exchange for finance lease obligations	$	—		$	3.9

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

Table of Contents

WINDSTREAM SERVICES, LLC

(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENT OF MEMBER DEFICIT (UNAUDITED)


(Millions)	Additional Paid-In Capital			Accumulated Other Comprehensive Income			Accumulated Deficit			Total			Additional Paid-In Capital			Accumulated Other Comprehensive Income			Accumulated Deficit			Total
Balance at December 31, 2019	$	1,245.3		$	22.6		$	(3,342.3	)	$	(2,074.4	)	$	1,245.3		$	22.6		$	(3,342.3	)	$	(2,074.4	)
Cumulative effect adjustments, net of tax:
Adoption of ASU 2016-13 (See Note 1)	—			—			(1.8		)	(1.8		)	—			—			(1.8		)	(1.8		)
Net loss	—			—			(101.0		)	(101.0		)	—			—			(101.0		)	(101.0		)
Other comprehensive loss, net of tax:
Change in pension and postretirement plans	—			(0.3		)	—			(0.3		)	—			(0.3		)	—			(0.3		)
Amortization of net unrealized gains on de-designated interest rate swaps	—			(2.4		)	—			(2.4		)	—			(2.4		)	—			(2.4		)
Comprehensive loss	—			(2.7		)	(101.0		)	(103.7		)	—			(2.7		)	(101.0		)	(103.7		)
Share-based compensation	0.6			—			—			0.6			0.6			—			—			0.6
Distributions payable to Windstream Holdings, Inc.	(0.5		)	—			—			(0.5		)	(0.5		)	—			—			(0.5		)
Balance at March 31, 2020	$	1,245.4		$	19.9		$	(3,445.1	)	$	(2,179.8	)	$	1,245.4		$	19.9		$	(3,445.1	)	$	(2,179.8	)
Net loss													—			—			(162.1		)	(162.1		)
Other comprehensive loss, net of tax:
Change in pension and postretirement plans													—			(0.9		)	—			(0.9		)
Amortization of net unrealized gains on de-designated interest rate swaps													—			(2.5		)	—			(2.5		)
Comprehensive loss													—			(3.4		)	(162.1		)	(165.5		)
Share-based compensation													0.4			—			—			0.4
Distributions payable to Windstream Holdings, Inc.													(0.3		)	—			—			(0.3		)
Balance at June 30, 2020													1,245.5			16.5			(3,607.2		)	(2,345.2		)

(Millions)
Additional
Paid-In
Capital

Accumulated
Other
Comprehensive
Income
Accumulated Deficit Total
Balance at December 31, 2018 $ 1,244.2
$ 35.6
$ (3,199.1 ) $ (1,919.3 )
Cumulative effect adjustments, net of tax:
Adoption of ASU 2016-02 —
—
3,013.0
3,013.0
Net loss —
—
(2,310.0 ) (2,310.0 )
Other comprehensive loss, net of tax:
Change in pension and postretirement plans —
(0.3 ) —
(0.3 )
Amortization of net unrealized losses on de-designated
interest rate swaps
—
(0.9 ) —
(0.9 )
Changes in designated interest rate swaps —
(2.4 ) —
(2.4 )
Comprehensive loss —
(3.6 ) (2,310.0 ) (2,313.6 )
Contributions from Windstream Holdings, Inc.:
Share-based compensation 2.4
—
—
2.4
Taxes withheld on vested restricted stock and other (0.4 ) —
—
(0.4 )
Distributions payable to Windstream Holdings, Inc. (0.3 ) —
—
(0.3 )
Balance at March 31, 2019 $ 1,245.9
$ 32.0
$ (2,496.1 ) $ (1,218.2 )

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

1112

Table of Contents

WINDSTREAM SERVICES, LLC

(DEBTOR-IN-POSSESSION)

CONSOLIDATED STATEMENT OF MEMBER DEFICIT (UNAUDITED)



(Millions)	Additional Paid-In Capital			Accumulated Other Comprehensive Income			Accumulated Deficit			Total
Balance at December 31, 2018	$	1,244.2		$	35.6		$	(3,199.1	)	$	(1,919.3	)
Cumulative effect adjustments, net of tax:
Adoption of ASU 2016-02	—			—			3,013.0			3,013.0
Net loss	—			—			(2,310.0		)	(2,310.0		)
Other comprehensive loss, net of tax:
Change in pension and postretirement plans	—			(0.3		)	—			(0.3		)
Amortization of net unrealized gains on de-designated interest rate swaps	—			(0.9		)	—			(0.9		)
Changes in designated interest rate swaps	—			(2.4		)	—			(2.4		)
Comprehensive loss	—			(3.6		)	(2,310.0		)	(2,313.6		)
Share-based compensation	2.4			—			—			2.4
Taxes withheld on vested restricted stock and other	(0.4		)	—			—			(0.4		)
Distributions payable to Windstream Holdings, Inc.	(0.3		)	—			—			(0.3		)
Balance at March 31, 2019	$	1,245.9		$	32.0		$	(2,496.1	)	$	(1,218.2	)
Net loss	—			—			(543.7		)	(543.7		)
Other comprehensive loss, net of tax:
Change in pension and postretirement plans	—			(0.4		)	—			(0.4		)
Amortization of net unrealized gains on de-designated interest rate swaps	—			(2.2		)	—			(2.2		)
Comprehensive loss	—			(2.6		)	(543.7		)	(546.3		)
Share-based compensation	(1.6		)	—			—			(1.6		)
Taxes withheld on vested restricted stock and other	0.1			—			—			0.1
Distributions payable to Windstream Holdings, Inc.	(0.4		)	—			—			(0.4		)
Balance at June 30, 2019	1,244.0			29.4			(3,039.8		)	(1,766.4		)

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

Table of Contents

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

1. Preparation of Interim Financial Statements:

In these consolidated financial statements, unless the context requires otherwise, the use of the terms “Windstream,” “we,” “us” or “our” shall refer to Windstream Holdings, Inc. and its subsidiaries, including Windstream Services, LLC, and the term “Windstream Services” shall refer to Windstream Services, LLC and its subsidiaries.

Organizational Structure – Windstream Holdings, Inc. (“Windstream Holdings”) is a publicly traded holding company incorporated in the state of Delaware on May 23, 2013, and the parent of Windstream Services, LLC (“Windstream Services”), a Delaware limited liability company organized on March 1, 2004. Following its delisting on March 6, 2019, Windstream Holdings common stock no longer trades on the Nasdaq Global Select Market (“NASDAQ”) but trades on the Over-the-Counter (“OTC”) Pink Sheets market maintained by the OTC Market Group, Inc. under the trading symbol “WINMQ”. Windstream Holdings owns a 100 percent interest in 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.

Description of Business – We are a leading provider of advanced network communications and technology solutions for businesses across the U.S. We also offer broadband, entertainment and security solutions to consumers and small businesses primarily in rural areas in 18 states. Additionally, we supply core transport solutions on a local and long-haul fiber network spanning approximately ~~164,000~~169,000 route miles.

Consumer service revenues are generated from the provisioning of high-speed Internet, voice and video services to consumers. Enterprise service revenues include revenues from integrated voice and data services, advanced data and traditional voice and long-distance services provided to enterprise, mid-market and small business customers. Wholesale revenues include revenues from other communications services providers for special access circuits and fiber connections, voice and data transport services, and revenues from the reselling of our services. Service revenues also include switched access revenues, federal and state Universal Service Fund (“USF”) revenues, amounts received from Connect America Fund (“CAF”) - Phase II, USF surcharges and revenues from providing other miscellaneous services.

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, 2019, was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States (“U.S. GAAP”). In our opinion, these financial statements reflect all adjustments that are necessary for a fair statement of results of operations and financial condition for the interim periods presented 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, 2019, which was filed with the SEC on May 19, 2020.

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 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, including the potential impacts arising from the COVID-19 global pandemic. Actual results may differ from the estimates and assumptions used in preparing the accompanying consolidated financial statements, and such differences could be material.

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

1. Preparation of Interim Financial Statements, Continued:

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

FCC Spectrum Licenses - During 2020, we acquired wireless spectrum licenses in the 37, 39 and 47 GHz bands auction conducted by the Federal Communications Commission (“FCC”) for $13.8 million. Combined with the spectrum licenses we acquired in the 24 and 28 GHz bands auctions completed during 2019, the total carrying value of FCC spectrum licenses included in other intangible assets as of June 30, 2020 was $40.4 million. The spectrum licenses have an initial term of 10 years and are subject to renewal by the FCC. Currently, there are no legal, regulatory, contractual, competitive, economic or other factors that would limit the useful life of the spectrum. Accordingly, the spectrum licenses have been classified as indefinite-lived assets.

Operating Lease Income - Certain of our service offerings include equipment leases. We also lease our network facilities to other service providers and enter into arrangements with third parties to lease unused or underutilized portions of our network. Operating lease income was ~~$65.2~~$67.1 million and ~~$62.1~~$132.3 million for the three ~~months~~and six-month periods ended ~~March 31,~~June 30, 2020, respectively, as compared to $62.0 million and $124.1 million for the three and six-month periods ended June 30, 2019, respectively, and is included in services revenues in our consolidated statement of operations.

Provision for Income Taxes - WeDuring the three and six-month periods ended June 30, 2020, we recognized income tax expense of ~~$7.8~~$8.5 million and an$16.3 million, respectively, as compared to income tax ~~benefit~~benefits of ~~$268.8~~$54.2 million and $323.0 million for the ~~three months ended March 31, 2020 and 2019, respectively.~~same periods in 2019. Income tax expense recorded in the ~~first quarter~~three and six-month periods of 2020 reflected discrete tax expense of ~~$8.5~~$25.9 million and $34.4 million, respectively, related to our bankruptcy reorganization and discrete tax expense of ~~$21.5~~$19.7 million and $41.2 million, respectively, related to an increase in our valuation allowance, partially offset by income tax benefits attributable to our loss before taxes. Comparatively, the income tax benefit recorded for the ~~three-month period~~three and six-month periods ended ~~March 31,~~June 30, 2019 reflected the ~~loss~~losses before taxes offset by discrete tax expense of ~~$368.0~~$87.6 million and $455.6 million, respectively, related to our goodwill ~~impairment.~~impairments. Inclusive of the discrete items, our effective tax rate was ~~(8.3)~~(5.5) percent and ~~10.4~~(6.6) percent for the three ~~months~~and six-month periods ended ~~March 31,~~June 30, 2020 as compared to 9.1 percent and ~~2019, respectively.~~10.2 percent for the same periods in 2019.

As of ~~March 31,~~June 30, 2020, we were in a net deferred tax liability position and recorded an income tax ~~benefit~~benefits on non-discrete items during the ~~first quarter~~three and six-month periods of 2020. We will monitor our deferred tax asset position each quarter and determine the appropriate income tax benefit to record based upon the reversal of taxable temporary differences.

~~Revision to Previously Issued Financial Statements~~

On January 1, 2019, we adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), using the modified retrospective transition method. Under this transition method, we recognized the cumulative effect of the initial adoption of the standard as an adjustment to our opening accumulated deficit balance at the adoption date of approximately $3.0 billion, primarily due to changing the accounting treatment of our arrangement with Uniti Group, Inc. (“Uniti”) from a financing transaction to an operating lease. As a result of this change, we de-recognized the remaining net book value of assets transferred to Uniti of approximately $1.3 billion, recognized a right-of-use asset of approximately $3.9 billion equaling the adjusted Uniti liability, which decreased by $0.7 billion and recorded a deferred tax liability of approximately $0.3 billion in accordance with the transition guidance specified in ASU 2016-02.

During the second quarter of 2019, management identified an immaterial error in the cumulative effect adjustment recorded related to Windstream’s adoption of ASU 2016-02. Specifically, the net book value of certain assets transferred to Uniti had not been properly de-recognized as of January 1, 2019, resulting in an overstatement of net property, plant and equipment of $33.8 million, an overstatement of deferred income tax liabilities of $8.5 million and an overstatement of the cumulative effect adjustment recorded to accumulated deficit of $25.3 million. The accompanying consolidated statement of shareholders’ deficit for the period January 1, 2019 to March 31, 2019 has been revised to correct for this error. As a result, the cumulative effect adjustment for the adoption of ASU 2016-02 changed from the previously reported amount of $3,038.3 million to $3,013.0 million.

~~(DEBTOR-IN-POSSESSION)~~

~~NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS~~

~~_____~~

~~1. Preparation of Interim Financial Statements, Continued:~~

Recently Adopted Accounting Standards

Financial Instruments - Credit Losses – In June 2016, the Financial Accounting Standards Boards (“FASB”) issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as modified by subsequently issued ASU Nos. 2018-19, 2019-11 and 2020-02 (collectively “ASU 2016-13”). This standard introduced a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses requires entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This new standard also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. ASU 2016-13 was effective for annual and interim reporting periods beginning after December 15, 2019. We adopted ASU 2016-13 using the modified retrospective transition method effective January 1, 2020. Upon adoption, we recorded a cumulative effect adjustment of approximately $1.8 million, net of tax, increasing our accumulated deficit.

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

1. Preparation of Interim Financial Statements, Continued:

We estimate credit losses for trade receivables by aggregating similar customer types together to calculate expected default rates based on historical losses as a percentage of total aged revenue. These rates are then applied, on a monthly basis, to the outstanding balances staged by customer. In addition to continued evaluation of historical losses, ASU 2016-13 requires forward-looking information and forecasts to be considered in determining credit loss estimates. Our current forecast methodology assesses historical trends to project future losses and is not forward-looking for potential economic factors that would change the credit loss model. Therefore, historical trends continue to be the most accurate expectation of future losses as Windstream has defined rules around customers who can establish service. Our revenue and associated accounts receivable are based upon a recurring revenue structure whereby customers are billed in advance of service being provided and there is little month-to-month volatility in the composition of the customer base across all segments. We are actively monitoring the impacts of the COVID-19 global pandemic on our customers and their associated accounts receivable balances in order to adjust the allowance for credit losses accordingly. To date, no material risk has been identified, but management will continue to monitor and make adjustments, as necessary.

Our accounts receivable balance consists of the following as of:


(Millions)	March 31, 2020			June 30, 2020
Accounts receivable	$	568.1		$	575.5
Less: Allowance for credit losses	(47.0		)	(47.7		)
Accounts receivable, net	$	521.1		$	527.8

Activity in our allowance for credit losses consists of the following:


(Millions)
Balance as of December 31, 2019	$	(48.2	)	$	(48.2	)
Cumulative effect adjustment for ASU 2016-13 adoption	(2.6		)	(2.6		)
Additional allowance for estimated credit losses	(4.4		)	(12.8		)
Write-offs, net of recovered accounts	8.2			15.9
Balance as of March 31, 2020	$	(47.0	)
Balance as of June 30, 2020				$	(47.7	)

Implementation Costs in Cloud Computing Arrangements - In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). This standard requires entities that are customers in cloud computing arrangements to defer implementation costs if they would be capitalized by the entity in software licensing arrangements under the internal-use software guidance. The service element of a hosting arrangement will continue to be expensed as incurred. The guidance was effective for annual and interim reporting periods beginning after December 15, 2019 and may be applied retrospectively or prospectively to implementation costs incurred after the date of adoption. We adopted ASU 2018-15 on a prospective basis effective January 1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements.

~~(DEBTOR-IN-POSSESSION)~~

~~NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS~~

~~_____~~

~~1. Preparation of Interim Financial Statements, Continued:~~

Recently Issued Authoritative Guidance

Income Taxes - In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740)-Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The standard intends to simplify accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and by amending existing guidance to improve consistent application in financial statements. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, which is January 1, 2021 for us, with early adoption permitted. We are currently in the process of evaluating the impacts of this guidance on our consolidated financial statements and related income tax disclosures.

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

2. Chapter 11 Filing, Going Concern and Other Related Matters:

Chapter 11 Filing

On February 15, 2019, Judge Jesse Furman of the United States District Court for the Southern District of New York issued findings of fact and conclusions of law in litigation relating to a noteholder’s allegations that our spin-off of certain assets in 2015 into a publicly-traded real estate investment trust resulted in one or more defaults of certain covenants under one of Windstream Services’ existing indentures. The findings resulted in a cross default under Windstream Services’ senior secured credit agreement governing its secured term and revolving loan obligations and remaining obligations under the contractual arrangement with Uniti. In addition, the findings resulted in a cross-acceleration event of default under the indentures governing Windstream Services’ other series of secured and unsecured notes.

On February 25, 2019 (the “Petition Date”), Windstream Holdings and all of its subsidiaries, including Windstream Services (collectively, the “Debtors”), filed voluntary petitions (the “Chapter 11 Cases”) for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”).The filing of the Chapter 11 Cases also constitutes an event of default under our debt agreements. Subject to certain specific exceptions under the Bankruptcy Code, the filing of the Chapter 11 Cases automatically stayed most judicial or administrative actions against the Debtors and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code.

The Chapter 11 Cases are being jointly administered under the caption In re Windstream Holdings, Inc., et al., No 19-22312 (RDD). We will continue to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

In general, as debtors-in-possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business, however, we may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Pursuant to first day motions filed with the Bankruptcy Court, the Bankruptcy Court authorized us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to: obtain debtor-in-possession financing, pay certain employee wages and benefits, and pay certain vendors and suppliers in the ordinary course for most goods and services.

~~Subject to certain exceptions,~~As further discussed under “Plan of Reorganization,” on June 26, 2020, the Bankruptcy ~~Code,~~Court entered an order confirming the Debtors’ Plan of Reorganization (the “Confirmation Order”) pursuant to which the Debtors may assume, assign, or reject certain executory contracts and unexpired leases ~~subject to~~until 45 days after the ~~approval~~effective date of ~~the Bankruptcy Court and certain other conditions.~~our Plan of Reorganization. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Debtors discussed herein, including a quantification of the Debtors’ obligations under any such executory contract or unexpired lease, is qualified by any overriding rejection rights the Debtors continue to have under the Bankruptcy Code.

~~(DEBTOR-IN-POSSESSION)~~

~~NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS~~

~~_____~~

~~2. Chapter 11 Filing, Going Concern and Other Related Matters, Continued:~~

Uniti Arrangement

The acceleration of the 2023 Notes resulted in an event of default under the contractual arrangement with Uniti, but no default notice has been received. Upon an event of default, remedies available to Uniti include terminating the contractual arrangement and requiring us to transfer the business operations we conduct on the telecommunication network assets so terminated (with limited exceptions) to a successor party for fair market value pursuant to a process set forth in the contractual arrangement, dispossessing us from the telecommunication network assets, and/or collecting monetary damages for the breach (including payment acceleration), electing to leave the contractual arrangement in place and sue for payment and any other monetary damages, and seeking any and all other rights and remedies available under law or in equity. The exercise of such remedies could have a material adverse effect on our business, financial position, results of operations and liquidity. Uniti’s ability to exercise remedies under the contractual arrangement was stayed as of the date of the Chapter 11 petition filing.

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

2. Chapter 11 Filing, Going Concern and Other Related Matters, Continued:

In connection with the Chapter 11 Cases, the Debtors analyzed the arrangement with Uniti, and on July 25, 2019, the Debtors filed a complaint in the Bankruptcy Court seeking, among other things, to recharacterize the Uniti arrangement from a lease to a financing. The complaint contained additional claims that certain transfers from Windstream to Uniti were fraudulent transfers under the applicable Bankruptcy Code provisions, and finally, that Uniti was in breach of the arrangement by engaging in competitive behavior in violation of certain provisions in the arrangement. After engaging in a seven months-long mediation process with Uniti and its creditors regarding the litigation, that was overseen by the Honorable Judge Shelly C. Chapman, on March 2, 2020, Windstream announced an agreement in principle with Uniti to settle any and all claims and causes that were or could have been asserted against Uniti by Windstream, including seeking the recharacterization of the lease to a financing. Among the terms of the settlement, Uniti agreed to fund up to $1.75 billion in capital improvements to the network; pay Windstream $400 million payable in quarterly cash installments over five years, at an annual interest rate of 9.0 percent, which amount may be fully paid after one year, resulting in total cash payments ranging from $432 - $490 million; and purchase, for $40 million, certain Windstream-owned fiber assets, including certain fiber indefeasible rights of use (“IRU”) contracts with Windstream transferring to Uniti certain dark fiber IRU contracts. Uniti will also transfer to Windstream $244.5 million of proceeds from, and conditioned upon, the sale of Uniti’s common stock to certain first lien creditors of Windstream Services. Annual rental payments will be equal to the annual rent due under the existing master lease agreement. On the one-year anniversary of any growth capital improvements funded by Uniti, the annual base rent payable by Windstream will increase by an amount equal to 8.0 percent of such investment, subject to a 0.5 percent annual escalator.

In conjunction with the announcement, Windstream filed a motion seeking approval from the Bankruptcy Court of the proposed settlement, and a hearing on the motion was held on May ~~7-8,~~7 and 8, 2020, at which time the Bankruptcy Court approved the settlement with Uniti. The approved settlement is subject to certain regulatory approvals and conditions precedent, including Uniti's receipt of satisfactory "true lease" and REIT opinions, which remain outstanding. Until all conditions are satisfied, there is no guarantee that the settlement with Uniti will be consummated.

Plan Support Agreement

On March 2, 2020, the Debtors entered into a Plan Support Agreement (the “PSA”) with certain members of first lien lenders and noteholders, including the Debtors’ largest creditor, Elliott Investment Management L.P. (“Elliott”), and Uniti. The PSA contemplates the Debtors’ restructuring and recapitalization (the “Restructuring Transactions”), which will be implemented through a Chapter 11 plan of reorganization (the “Plan”). The PSA provided for, among other things: (1) reduction of Windstream’s existing funded debt by more than $4 billion upon emergence of the Chapter 11 Cases, (2) reduction of Windstream’s annual debt service obligations, and (3) access to exit financing consistent with terms set forth in the PSA. Pursuant to the PSA, participating parties agreed to, among other things, support the Restructuring Transactions and vote in favor of the Plan. The PSA, as amended, has support across the Debtors’ capital structure, and participating parties include 94 percent of first lien claims, 54 percent of second lien claims, 39 percent of unsecured notes claims, and 72 percent of holders of 6.375 percent Senior Notes due 2028 (the “Midwest Notes”).

~~(DEBTOR-IN-POSSESSION)~~

~~NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS~~

~~_____~~

~~2. Chapter 11 Filing, Going Concern and Other Related Matters, Continued:~~

On March 2, 2020, the Debtors publicly filed the PSA and accompanying plan term sheet (the “Plan Term Sheet”), outlining the terms of the reorganization, including funding an exit facility in an aggregate amount up to $3,250 million (the “New Exit Facility”) and backstop commitments from certain first lien creditors (the “Backstop Commitment Agreement”) related to a $750 million common equity rights offering upon the effective date (the “Rights Offering”). On March 13, 2020, the Debtors filed a motion to approve the Backstop Commitment Agreement, providing for a backstop premium equal to 8 percent of the $750 million committed amount payable in common stock (the “Backstop Premium”), which agreement was approved by the Bankruptcy Court at a hearing on May 8, ~~2020, subject to an adjustment, required by~~2020. Upon the Bankruptcy ~~Court, that in the event that Windstream’s proposed plan~~Court’s entry of ~~reorganization is not confirmed,~~ the Backstop Premium ~~shall~~Agreement approval order on May 13, 2020, the Backstop Premium became fully earned and a liability to Windstream. Following the Bankruptcy Court’s approval of our Plan of Reorganization on June 25, 2020, as further discussed below, the only conditions in which the Backstop Premium would be ~~reduced~~payable for less than $60.0 million is if Windstream terminates the Backstop Premium Agreement due to ~~4 percent,~~a breach by an equity backstop party or ~~$30 million.~~the PSA is terminated in accordance with its terms. Because both of these conditions were deemed remote following the confirmation of our Plan of Reorganization, Windstream accrued $60.0 million for the Backstop Premium in the second quarter of 2020, which amount has been included in reorganization items, net. Among other items, the PSA is conditioned upon the consummation of the settlement with Uniti. Accordingly, there is no guarantee that the Debtors will consummate the PSA.

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

2. Chapter 11 Filing, Going Concern and Other Related Matters, Continued:

Plan of Reorganization

In order for the Debtors to emerge successfully from Chapter 11, the Debtors must obtain the required votes of creditors accepting a plan of reorganization as well as the Bankruptcy Court’s confirmation of such plan. A reorganization plan determines the rights and satisfaction of claims of various creditors and security holders and is subject to the ultimate outcome of negotiations and Bankruptcy Court decisions ongoing through the date on which the reorganization plan is confirmed.

On April 1, 2020, the Debtors filed a Joint Chapter 11 Plan of Reorganization (“the Plan”) with the Bankruptcy Court. On the same date, the Debtors filed a Disclosure Statement relating to the Plan, along with a motion seeking approval of the Disclosure Statement. On May 6, 2020, an amended Disclosure Statement was filed with the Bankruptcy Court that included ranges of allowed claims by creditor classes. As of ~~March 31,~~June 30, 2020 and December 31, 2019, the Debtors have adjusted their recorded liabilities to amounts consistent with the estimate’s ranges specified in the Disclosure Statement. At a hearing held on May 8, 2020, the Disclosure Statement was approved by the Bankruptcy Court, allowing the Company to begin soliciting the requisite accepting votes in favor of the Plan. The Debtors ~~retain the exclusive right to file~~promptly commenced solicitation of votes on the Plan through and including June 22, 2020, as well as the right to seek further extensions of such period up to the statutory maximum date of August 25, 2020. The Plan can be supplemented and revised based upon discussionsin compliance with the ~~Debtors’ creditors and other interested parties and~~Bankruptcy Court’s order.

The deadline for all holders of Claims to vote on the Plan was June 17, 2020, at 4:00 p.m., prevailing Eastern Time. Holders of Claims entitled to vote in ~~response~~three classes with respect to ~~creditor claims and objections~~each Debtor voted to accept the Plan, and the ~~requirements of~~Debtors fulfilled the ~~Bankruptcy Code or the Bankruptcy Court. There can be no assurance that the Debtors will be able~~conditions for voting to ~~secure requisite accepting votes~~allow for ~~the Plan or that~~ confirmation ~~of the Plan by the Bankruptcy Court will~~to occur.

On June 24 and 25, 2020, the Bankruptcy Court ~~is scheduled to hold~~held a confirmation hearing to consider the approval of the Debtors’ ~~Plan. The~~ Plan ~~will be subject to usual and customary conditions to plan confirmation, including obtaining the requisite vote of creditors and approval of~~at which time the Bankruptcy ~~Court.~~Court confirmed the Plan. The Plan memorializes the terms agreed to in the PSA and Plan Term Sheet, providing for, among other things:


a)	payment in full of debtor-in-possession financing obligations and administrative expense claims;

distribution to holders of first lien claims on a pro rata basis: (i) 100 percent of new common stock, subject to certain adjustments described in the Plan and dilution by the Backstop Premium, Rights Offering, and Management Incentive Program; (ii) cash in the amount equal to the sum of Exit Facility proceeds, flex proceeds, cash proceeds of the Rights Offering, and cash held by the Debtors; (iii) subscription rights; and (iv) first lien replacement loans, as applicable;


c)	$100 million in new loans arising under the New Exit Facility to holders of Midwest Notes;


d)	certain cash distributions to holders of the second lien claims, unsecured notes claims, and other general unsecured claims against obligor Debtors, if those classes accept the plan;


e)	reinstatement or repayment of general unsecured claims against non-obligor Debtors; and


f)	the cancellation of existing equity interests in Windstream Holdings.

17After the confirmation hearing, on June 26, 2020, the Bankruptcy Court signed an order and confirmed the Plan (the “Confirmation Order”). The approved Plan is subject to certain regulatory approvals and conditions precedent which remain outstanding. Until all conditions are satisfied, there is no guarantee that the Plan will be consummated. As the Plan has yet to be consummated, the accompanying financial statements continue to be prepared pursuant to Accounting Standards Codification (“ASC”) 852, Reorganizations.

~~(DEBTOR-IN-POSSESSION)~~

~~NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS~~

~~_____~~

~~2. Chapter 11 Filing, Going Concern and Other Related Matters, Continued:~~

The Debtors have been in compliance with all milestones under the PSA, including (1) the milestones to file with the Bankruptcy Court the motion to approve the Uniti Settlement, the Backstop Commitment Agreement, and the motion to approve the Backstop Commitment Agreement, (2) the milestone to file with the Bankruptcy Court the Plan, Disclosure Statement, and motion to approve the Disclosure Statement, (3) the milestones, as extended, to achieve entry of the orders to approve the Backstop Commitment Agreement and Uniti Settlement, and (4) the milestone to achieve entry of the order approving the Disclosure Statement.

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

2. Chapter 11 Filing, Going Concern and Other Related Matters, Continued:

After the Bankruptcy Court’s approval of the order approving the Disclosure Statement on May 14, 2020, the remaining PSA milestones were extended to provide for a milestone of July 2, 2020 to confirm the Plan and September 30, 2020 to emerge from Chapter 11. The Debtors’ emergence from Chapter 11 is subject to, among other things, consummation of the Restructuring Transactions described above, certain regulatory approvals, and execution and implementation of the definitive documents contemplated by the Uniti Settlement. The Debtors expect to timely emerge from Chapter 11; however, there is no guarantee that we will consummate the Plan and emerge from Chapter 11.

Going Concern and Financial Reporting

Our financial condition, the defaults under our debt agreements and contractual arrangement with Uniti, and the risks and uncertainties surrounding the Chapter 11 Cases, raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our ability to continue as a going concern is contingent upon, among other factors, our ability to (i) ~~obtain the required creditor acceptance and confirmation under the Bankruptcy Code of our plan of reorganization, (ii)~~ successfully implement such plan of reorganization, ~~(iii)~~(ii) address debt and other liabilities through the bankruptcy process, ~~(iv)~~(iii) generate sufficient cash flow from operations, and ~~(v)~~(iv) obtain financing sources sufficient to meet our future obligations. As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession pursuant to the Bankruptcy Code, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business pursuant to relief we obtained from the Bankruptcy Court, for amounts other than those reflected in the accompanying consolidated financial statements. In particular, such financial statements do not purport to show with respect to (i) assets, the realization value on a liquidation basis or availability to satisfy liabilities, (ii) liabilities arising prior to the Petition Date, the amounts that may be allowed for claims or contingencies, or the status and priority thereof, (iii) shareholders’ equity accounts, the effect of any changes that may be made in our capitalization, or (iv) operations, the effects of any changes that may be made in the underlying business. ~~A confirmed~~An effective plan of reorganization would likely cause material changes to the amounts currently disclosed in the accompanying consolidated financial statements. Further, the plan of reorganization could materially change the amounts and classifications reported in the consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization. The accompanying consolidated financial statements do not include any direct adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern or as a consequence of the Chapter 11 Cases.

Effective on February 25, 2019, we began to apply the provisions of ~~Accounting Standards Codification (“ASC”)~~ASC 852, ~~Reorganizations,~~ which is applicable to companies under bankruptcy protection, and requires amendments to the presentation of key financial statement line items. ASC 852 requires that the financial statements for periods subsequent to the filing of the Chapter 11 Cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items, net in the consolidated statements of operations beginning February 25, 2019. The consolidated balance sheet must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities subject to compromise include pre-petition liabilities that are unsecured, under-secured or where it cannot be determined that the liabilities are fully secured. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts as a result of the plan of reorganization or negotiations with creditors. If there is uncertainty about whether a secured claim is ~~undersecured,~~under-secured, or will be impaired under the plan of reorganization, the entire amount of the claim is included with ~~prepetition~~pre-petition claims in liabilities subject to compromise. In addition, cash used for reorganization items, net is disclosed.

1820

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

2. Chapter 11 Filing, Going Concern and Other Related Matters, Continued:

Liabilities Subject to Compromise

Due to the filing of the Chapter 11 Cases on February 25, 2019, the classification of pre-petition indebtedness is generally subject to compromise pursuant to a plan of reorganization, as previously described above. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Debtors authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtors’ businesses and assets. Among other things, the Bankruptcy Court authorized the Debtors to pay certain pre-petition claims relating to employee wages and benefits, taxes and critical vendors. The Debtors are paying and intend to pay undisputed post-petition liabilities in the ordinary course of business. In addition, the Debtors may reject certain pre-petition executory contracts and unexpired leases with respect to their operations with the approval of the Bankruptcy Court. Any damages resulting from the rejection of executory contracts and unexpired leases are treated as general unsecured claims and classified as liabilities subject to compromise.

Pre-petition liabilities that are subject to compromise are required to be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts. The amounts currently classified as liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determinations of secured status of certain claims, the values of any collateral securing such claims, or other events. Any resulting changes in classification will be reflected in subsequent financial statements, as was the case for certain debt obligations of Windstream Services, which were reclassified to liabilities subject to compromise in the second quarter of 2019, as discussed below.

As further discussed in Note 3, “Debt,” our debtor-in-possession facilities have priority over all the other debt obligations of Windstream Services and its subsidiaries. Both the ~~March 2020~~ PSA and the Plan indicated that all debt obligations of Windstream Services and its subsidiaries were impaired, except for the debtor-in-possession facilities. Based on the expected treatment of the creditor classes included in the PSA and the Plan, which the Debtors believe to be the most relevant factor in determining the appropriate classification of its debt obligations as of the balance sheet date, debt obligations under the senior secured credit facility, senior first lien notes and bonds issued by Windstream Holdings of the Midwest, Inc. (“Midwest Bonds”) were classified as liabilities subject to compromise during the second quarter of 2019. All unamortized debt issuance costs and original net discount related to these debt obligations were written-off and charged to reorganization items, net during second quarter of 2019. The senior secured second lien notes and unsecured senior notes, which were undercollateralized as of the Petition Date, had been classified as liabilities subject to compromise in the first quarter of 2019. Accordingly, all debt obligations, except for the debtor-in-possession facilities, have been classified as liabilities subject to compromise in the accompanying consolidated balance sheets.

As also discussed in Note 3, “Debt,” adequate protection payment was granted by the Bankruptcy Court to holders of debt obligations under Windstream Services’ senior secured credit facility and to holders of the senior first lien notes and Midwest Bonds. The Debtors have concluded that such payments do not represent the reduction of principal because the allowed claim for the associated secured debt included in the Disclosure Statement agreed to the outstanding principal balance as of ~~March 31,~~June 30, 2020 and December 31, 2019, respectively, and the Bankruptcy Court has not taken any action to date to recharacterize the adequate protection payments as principal reduction. Accordingly, all such adequate protection payments remitted subsequent to the filing of the Chapter 11 Cases have been classified as interest expense in the accompanying consolidated statements of operations. On June 10, 2020, Windstream filed an amendment to the final debtor-in-possession order, which deferred the remittance of the adequate protection payments earned between July 1, 2020 through and including October 31, 2020. The Disclosure Statement is subject to amendment and, accordingly, there can be no assurance that the treatment of the adequate protection payments will not change.

1921

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

2. Chapter 11 Filing, Going Concern and Other Related Matters, Continued:

Liabilities subject to compromise was as follows at:


(Millions)	March 31, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Accounts payable	$	326.3	$	335.7	$	227.3	$	335.7
Advance payments	6.4		6.6		6.2		6.6
Accrued taxes	25.0		24.5		26.2		24.5
Other current liabilities	86.4		97.1		95.1		97.1
Deferred taxes	80.1		72.6		91.7		72.6
Operating lease liabilities	3,985.9		4,040.7		3,934.7		4,040.7
Pension and other employee benefit plan obligations	305.8		314.0		305.6		314.0
Other liabilities	194.1		200.7		185.0		200.7
Accounts payable, accrued and other liabilities	5,010.0		5,091.9		4,871.8		5,091.9
Debt subject to compromise	5,599.3		5,599.3		5,599.3		5,599.3
Accrued interest on debt subject to compromise	28.9		28.9		28.9		28.9
Long-term debt and accrued interest	5,628.2		5,628.2		5,628.2		5,628.2
Total liabilities subject to compromise	$	10,638.2	$	10,720.1	$	10,500.0	$	10,720.1

Determination of the value at which liabilities will ultimately be settled cannot be made until the ~~Bankruptcy Court approves~~Plan becomes effective and the ~~Plan.~~Debtors emerge from bankruptcy. We will continue to evaluate the amount and classification of our pre-petition liabilities. Any adjustment to liabilities that are subject to compromise will be recognized accordingly, and therefore, the aggregate amount of liabilities subject to compromise may change.

Potential Claims

On May 10, 2019, the Debtors filed with the Bankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of each of the Debtors, subject to the assumptions filed in connection therewith. These schedules and statements may be subject to further amendment or modification after filing. Certain holders of pre-petition claims that were not governmental entities were required to file proofs of claim by the deadline for general claims, which was on July 15, 2019 (the “Bar Date”). The governmental bar date was August 26, 2019.

As of ~~June 5,~~July 24, 2020, the Debtors have received approximately ~~8,400~~8,500 proofs of claim for an amount of approximately $16.5 billion. Such amount includes duplicate claims across multiple debtor legal entities. These claims will continue to be reconciled to amounts recorded in liabilities subject to compromise in the consolidated balance sheet. Differences in amounts recorded and claims filed by creditors continue to be investigated and resolved, including through the filing of objections with the Bankruptcy Court, where appropriate. The Debtors may ask the Bankruptcy Court to disallow claims that the Debtors believe are duplicative, have been later amended or superseded, are without merit, are overstated or should be disallowed for other reasons. In addition, as a result of this process, the Debtors may identify additional liabilities that will need to be recorded or reclassified to liabilities subject to compromise. In light of the substantial number of claims filed, and expected to be filed, the claims resolution process may take considerable time to complete and likely will continue after the Debtors emerge from bankruptcy.

2022

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

2. Chapter 11 Filing, Going Concern and Other Related Matters, Continued:

Reorganization Items, Net

The Debtors have incurred and will continue to incur significant costs associated with the reorganization, primarily legal and professional fees. Subsequent to the Petition Date, these costs are being expensed as incurred and are expected to significantly affect our consolidated results of operations. Reorganization items, net incurred as a result of the Chapter 11 Cases presented separately in the accompanying consolidated statement of operations was as follows:


	Three Months Ended March 31,					Three Months Ended June 30,						Six Months Ended June 30,
(Millions)	2020			2019		2020			2019			2020			2019
Professional fees and other bankruptcy-related costs						$	47.3		$	47.7		$	92.1		$	66.7
Provision for estimated damages on rejected executory contracts						11.2			25.3			11.2			25.3
Backstop premium						60.0			—			60.0			—
Gain on write-off of net lease liabilities for rejected leases						—			(17.4		)	—			(17.4		)
Gain on vendor settlements of liabilities subject to compromise						(4.1		)	(8.5		)	(8.4		)	(8.5		)
Write-off of deferred long-term debt issuance costs	$	—		$	24.1	—			30.6			—			54.7
Write-off of original issue net discount on debt subject to compromise	—			21.6		—			5.5			—			27.1
Debtor-in-possession financing costs	—			40.2		—			2.2			—			42.4
Professional fees and other bankruptcy-related costs	44.8			19.0
Gain on vendor settlements of liabilities subject to compromise	(4.3		)	—
Reorganization items, net	$	40.5		$	104.9	$	114.4		$	85.4		$	154.9		$	190.3

Professional fees included in reorganization items, net represent fees for post-petition expenses related to the Chapter 11 Cases. The write-offs of deferred long-term debt issuance costs and original issue net discount relate to debt classified as liabilities subject to compromise. Included in debtor-in-possession financing costs for the ~~three-month period~~three and six-month periods ended ~~March 31,~~June 30, 2019 were fees of ~~$14.7~~$16.9 million that were netted against the ~~$300.0~~$500.0 million proceeds received from issuance of the DIP ~~Facility.~~Facilities, as defined in Note 3.

3. Debt:

Event of Default and Chapter 11 Cases – As discussed in Notes 2 and 12, on February 15, 2019, Judge ~~Jessie~~Jesse Furman found that Windstream Services had defaulted under the indenture governing the August 2023 Notes, which resulted in the acceleration of the August 2023 Notes, and a cross default under Windstream Services’ senior secured credit agreement governing its secured term and revolving line of credit obligations, as well as the remaining obligations under the contractual arrangement with Uniti. In addition, the acceleration of the August 2023 Notes resulted in a cross-acceleration event of default under the indentures governing Windstream Services’ other series of secured and unsecured notes.

On February 25, 2019, Windstream Holdings and all of its subsidiaries, including Windstream Services, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. The filing of the Chapter 11 Cases also constituted an event of default under our debt agreements. Due to the Chapter 11 Cases, however, our creditors’ ability to exercise remedies under our debt agreements were stayed as of the date of the Chapter 11 petition filing. In general, as debtors-in-possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Pursuant to orders entered by the Bankruptcy Court, the Bankruptcy Court after the second day motion hearing authorized us to conduct our business activities in the ordinary course.

2123

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

3. Debt, Continued:

Debt incurred by Windstream Services and its subsidiaries was as follows at:


(Millions)	March 31, 2020			December 31, 2019			June 30, 2020			December 31, 2019
Issued by Windstream Services:
Superpriority debtor-in-possession term loan facility	$	500.0		$	500.0		$	500.0		$	500.0
Superpriority debtor-in-possession revolving credit facility	400.0			—			400.0			—
Senior secured credit facility, Tranche B6 – variable rates, due March 29, 2021 (a) (b)	1,180.5			1,180.5			1,180.5			1,180.5
Senior secured credit facility, Tranche B7 – variable rates, due February 17, 2024 (b)	568.4			568.4			568.4			568.4
Senior secured credit facility, Revolving line of credit – variable rates, due April 24, 2020 (b)	802.0			802.0			802.0			802.0
Senior First Lien Notes – 8.625%, due October 31, 2025 (b)	600.0			600.0			600.0			600.0
Senior Second Lien Notes – 10.500%, due June 30, 2024 (b)	414.9			414.9			414.9			414.9
Senior Second Lien Notes – 9.000%, due June 30, 2025 (b)	802.0			802.0			802.0			802.0
Debentures and notes, without collateral:
2020 Notes – 7.750%, due October 15, 2020 (b)	78.1			78.1			78.1			78.1
2021 Notes – 7.750%, due October 1, 2021 (b)	70.1			70.1			70.1			70.1
2022 Notes – 7.500%, due June 1, 2022 (b)	36.2			36.2			36.2			36.2
2023 Notes – 7.500%, due April 1, 2023 (b)	34.4			34.4			34.4			34.4
2023 Notes – 6.375%, due August 1, 2023 (b)	806.9			806.9			806.9			806.9
2024 Notes – 8.750%, due December 15, 2024 (b)	105.8			105.8			105.8			105.8
Issued by subsidiaries of Windstream Services:
Windstream Holdings of the Midwest, Inc. – 6.75%, due April 1, 2028 (b)	100.0			100.0			100.0			100.0
Long-term debt prior to reclassification to liabilities subject to compromise	6,499.3			6,099.3			6,499.3			6,099.3
Less current portion	(900.0		)	(500.0		)	(900.0		)	(500.0		)
Less amounts reclassified to liabilities subject to compromise	(5,599.3		)	(5,599.3		)	(5,599.3		)	(5,599.3		)
Total long-term debt	$	—		$	—		$	—		$	—

(a)

Prior to the filing of the Chapter 11 Cases, if the maturity of the revolving line of credit was not extended prior to April 24, 2020, the maturity date of the Tranche B6 term loan would have become April 24, 2020; provided further, if the 2020 Notes had 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 would have become July 15, 2020.


(b)	Balances have been reclassified to liabilities subject to compromise because these obligations were under-collateralized as of the Petition Date of the Chapter 11 Cases and/or impaired based on the expected treatment of the creditor classes included in the PSA and the Plan.

2224

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

3. Debt, Continued:

Debtor-in-Possession Credit Facility - On the Petition Date, Windstream Holdings and Windstream Services entered into a commitment letter (as amended, the “DIP Commitment Letter”) dated as of February 25, 2019 with Citigroup Global Markets Inc. (together with Barclays Bank, PLC, Credit Suisse Loan Funding, Deutsche Bank Securities Inc., Goldman Sachs Bank USA and JPMorgan Chase Bank, N.A., the “Arrangers”), pursuant to which the Arrangers or their affiliates committed to provide senior secured superpriority debtor-in-possession credit facilities in an aggregate principal amount of $1.0 billion, subject to conditions described therein. In connection with the Chapter 11 Cases and in accordance with the DIP Commitment Letter, Windstream Holdings and Windstream Services entered into a Superpriority Secured Debtor-in-Possession Credit Agreement, dated as of March 13, 2019 (the “DIP Credit Agreement”), by and among Windstream Services, as the borrower (the “Borrower”), Windstream Holdings, the other guarantors party thereto, the lenders party thereto (together with such other financial institutions from time to time party thereto, the “DIP Lenders”) and Citibank, N.A., as administrative agent and collateral agent (the “Agent”). The DIP Credit Agreement provides for $1.0 billion in superpriority secured debtor-in-possession credit facilities comprising of (i) a superpriority revolving credit facility in an aggregate amount of $500.0 million (the “Revolving Facility”) and (ii) a superpriority term loan facility in an aggregate principal amount of $500.0 million (the “Term Loan Facility” and, together with the Revolving Facility, the “DIP Facilities”), subject to the terms and conditions set forth therein. In March 2020, Windstream Services borrowed $400.0 million under the Revolving Facility to assist with working capital and other general corporate purposes during the coronavirus ~~COVID-19,~~ global pandemic. Accordingly, as of ~~March 31,~~June 30, 2020, $500.0 million was outstanding under the Term Loan Facility and $400.0 million was outstanding under the Revolving Facility. Considering letters of credit of ~~$28.7~~$28.8 million and ~~$58.4~~$63.5 million reserved for potential professional fees, the amount available for borrowing under the Revolving Facility was ~~$12.9~~$7.7 million as of ~~March 31,~~June 30, 2020.

The proceeds of loans extended under the DIP Facilities will be used for purposes permitted by orders of the Bankruptcy Court, including (i) for working capital and other general corporate purposes (ii) to pay transaction costs, professional fees and other obligations and expenses incurred in connection with the DIP Facilities, the Chapter 11 Cases and the transactions contemplated thereunder, and (iii) to pay adequate protection expenses, if any, to the extent set forth in any order entered by the Bankruptcy Court.

The maturity date of the DIP Facilities is February 26, 2021. Loans under the Term Loan Facility and the Revolving Facility will bear interest, at the option of the Borrower, at (1) 1.50 percent plus a base rate of the highest of (i) Citibank, N.A.’s base rate, (ii) the Federal funds effective rate plus 1/2 of 1 percent and (iii) the one-month LIBOR plus 1.00 percent per annum; or (2) 2.50 percent plus LIBOR. From and after the Effective Date, a non-refundable unused commitment fee will accrue at the rate of 0.50 percent per annum on the daily average unused portion of the Revolving Facility (whether or not then available).

The DIP Credit Agreement includes usual and customary negative covenants for debtor-in-possession loan agreements of this type, including covenants limiting Windstream Holdings’ and its subsidiaries’ ability to, among other things, incur additional indebtedness, create liens on assets, make investments, loans or advances, engage in mergers, consolidations, sales of assets and acquisitions, pay dividends and distributions and make payments in respect of junior or pre-petition indebtedness, in each case subject to customary exceptions for debtor-in-possession loan agreements of this type.

The DIP Credit Agreement also includes certain customary representations and warranties, affirmative covenants and events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, certain events under ERISA, unstayed judgments in favor of a third party involving an aggregate liability in excess of $25.0 million, change of control, specified governmental actions having a material adverse effect or condemnation or damage to a material portion of the collateral. Certain bankruptcy-related events are also events of default, including, but not limited to, the dismissal by the Bankruptcy Court of any of the Chapter 11 Cases, the conversion of any of the Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code, the appointment of a trustee pursuant to Chapter 11 of the Bankruptcy Code, the final order approving the DIP Facilities failing to have been entered within 60 days after the Petition Date and certain other events related to the impairment of the DIP Lenders’ rights or liens granted under the DIP Credit Agreement.

The foregoing description of the DIP Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the DIP Credit Agreement.

2325

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

3. Debt, Continued:

Senior Secured Credit Facility - Prior to the filing of the Chapter 11 Cases, the amended credit facility provided Windstream Services the ability 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 could have requested extensions of the maturity date under any of its existing revolving or term loan facilities. Interest rates applicable to the Tranche B7 term loan were, at Windstream Services’ option, equal to either a base rate plus a margin of 2.25 percent per annum or LIBOR plus a margin of 3.25 percent per annum; however, LIBOR at no time could have been less than 0.75 percent. Interest on loans under Tranche B6 were equal to LIBOR plus a margin of 4.00 percent per annum, with LIBOR subject to a 0.75 percent floor. The Tranche B6 and B7 term loans were subject to quarterly amortization in an aggregate amount of approximately 0.25 percent of the initial principal amount of the loans, with the remaining balance payable at maturity.

Revolving Line of Credit - Prior to the filing of the Chapter 11 Cases, under the amended senior secured credit facility, Windstream Services had the ability to obtain revolving loans and issue up to $50.0 million of letters of credit, which upon issuance reduced the amount available for other extensions of credit. Accordingly, the total amount outstanding under the letters of credit and the indebtedness incurred under the revolving line of credit could not exceed $1,250.0 million. Borrowings under the revolving line of credit were used for permitted acquisitions, working capital and other general corporate purposes of Windstream Services and its subsidiaries. Windstream Services paid a commitment fee on the unused portion of the commitments under the revolving credit facility that ranged 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 were not subject to interim amortization and such loans were 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 were, 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.

Prior to the filing of the Chapter 11 Cases, Windstream Services borrowed $155.0 million under the revolving line of credit in its senior secured credit facility and retired $370.0 million of these borrowings during the period January 1, 2019 to February 24, 2019. During the first ~~three~~six months of 2019, the variable interest rate on the revolving line of credit ranged from 4.38 percent to 8.50 percent with a weighted average rate on amounts outstanding during the period of ~~5.89~~7.23 percent.

Following the filing of the Chapter 11 Cases, interest rates applicable to the revolving line of credit, Tranche B6 term loan and Tranche B7 term loan were converted from LIBOR to the alternate base rate, the effects of which increased interest rates 2.00 percent for borrowings under the senior secured credit facility. The Bankruptcy Court also approved an additional 2.00 percent default rate applicable to borrowings under the senior secured credit facility. As of ~~March 31,~~June 30, 2020, interest rates applicable to the revolving line of credit, Tranche B6 term loan and Tranche B7 term loan were 8.50 percent, 10.50 percent and 9.75 percent, respectively. All payments to holders of debt obligations under the senior secured credit facility, senior first lien notes and Midwest Bonds remitted subsequent to the filing of the Chapter 11 Cases have been classified as interest expense in the accompanying consolidated statements of operations.

Interest Expense

Interest expense was as follows:


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
(Millions)	2020			2019			2020			2019			2020			2019
Interest expense - debt	$	76.1		$	93.8		$	69.1		$	82.9		$	145.2		$	176.7
Interest expense - leaseback of real estate contributed to pension plan	1.5			1.6			1.6			1.5			3.1			3.1
Impact of interest rate swaps	(3.3		)	(2.9		)	(3.3		)	(3.0		)	(6.6		)	(5.9		)
Interest on finance leases and other	0.8			0.9			0.6			1.4			1.4			2.3
Less capitalized interest expense	(2.0		)	(1.5		)	(2.0		)	(2.0		)	(4.0		)	(3.5		)
Total interest expense	$	73.1		$	91.9		$	66.0		$	80.8		$	139.1		$	172.7

2426

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

4. Derivatives:

Prior to the filing of the Chapter 11 Cases, Windstream Services was party to 6 pay fixed, receive variable interest rate swap agreements. Windstream Services had designated each of the 6 swaps as cash flow hedges of the interest rate risk inherent in borrowings outstanding under its senior secured credit facility due to changes in the LIBOR benchmark interest rate. All of the swaps hedged the probable variable cash flows which extended up to one year beyond the maturity of certain components of Windstream Services’ variable rate debt. Windstream Services expected to extend or otherwise replace those components of its debt with variable rate debt.

Prior to the filing of the Chapter 11 Cases, the variable rate received on the 6 swaps was based on one-month LIBOR and reset on the seventeenth day of each month. The maturity date for all 6 interest rate swap agreements was October 17, 2021 and the total notional value of the swaps was $1,375.0 million. The average fixed interest paid on the swaps ranged from 1.1275 percent to 2.984 percent. All of the interest rate swaps were recognized at fair value as either assets or liabilities, depending on the rights or obligations under the related contracts. Due to previous refinancing transactions, Windstream Services had de-designated certain interest rate swaps and froze the accumulated net losses in accumulated other comprehensive income related to those swaps. The frozen balance is amortized from accumulated other comprehensive income to interest expense over the remaining life of the original swaps.

The agreements with each of the derivative counterparties contained 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 be required to net settle any outstanding derivative liability positions with its counterparties at the swap termination value, including accrued interest and excluding any credit valuation adjustment to measure non-performance risk. Following the adverse court ruling from Judge Furman, each of the bank counterparties exercised their rights to terminate the interest rate swap agreements. Accordingly, Windstream Services ceased the application of hedge accounting for all 6 interest rate swaps, effective February 15, 2019. For those swaps in an asset position at the date of termination as determined by the counterparty, Windstream Services received cash proceeds of $9.6 million to settle the derivative contracts. For swaps in a liability position at the date of termination as determined by the counterparty, the interest rate swaps were adjusted to their termination value of $6.1 million and reclassified as liabilities subject to compromise in the accompanying consolidated balance sheets.

Upon the discontinuance of hedge accounting, Windstream Services concluded that it was still probable that the hedged transactions (future interest payments) will occur. As a result, the accumulated net gains related to the interest rate swaps recorded in accumulated other comprehensive income as of February 15, 2019 were frozen and are being amortized from accumulated other comprehensive income to interest expense over the contractual remaining life of the interest rate swaps.

Set forth below is information related to interest rate swap agreements:


(Millions, except for percentages)	March 31, 2020		December 31, 2019		June 30, 2020		December 31, 2019
De-designated portion, unamortized value:
Liabilities subject to compromise	$	6.1	$	6.1	$	6.1	$	6.1
Accumulated other comprehensive income	$	20.3	$	23.6	$	17.0	$	23.6

Changes in derivative instruments were as follows for the ~~three-month~~six-month period ended ~~March 31:~~June 30:


(Millions)	2020			2019			2020			2019
Changes in fair value, net of tax	$	—		$	(2.4	)	$	—		$	(2.4	)
Amortization of net unrealized gains on de-designated interest rate swaps, net of tax	$	(2.4	)	$	(0.9	)	$	(4.9	)	$	(3.1	)

As of ~~March 31,~~June 30, 2020, Windstream Services expects to recognize net gains of $9.8 million, net of taxes, in interest expense during the next twelve months related to the unamortized value of the de-designated portion of its terminated interest rate swap agreements.

2527

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

5. 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 determination of fair value of 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~~six-month period ended ~~March 31,~~June 30, 2020 requiring our non-financial assets and liabilities to be subsequently recognized at fair value. Our financial instruments consist primarily of cash, cash equivalents, restricted cash, accounts receivable, accounts payable, and debt. These financial instruments are measured at fair value on a recurring basis. Except for debt, the carrying amount of our other financial instruments were estimated by management to approximate fair value due to the relatively short period of time to maturity for those instruments. In calculating the fair value of Windstream Services’ 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.

The fair value of debt was as follows:


(Millions)	March 31, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Not Recorded at Fair Value in the Financial Statements: (a)
Debt, including current portion - Level 2:
Included in current portion of long-term debt	$	752.7	$	500.0	$	766.4	$	500.0
Included in liabilities subject to compromise	$	2,045.6	$	3,676.1	$	2,051.1	$	3,676.1


(a)	Recognized at carrying value of $6,499.3 million and $6,099.3 million in debt, including current portion, and liabilities subject to compromise and excluding unamortized debt issuance costs, in the accompanying consolidated balance sheets as of ~~March 31,~~June 30, 2020 and December 31, 2019, respectively.

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). There were no transfers within the fair value hierarchy during the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2020.

2628

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

6. Revenues:

We earn revenue from contracts with customers, primarily through the provision of telecommunications and other services and through the sale of equipment to customers and contractors. We also earn revenues from leasing arrangements, federal and state universal service funds and other regulatory-related sources and activities.

Accounts Receivable – Accounts receivable principally consist of amounts billed and currently due from customers and are generally unsecured and due within 30 days. The amounts due are stated at their net estimated realizable value. We maintain an allowance for credit losses to provide for the estimated amount of receivables that will not be collected. As discussed in Note 1, the allowance is based upon an assessment of historical collection experience and the age of outstanding receivables. Concentration of credit risk with respect to accounts receivable is limited because a large number of geographically diverse customers make up our customer base. Due to varying customer billing cycle cut-off, we must estimate service revenues earned but not yet billed at the end of each reporting period. Included in accounts receivable are unbilled revenues related to communication services and product sales of ~~$30.9~~$31.6 million and $33.9 million at ~~March 31,~~June 30, 2020 and December 31, 2019, respectively.

Contract Balances – Contract assets include unbilled amounts, which result when revenue recognized exceeds the amount billed to the customer and the right to payment is not just subject to the passage of time. Contract assets principally consist of discounts and promotional credits given to customers. The current and noncurrent portions of contract assets are included in prepaid expenses and other and other assets, respectively, in the accompanying consolidated balance sheets.

Contract liabilities consist of services billed in excess of revenue recognized. The changes in contract liabilities are primarily related to customer activity associated with services billed in advance, the receipt of cash payments and the satisfaction of our performance obligations. We classify these amounts as current or noncurrent based on the timing of when we expect to recognize revenue. The current portion of contract liabilities is included in advance payments while the noncurrent portion is included in other liabilities or liabilities subject to compromise.

Contract assets and liabilities from contracts with customers were as follows at:


(Millions)	March 31, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Contract assets (a)	$	36.9	$	32.8	$	45.0	$	32.8
Contract liabilities (b)	$	159.9	$	162.3	$	159.4	$	162.3
Revenues recognized included in the opening contract liability balance (c)	$	125.3	$	156.8	$	136.6	$	161.6


(a)	Included ~~$23.3~~$26.3 million and $20.8 million in prepaid expense and other and ~~$13.6~~$18.7 million and $12.0 million in other assets as of ~~March 31,~~June 30, 2020 and December 31, 2019, respectively.


(b)	Included ~~$148.5~~$145.0 million and $148.0 million in advance payments, ~~$9.7~~$10.8 million and $9.9 million in other liabilities, and ~~$1.7~~$3.6 million and $4.4 million in liabilities subject to compromise as of ~~March 31,~~June 30, 2020 and December 31, 2019, respectively.


(c)	Represents revenues recognized from the contract liability balance as of the beginning of the periods ended ~~March 31,~~June 30, 2020 and 2019, respectively.

Remaining Performance Obligations – Our remaining performance obligations represent services we are required to provide to customers under bundled or discounted arrangements, which are satisfied as services are provided over the contract term. Certain contracts provide customers the option to purchase additional services or usage-based services. The fees related to the additional services or usage-based services are recognized when the customer exercises the option, typically on a month-to-month basis. In determining the transaction price allocated, we do not include these non-recurring fees and estimates for usage, nor do we consider arrangements with an original expected duration of less than one year.

Remaining performance obligations reflect recurring charges billed, adjusted for discounts and promotional credits and revenue adjustments. At ~~March 31,~~June 30, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately ~~$2.5~~$2.4 billion for contracts with original expected durations of more than one year remaining. We expect to recognize approximately 3322 percent, 3134 percent and 2024 percent of our remaining performance obligations as revenue during the remainder of 2020, 2021 and 2022, respectively, with the remaining balance thereafter.

2729

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

6. Revenues, Continued:

Revenue by Category – We disaggregate our revenue from contracts with customers by product type for each of our segments, as we believe it best depicts the nature, amount and timing of our revenue. Revenues recognized from contracts with customers by customer and product type ~~for the three-month period ended March 31, 2020~~ were as follows:

(Millions) Kinetic Enterprise Wholesale Total
Revenue from contracts with customers:
Type of service:
High-speed Internet bundles $ 240.1
$ —
$ —
$ 240.1
Voice-only 23.3
—
—
23.3
Video and miscellaneous 7.9
—
—
7.9
Core (a) —
249.4
—
249.4
Strategic (b) —
63.9
—
63.9
Legacy (c) —
104.7
—
104.7
Small business 71.1
—
—
71.1
Wholesale (d) 58.9
—
66.2
125.1
Switched access (e) 5.4
—
5.6
11.0
Other (f) —
111.9
—
111.9
Service revenues from contracts with
customers
406.7
529.9
71.8
1,008.4
Product and fiber sales 13.7
7.6
0.7
22.0
Total revenue from contracts with
customers
420.4
537.5
72.5
1,030.4
Other service revenues (g) 98.1
59.8
12.6
170.5
Total revenues and sales $ 518.5
$ 597.3
$ 85.1
$ 1,200.9



	Three Months Ended June 30, 2020
(Millions)	Kinetic		Enterprise		Wholesale		Total
Revenue from contracts with customers:
Type of service:
High-speed Internet bundles	$	242.3	$	—	$	—	$	242.3
Voice-only	22.7		—		—		22.7
Video and miscellaneous	6.6		—		—		6.6
Core (a)	—		238.9		—		238.9
Strategic (b)	—		66.1		—		66.1
Legacy (c)	—		103.2		—		103.2
Small business	68.9		—		—		68.9
Wholesale (d)	57.4		—		66.5		123.9
Switched access (e)	5.8		—		4.8		10.6
Other (f)	—		112.6		—		112.6
Service revenues from contracts with customers	403.7		520.8		71.3		995.8
Product and fiber sales	14.3		5.2		1.2		20.7
Total revenue from contracts with customers	418.0		526.0		72.5		1,016.5
Other service revenues (g)	98.1		56.5		14.2		168.8
Total revenues and sales	$	516.1	$	582.5	$	86.7	$	1,185.3

2830

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

6. Revenues, Continued:



	Six Months Ended June 30, 2020
(Millions)	Kinetic		Enterprise		Wholesale		Total
Revenue from contracts with customers:
Type of service:
High-speed Internet bundles	$	482.4	$	—	$	—	$	482.4
Voice-only	46.0		—		—		46.0
Video and miscellaneous	14.5		—		—		14.5
Core (a)	—		488.3		—		488.3
Strategic (b)	—		130.0		—		130.0
Legacy (c)	—		207.9		—		207.9
Small business	140.0		—		—		140.0
Wholesale (d)	116.3		—		132.7		249.0
Switched access (e)	11.2		—		10.4		21.6
Other (f)	—		224.5		—		224.5
Service revenues from contracts with customers	810.4		1,050.7		143.1		2,004.2
Product and fiber sales	28.0		12.8		1.9		42.7
Total revenue from contracts with customers	838.4		1,063.5		145.0		2,046.9
Other service revenues (g)	196.2		116.3		26.8		339.3
Total revenues and sales	$	1,034.6	$	1,179.8	$	171.8	$	2,386.2

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

6. Revenues, ~~recognized from contracts with customers by customer and product type for the three-month period ended March 31, 2019 were as follows:~~Continued:


									Three Months Ended June 30, 2019
(Millions)	Kinetic		Enterprise		Wholesale		Total		Kinetic		Enterprise		Wholesale		Total
Revenue from contracts with customers:
Type of service:
High-speed Internet bundles	$	239.9	$	—	$	—	$	239.9	$	239.6	$	—	$	—	$	239.6
Voice-only	28.6		—		—		28.6		28.1		—		—		28.1
Video and miscellaneous	10.1		—		—		10.1		10.1		—		—		10.1
Core (a)	—		309.4		—		309.4		—		296.9		—		296.9
Strategic (b)	—		48.8		—		48.8		—		54.8		—		54.8
Legacy (c)	—		132.6		—		132.6		—		125.8		—		125.8
Small business	77.2		—		—		77.2		75.6		—		—		75.6
Wholesale (d)	51.5		—		73.8		125.3		51.6		—		69.8		121.4
Switched access (e)	6.3		—		7.5		13.8		6.2		—		7.6		13.8
Other (f)	—		140.5		—		140.5		—		134.8		—		134.8
Service revenues from contracts with customers	413.6		631.3		81.3		1,126.2		411.2		612.3		77.4		1,100.9
Product and fiber sales	8.0		10.4		—		18.4		8.0		8.3		—		16.3
Total revenue from contracts with customers	421.6		641.7		81.3		1,144.6		419.2		620.6		77.4		1,117.2
Other service revenues (g)	100.0		64.7		11.3		176.0		97.5		61.1		10.7		169.3
Total revenues and sales	$	521.6	$	706.4	$	92.6	$	1,320.6	$	516.7	$	681.7	$	88.1	$	1,286.5

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

6. Revenues, Continued:



	Six Months Ended June 30, 2019
(Millions)	Kinetic		Enterprise		Wholesale		Total
Revenue from contracts with customers:
Type of service:
High-speed Internet bundles	$	479.5	$	—	$	—	$	479.5
Voice-only	56.7		—		—		56.7
Video and miscellaneous	20.2		—		—		20.2
Core (a)	—		606.3		—		606.3
Strategic (b)	—		103.6		—		103.6
Legacy (c)	—		258.4		—		258.4
Small business	152.8		—		—		152.8
Wholesale (d)	103.1		—		143.6		246.7
Switched access (e)	12.5		—		15.1		27.6
Other (f)	—		275.3		—		275.3
Service revenues from contracts with customers	824.8		1,243.6		158.7		2,227.1
Product and fiber sales	16.0		18.7		—		34.7
Total revenue from contracts with customers	840.8		1,262.3		158.7		2,261.8
Other service revenues (g)	197.5		125.8		22.0		345.3
Total revenues and sales	$	1,038.3	$	1,388.1	$	180.7	$	2,607.1


(a)	Core revenues consist of dynamic Internet protocol, dedicated Internet access, multi-protocol label switching services, integrated voice and data, long distance, and managed services.


(b)	Strategic revenues consist of Software Defined Wide Area Network (“SD-WAN”), Unified Communications as a Service (“UCaaS”), OfficeSuite©, and associated network access products and services.


(c)	Legacy revenues consist of Time Division Multiplexing (“TDM”) voice and data services.


(d)	Wholesale revenues primarily include revenues from providing special access circuits, fiber connections, data transport and wireless backhaul services.


(e)	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 use of our network facilities.


(f)	Other revenues primarily consist of administrative service fees, subscriber line charges, and non-recurring usage-based long-distance revenues.


(g)	Other service revenues primarily include end user surcharges, CAF – Phase II funding, frozen federal USF, state USF, and access recovery mechanism (“ARM”) support and lease revenue.

2933

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

6. Revenues, Continued:

Deferred Commissions and Other Costs to Fulfill a Contract – Direct incremental costs of obtaining a contract, consisting of sales commissions and certain costs associated with activating services, including costs to develop customized solutions and provision services, are deferred and recognized as an operating expense using a portfolio approach over the estimated life of the customer, which ranges from 18 to 36 months.

Determining the amount of costs to fulfill requires judgment. In determining costs to fulfill, consideration is given to periodic time studies, management estimates and statistics from internal information systems.

Collectively, deferred commissions and other costs to fulfill a contract are referred to as deferred contract costs. We classify deferred contract costs as current or noncurrent based on the timing of when we expect to recognize the expense. The current and noncurrent portions of deferred contract costs are included in prepaid expenses and other and other assets, respectively, in the accompanying consolidated balance sheets. Deferred contract costs totaled ~~$54.4~~$55.5 million at ~~March 31,~~June 30, 2020, of which ~~$36.2~~$37.6 million and ~~$18.2~~$17.9 million were included in prepaid expenses and other and other assets, respectively. At December 31, 2019, deferred contract costs were $53.8 million, of which $34.9 million and $18.9 million were included in prepaid expenses and other and other assets, respectively. Amortization of deferred contract costs was ~~$11.4~~$11.8 million and $23.2 million for the ~~three-month period~~three and six-month periods ended ~~March 31,~~June 30, 2020, compared to ~~$9.9~~$10.0 million and $19.9 million for the ~~three-month period~~three and six-month periods ended ~~March 31,~~June 30, 2019. There was no impairment loss recognized for the ~~three-month~~three and six-month periods ended ~~March 31,~~June 30, 2020 and 2019, related to deferred contract costs.

7. Employee Benefit Plans:

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.

The components of pension benefit ~~income,~~(income) expense, including provision for executive retirement agreements, were as follows:


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
(Millions)	2020			2019			2020			2019			2020			2019
Benefits earned during the period (a)	$	1.0		$	0.6		$	1.0		$	0.9		$	2.0		$	1.5
Interest cost on benefit obligation (b)	9.4			10.9			9.4			11.1			18.8			22.0
Net actuarial loss (b)							2.9			7.7			2.9			7.7
Amortization of prior service credit (b)	(0.2		)	(0.3		)	(0.2		)	(0.2		)	(0.4		)	(0.5		)
Expected return on plan assets (b)	(14.7		)	(12.4		)	(14.6		)	(12.4		)	(29.3		)	(24.8		)
Net periodic benefit income	$	(4.5	)	$	(1.2	)
Net periodic benefit (income) expense							$	(1.5	)	$	7.1		$	(6.0	)	$	5.9


(a)	Included in cost of services and selling, general and administrative expense.


(b)	Included in other income (expense), net.

For 2020, the expected employer contributions for pension benefits consists of $52.8 million to the qualified pension plan to satisfy our remaining 2019 and 2020 funding requirements and $0.9 million necessary to fund the expected benefit payments of our unfunded supplemental executive retirement pension plans to avoid certain benefit restrictions. During the first ~~three months~~quarter of 2020, we made our required quarterly employer contributions totaling $3.4 million in cash. The remaining required quarterly and annual employer contributions due in 2020 will be funded no later than December 31, 2020, as permitted under certain relief provisions included in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Comparatively in the first ~~three~~six months of 2019, we made our required quarterly employer contributions to the qualified pension plan of ~~$3.0~~$6.4 million in cash.

3034

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

7. Employee Benefit Plans, 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. Excluding amounts capitalized, we recorded expenses of ~~$7.3~~$6.4 million and $13.7 million in the ~~three-month period~~three and six-month periods ended ~~March 31,~~June 30, 2020, as compared to ~~$7.0~~$6.5 million and $13.5 million for the same ~~period~~periods in 2019 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. ~~In March~~Effective January 1, 2020, the 401(k) plan was amended such that the employer matching contribution is calculated and funded in cash to the plan each pay period with an annual true-up to be made as soon as administratively possible after the end of the year. During the first six months of 2020, we contributed $12.6 million in cash to fund the required 2020 employer matching contributions to date and we also contributed $25.7 million in cash to the plan in March 2020 for the 2019 annual matching contribution. We intend to fund the remaining employer matching contributions due in 2020 using cash. Comparatively, in March 2019, we contributed $26.4 million in cash to the plan for the 2018 annual matching contribution. ~~We intend to fund the remaining 2020 contributions using cash.~~

8. Restructuring and Other Charges:

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 and the balancing of our workforce based on the current needs of our customers. Severance and other employee benefit-related charges are included in restructuring charges. Other charges primarily consist of incremental costs incurred in integrating the operations of an acquired business.

During the first ~~three months~~half of 2020 and 2019, we completed restructurings of our workforce to improve our overall cost structure and gain operational efficiencies. In undertaking these efforts, we eliminated approximately ~~315~~525 positions and incurred related severance and employee benefit costs of ~~$6.4~~$12.0 million in the first ~~quarter~~half of 2020 and we eliminated approximately ~~275~~425 positions and incurred ~~$10.5~~$16.0 million in severance and employee benefit costs in the first ~~quarter~~half of 2019.

A summary of restructuring and other charges recorded was as follows:


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
(Millions)	2020		2019		2020		2019		2020		2019
Restructuring charges	$	6.4	$	10.5	$	5.6	$	6.1	$	12.0	$	16.6
Costs related to merger with EarthLink (a)	—		3.4		—		0.6		—		4.0
Other	—		1.2		—		0.2		—		1.4
Total restructuring and other charges	$	6.4	$	15.1	$	5.6	$	6.9	$	12.0	$	22.0


(a)	~~This amount included~~For the three and six-month periods ended June 30, 2019, these amounts include severance and employee benefit costs for EarthLink employees terminated after the acquisition of ~~$2.9~~$0.4 million and $3.3 million, respectively, and other miscellaneous expenses of ~~$0.5 million.~~$0.2 million and $0.7 million, respectively.

After giving consideration to tax benefits on deductible items, restructuring and other charges increased our reported net loss by ~~$4.8~~$4.2 million and $9.0 million for the ~~three-month period~~three and six-month periods ended ~~March 31,~~June 30, 2020, as compared to ~~$11.3~~$5.2 million and $16.5 million for the same ~~period~~periods in 2019.

The following is a summary of the activity related to the liabilities associated with restructuring activities at ~~March 31:~~June 30, 2020:


(Millions)
Balance at December 31, 2019	$	8.1		$	8.1
Severance and benefit costs incurred in period	6.4			12.0
Cash outlays during the period	(8.0		)	(14.7		)
Balance at March 31, 2020	$	6.5
Balance at June 30, 2020				$	5.4

Payments of these liabilities will be funded through operating cash flows.

3135

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

9. Accumulated Other Comprehensive Income:

Accumulated other comprehensive income balances, net of tax, were as follows:


(Millions)	March 31, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Pension and postretirement plans	$	4.7	$	5.0	$	3.8	$	5.0
Unrealized net gains on de-designated interest rate swaps	15.2		17.6		12.7		17.6
Accumulated other comprehensive income	$	19.9	$	22.6	$	16.5	$	22.6

Changes in accumulated other comprehensive income balances, net of tax, were as follows:


(Millions)	Unrealized Net Gains on Interest Rate Swaps			Pension and Postretirement Plans			Total			Unrealized Net Gains on Interest Rate Swaps			Pension and Postretirement Plans			Total
Balance at December 31, 2019	$	17.6		$	5.0		$	22.6		$	17.6		$	5.0		$	22.6
Other comprehensive income before reclassifications										—			(0.7		)	(0.7		)
Amounts reclassified from other accumulated comprehensive income (a)	(2.4		)	(0.3		)	(2.7		)	(4.9		)	(0.5		)	(5.4		)
Balance at March 31, 2020	$	15.2		$	4.7		$	19.9
Balance at June 30, 2020										$	12.7		$	3.8		$	16.5


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

Reclassifications out of accumulated other comprehensive income were as follows:


		(Millions) Amount Reclassified from Accumulated Other Comprehensive Income									(Millions) Amount Reclassified from Accumulated Other Comprehensive Income
Details about Accumulated Other Comprehensive Income Components			Three Months Ended March 31,							Affected Line Item in the Consolidated Statements of Operations	Three Months Ended June 30,						Six Months Ended June 30,							Affected Line Item in the Consolidated Statements of Operations
			2020			2019					2020			2019			2020			2019
Interest rate swaps:
Amortization of net unrealized gains on de-designated interest rate swaps	Amortization of net unrealized gains on de-designated interest rate swaps		$	(3.3	)	$	(1.2	)		Interest expense	$	(3.3	)	$	(3.0	)	$	(6.6	)	$	(4.2	)		Interest expense
			(3.3		)	(1.2		)		Loss before income taxes	(3.3		)	(3.0		)	(6.6		)	(4.2		)		Loss before income taxes
			0.9			0.3				Income tax (expense) benefit	0.8			0.8			1.7			1.1				Income tax (expense) benefit
			(2.4		)	(0.9		)		Net loss	(2.5		)	(2.2		)	(4.9		)	(3.1		)		Net loss
Pension and postretirement plans:
Amortization of net actuarial loss											0.1			—			0.1			—
Amortization of prior service credits	Amortization of prior service credits		(0.3		)	(0.4		)	(a)		(0.3		)	(0.3		)	(0.6		)	(0.7		)	(a)
			(0.3		)	(0.4		)		Loss before income taxes	(0.2		)	(0.3		)	(0.5		)	(0.7		)		Loss before income taxes
			—			0.1				Income tax (expense) benefit	—			—			—			0.1				Income tax (expense) benefit
			(0.3		)	(0.3		)		Net loss	(0.2		)	(0.3		)	(0.5		)	(0.6		)		Net loss
Total reclassifications for the period, net of tax	Total reclassifications for the period, net of tax		$	(2.7	)	$	(1.2	)		Net loss	$	(2.7	)	$	(2.5	)	$	(5.4	)	$	(3.7	)		Net loss


(a)	Included in the computation of net periodic benefit expense for the period.

3236

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

10. Loss per Share:

We compute basic loss per share by dividing net loss applicable to common shares by the weighted average number of common shares outstanding during each period.

A reconciliation of net loss and number of shares used in computing basic and diluted loss per share was as follows:


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
(Millions, except per share amounts)	2020			2019			2020			2019			2020			2019
Basic and diluted loss per share:
Numerator:
Net loss attributable to common shares	$	(101.6	)	$	(2,310.3	)	$	(162.4	)	$	(544.1	)	$	(264.0	)	$	(2,854.4	)
Denominator:
Basic and diluted shares outstanding
Weighted average basic and diluted shares outstanding	42.7			42.6			42.7			42.6			42.7			42.6
Basic and diluted loss per share:
Net loss		($2.38	)		($54.26	)		($3.80	)		($12.76	)		($6.18	)		($66.98	)

For the ~~three-month period~~three and six-month periods ended ~~March 31,~~June 30, 2020 and 2019, we excluded from the computation of diluted shares the effect of restricted stock units and options to purchase shares of our common stock because their inclusion would have an anti-dilutive effect due to our reported net losses. We had 0.3 million restricted stock units and 0.8 million stock options outstanding as of ~~March 31,~~June 30, 2020, compared to ~~1.0~~0.5 million restricted stock units and ~~1.3~~1.0 million stock options outstanding at ~~March 31,~~June 30, 2019.

11. Segment Information:

~~Effective April 1, 2019, we reorganized our~~Our business operations are organized into three segments: Kinetic, Enterprise and Wholesale. The Kinetic business unit primarily serves customers in markets in which we are the incumbent local exchange carrier (“ILEC”) and provides services over network facilities operated by us. The Enterprise and Wholesale business units primarily serve customers in markets in which we are a competitive local exchange carrier (“CLEC”) and provide services over network facilities primarily leased from other carriers. As a result of this reorganization, we improved the alignment of our customer base within our ILEC and CLEC markets. The significant changes to our previous segment structure included: (1) shifting certain business customers with operations in ILEC-only markets from the Enterprise segment to the Consumer & Small Business segment, which was renamed Kinetic; (2) shifting governmental and resale customers from Wholesale to Enterprise; (3) shifting wholesale customers and related services in ILEC markets from Wholesale to Kinetic; and (4) allocating certain corporate expenses, primarily property taxes, to the segments. Prior period segment information has been revised to reflect these changes for all periods presented.

For financial reporting purposes, our segments consist of:

•

Kinetic - We manage as one business our residential, business, and wholesale operations in those markets in which we are the ILEC due to the similarities with respect to service offerings, marketing strategies and customer service delivery. Residential customers can bundle voice, high-speed Internet and video services, to provide one convenient billing solution and receive bundle discounts. We offer a wide range of advanced Internet, voice, and web conferencing products to our business customers. 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 business customer needs.

Products and services offered to business customers include traditional local and long-distance voice services, high-speed Internet services, and value-added services such as security and online back-up, which are delivered primarily over network facilities operated by us. We offer consumer video services through relationships with DirecTV and Dish Network LLC, and we also own and operate cable television franchises in some of our service areas. We offer Kinetic, a premium broadband and video entertainment offering in several of our markets.

~~(DEBTOR-IN-POSSESSION)~~

~~NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS~~

~~_____~~

~~11. Segment Information, Continued:~~

Our wholesale services are focused on providing network bandwidth to other telecommunications carriers and network operators. These services include special access services, which provide access and network transport services to end users including Ethernet access up to 2 Gbps, traditional TDM private line access and transport. Wholesale services also include fiber-to-the-tower connections to support the wireless backhaul market, and both Ethernet/dedicated Internet connections and broadband access services. The combination of these services ~~allow~~allows Kinetic wholesale customers to provide voice and data services to their customers through the use of our network or in combination with their own networks.

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

11. Segment Information, Continued:

•

Enterprise - Products and services offered to our business customers include integrated voice and data services, which deliver voice and broadband services over a single Internet connection, data transport services, multi-site networking services which provide a fast and private connection between business locations, SD-WAN, which optimizes application performance, UCaaS, a next generation voice solution, 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.

•

Wholesale - Our wholesale operations are focused on providing network bandwidth to other telecommunications carriers, network operators, and content providers within CLEC markets. These services include network transport services to end users, Ethernet and Wave transport up to 100 Gbps, and dark fiber and colocation services. Wholesale services also include fiber-to-the-tower connections in CLEC markets to support the wireless backhaul market. In addition, we offer voice and data carrier services to other communications providers and to larger-scale purchasers of network capacity. The combination of these services ~~allow~~allows wholesale customers to provide voice and data services to their customers through the use of our network or in combination with their own networks.

We evaluate performance of the segments based on contribution margin or 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. Segment revenues also include revenue from federal and state USF, CAF – Phase II support, funds received from federal access recovery mechanisms, revenues from providing switched access services, including usage-based revenues from long-distance companies and other carriers for access to our network to complete long-distance calls, reciprocal compensation received from wireless and other local connecting carriers for the use of network facilities, certain surcharges assessed to our customers, including billings for our required contributions to federal and state USF programs, and product sales to contractors. There are no differences between total segment revenues and sales and total consolidated revenues and sales.

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. Operating expenses associated with regulatory and other revenues have also been assigned to our segments. We do not assign depreciation and amortization expense, goodwill impairment, restructuring and other charges, straight-line expense under the contractual arrangement with Uniti, share-based compensation, ~~business transformation expenses, and~~ spend commitment penalties incurred under certain carrier discount plans, and reserves for funding denials from Universal Service Administrative Company (“USAC”) to our segments because these expenses are centrally managed and/or are not monitored by or reported to the chief operating decision maker (“CODM”) by segment. Similarly, certain costs related to ~~centrally-managed~~centrally managed administrative functions, such as accounting and finance, information technology, network management, legal and human resources, are not assigned to our segments. Interest expense has also been excluded from segment operating results because we manage our financing activities on a total company basis and have not assigned any debt or lease obligations to the segments. Other income (expense), net, reorganization items, net, and income tax (expense) benefit are not monitored as a part of our segment operations and, therefore, these items also have been excluded from our segment operating results.

~~(DEBTOR-IN-POSSESSION)~~

~~NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS~~

~~_____~~

~~11. Segment Information, Continued:~~

Capital expenditures for network enhancements and information technology-related projects benefiting Windstream as a whole are presented as corporate/shared capital expenditures. Asset information by segment is not monitored or reported to the CODM and therefore has not been presented. Substantially 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.

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

11. Segment Information, Continued:

The following table summarizes our segment results:


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
(Millions)	2020		2019		2020		2019		2020		2019
Kinetic:
Revenues and sales	$	518.5	$	521.6	$	516.1	$	516.7	$	1,034.6	$	1,038.3
Costs and expenses	216.7		212.8		225.6		213.4		442.3		426.2
Segment income	$	301.8	$	308.8	$	290.5	$	303.3	$	592.3	$	612.1
Enterprise:
Revenues and sales	$	597.3	$	706.4	$	582.5	$	681.7	$	1,179.8	$	1,388.1
Cost and expenses	484.2		573.8		463.6		542.5		947.8		1,116.3
Segment income	$	113.1	$	132.6	$	118.9	$	139.2	$	232.0	$	271.8
Wholesale:
Revenues and sales	$	85.1	$	92.6	86.7		88.1		$	171.8	$	180.7
Costs and expenses	22.7		29.9		24.7		23.1		47.4		53.0
Segment income	$	62.4	$	62.7	62.0		65.0		$	124.4	$	127.7
Total segment revenues and sales	$	1,200.9	$	1,320.6	$	1,185.3	$	1,286.5	$	2,386.2	$	2,607.1
Total segment costs and expenses	723.6		816.5		713.9		779.0		1,437.5		1,595.5
Total segment income	$	477.3	$	504.1	$	471.4	$	507.5	$	948.7	$	1,011.6

Capital expenditures by segment were as follows:


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
(Millions)	2020		2019		2020		2019		2020		2019
Kinetic	$	133.0	$	98.4	$	151.3	$	105.7	$	284.3	$	204.1
Enterprise	26.7		42.1		24.1		36.5		50.8		78.6
Wholesale	6.9		5.2		9.2		5.5		16.1		10.7
Corporate/shared (a)	65.8		47.1		63.1		66.9		128.9		114.0
Total	$	232.4	$	192.8	$	247.7	$	214.6	$	480.1	$	407.4


(a)	Represents capital expenditures not directly assigned to the segments and primarily consist of capital outlays for network enhancements and information technology-related projects benefiting Windstream as a whole.

3539

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

11. Segment Information, Continued:

The following table reconciles segment income to consolidated net loss:


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
(Millions)	2020			2019			2020			2019			2020			2019
Total segment income	$	477.3		$	504.1		$	471.4		$	507.5		$	948.7		$	1,011.6
Depreciation and amortization	(232.6		)	(271.5		)	(219.9		)	(276.0		)	(452.5		)	(547.5		)
Goodwill impairment	—			(2,339.0		)	—			(373.3		)	—			(2,712.3		)
Restructuring and other charges	(6.4		)	(15.1		)	(5.6		)	(6.9		)	(12.0		)	(22.0		)
Straight-line expense under contractual arrangement with Uniti	(168.8		)	(168.8		)	(168.3		)	(168.9		)	(337.1		)	(337.7		)
Other unassigned operating expenses (a)	(55.4		)	(91.0		)	(52.8		)	(105.3		)	(108.2		)	(196.3		)
Other income (expense), net	5.7			(1.0		)	1.7			(9.2		)	7.4			(10.2		)
Reorganization items, net	(40.5		)	(104.9		)	(114.4		)	(85.4		)	(154.9		)	(190.3		)
Interest expense	(73.1		)	(91.9		)	(66.0		)	(80.8		)	(139.1		)	(172.7		)
Income tax (expense) benefit	(7.8		)	268.8			(8.5		)	54.2			(16.3		)	323.0
Net loss	$	(101.6	)	$	(2,310.3	)	$	(162.4	)	$	(544.1	)	$	(264.0	)	$	(2,854.4	)

(a)

Included in these expenses are spend commitment penalties incurred under certain carrier discount plans of ~~$0.4~~$0.8 million and ~~$28.5~~$1.2 million three and six-month periods ended June 30, 2020, as compared to $30.3 million and $58.9 million for the ~~three months ended March 31, 2020 and~~same periods in 2019. For both periods of 2019, ~~respectively.~~these expenses include a reserve of $19.7 million for a funding denial from USAC pursuant to the years 2012 to 2017 related to a large customer participating in the Universal Service Rural Healthcare Telecommunications Program.

12. Commitments and Contingencies:

Litigation

In a notice letter received September 22, 2017 (the “Original Notice”), Aurelius Capital Master, Ltd. ("Aurelius") asserted an alleged default of certain senior unsecured notes, the 6.375 percent Senior Notes due 2023 of Windstream Services, based on alleged violations of the associated indenture (the "2013 Indenture"). Aurelius primarily alleged that Windstream Services violated the 2013 Indenture by executing the spin-off of Uniti in April 2015 that, according to Aurelius, constituted a Sale and Leaseback Transaction that was prohibited under Section 4.19 of the 2013 Indenture.

In light of the allegations in the Original Notice, Windstream Services filed suit against U.S. Bank N.A., the Indenture Trustee (the “Trustee”), in Delaware Chancery Court seeking a declaration that it had not violated any provision of the 2013 Indenture and injunctive relief. On October 12, 2017, the Trustee filed suit in the Southern District of New York seeking a declaration that defaults had occurred. Windstream Services filed an answer and affirmative defenses in response to the Trustee’s complaint the following day, as well as counterclaims against the Trustee and Aurelius for declaratory relief. The Delaware action was subsequently dismissed.

On October 18, 2017, Windstream Services launched debt exchange offers with respect to its senior notes, including the 6.375 percent notes, and on October 31, 2017, learned that holders representing the requisite percentage of the 6.375 percent notes needed to waive the defaults alleged in the Original Notice would be received. On November 6, 2017, Windstream Services and the Trustee executed a supplemental indenture, and new 6.375 percent notes were issued, which gave effect to the waivers and consents for the 6.375 percent notes. During the fourth quarter of 2017, Windstream Services also completed consent solicitations with respect to each of its series of outstanding notes, pursuant to which noteholders agreed to waive alleged defaults with respect to the transactions related to the spin-off of Uniti and amend the indentures governing such notes to give effect to such waivers and amendments.

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

12. Commitments and Contingencies, Continued:

After a trial in July 2018, on February 15, 2019, Judge ~~Jessie~~Jesse Furman of United States District Court for the Southern District of New York issued certain findings of fact and conclusions of law regarding the Spin-Off, invalidating the 2017 exchange and consent transactions, and found that the trustee under the 2013 Indenture and/or Aurelius was entitled to a judgment:

that, in effecting the Spin-Off, we failed to comply with the covenants set forth in Section 4.19 of the 2013 Indenture restricting certain sale and leaseback transactions;

~~(DEBTOR-IN-POSSESSION)~~

~~NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS~~

~~_____~~

~~12. Commitments and Contingencies, Continued:~~

that our breaches of Section 4.19 constitute a “Default” under 2013 Indenture;

that the 6.375 percent notes issued in the 2017 exchange and consent transactions do not constitute “Additional Notes” under the 2013 Indenture;

that the notice of default with respect to the foregoing breaches was valid and effective;

that those breaches ripened into “Events of Default” as defined in the 2013 Indenture on December 6, 2017;

that the notice of acceleration with respect to those “Events of Default” was valid and effective, and all principal together with all accrued and unpaid interest on the notes became immediately due and payable as of that date;

enjoining us from taking any further action to issue new notes in contravention of, or to otherwise violate, the 2013 Indenture;

awarding Aurelius a money judgment in an amount of $310,459,959.10 plus interest from and after July 23, 2018; and

dismissing our counterclaims with prejudice.

On March 1, 2019, Judge Furman issued an Order that he cannot enter a final judgment due to the Automatic Stay imposed by the filing of the Chapter 11 Cases. The matter has been administratively closed subject to the right of any party to move to reopen it within twenty-one (21) days of the conclusion of the Chapter 11 Cases or the lifting or modification of the automatic stay.

Windstream Holdings, its current and former directors, and certain of its executive officers are the subject of shareholder-related lawsuits arising out of the merger with EarthLink Holdings Corp. in February 2017. Two putative shareholders have filed separate purported shareholder class action complaints in federal court in Arkansas and state court in Georgia, captioned Murray v. Earthlink Holdings Corp., et. al., and Yadegarian v. Windstream Holdings, Inc., et. al., respectively. Additionally, two separate shareholder derivative actions were filed during the fourth quarter of 2018 in Arkansas federal court on behalf of Windstream Holdings, Inc., styled Cindy Graham v. Wells, et. al., and Larry Graham v. Thomas, et. al. All of the complaints contain similar assertions and claims of alleged securities law violations and breaches of fiduciary duties related to the disclosures in the joint proxy statement/prospectus soliciting shareholder approval of the merger, which the plaintiffs allege were inadequate and misleading.

Suggestions of Bankruptcy and Notices of the Automatic Stay were filed with regard to the Murray, Yadegarian and Graham cases, but the Plaintiffs challenged the applicability of the stay with regard to non-debtor defendants. Windstream filed an adversary proceeding motion with the Bankruptcy Court regarding this challenge. At a hearing on Windstream’s adversary proceeding motion conducted on June 17, 2019, the Bankruptcy court agreed to lift the automatic stay temporarily to allow the federal court presiding over the Murray case to hear arguments regarding Windstream’s motion to dismiss because it was procedural in nature. Oral arguments on the motion to dismiss were held August 22, 2019, but a ruling has not yet been issued by the federal court. In the Yadegarian case, Windstream agreed to lift the automatic stay for the limited purpose of allowing the state court to rule on pending Motions to Stay or Dismiss filed by Windstream. Both motions were heard on November 18, 2019, with the state court granting the Motion to Stay, pending a decision in the Murray case.

While the plaintiffs in the Murray case filed a proof of claim for an undetermined monetary amount, neither the plaintiffs in the Yadegarian nor Graham cases submitted proof of claims.

We believe that we have valid defenses for each of the lawsuits, and we plan to vigorously defend the pursuit of all matters. While the ultimate resolution of the matters is not currently predictable, if there is an adverse ruling in any of these matters, the ruling could constitute a material adverse outcome on the future consolidated results of our income, cash flows, or financial condition.

(DEBTOR-IN-POSSESSION)

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

_____

12. Commitments and Contingencies, Continued:

Windstream did not file a Suggestion of Bankruptcy as a result of the filing of the Chapter 11 cases with regard to this matter as it was determined it would fall under a regulatory exception and is precluded from the automatic stay.

~~(DEBTOR-IN-POSSESSION)~~

~~NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS~~

~~_____~~

~~12. Commitments and Contingencies, Continued:~~

Other Matters

Windstream and one of its Enterprise customers entered into an agreement in which Windstream provided communication services to several of the customer’s locations. The majority of funding for the services was administered by USAC pursuant to the Universal Service Rural Health Care Telecommunications Program which offers reduced rates for broadband and telecommunications services to rural health care facilities. In March 2017, USAC issued a funding denial to the customer on the basis that certain rules of the FCC were violated with the selection of Windstream as the service provider. Due to an alleged conflict of interest created by a third-party Windstream channel partner that acted as a consultant for the customer regarding the agreement, USAC asserted that Windstream’s selection was not based upon a fair and open competitive bidding process. USAC’s denial addressed accrued funding of approximately $16.6 million, as well as funding of approximately $6.0 million previously remitted to us. Windstream, along with the customer, appealed the denial; USAC rejected the appeal on June 29, 2018, upholding its previous denial of funding. Windstream appealed the denial to the FCC in August 2018. The FCC has yet to rule on the appeal and timing of a decision by the FCC is unknown. We recorded a reserve for the funding denial from USAC during the second quarter of 2019, and as a result, we have no additional loss exposure related to this matter.

Windstream did not file a Suggestion of Bankruptcy as a result of the filing of the Chapter 11 Cases with regard to this matter as it was determined it falls under a regulatory exception and is precluded from the automatic stay. USAC filed a proof of claim in the Chapter 11 Cases for approximately $6.0 million, reflecting the amount of funding previously remitted to Windstream as referenced above; Windstream has filed an objection to this proof of claim.

We currently are involved in certain legal proceedings arising in the ordinary course of business and, as required, have accrued an estimate of the probable costs for the resolution of those claims for which the occurrence of loss is probable and the amount can be reasonably estimated. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to these proceedings. Additionally, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on our financial condition or results of operations.

Notwithstanding the foregoing, any litigation pending against us and any claims that could be asserted against us that arose prior to the Petition Date are automatically stayed as a result of the commencement of the Chapter 11 Cases pursuant to Section 362(a) of the Bankruptcy Code, subject to certain statutory exceptions. These matters will be subject to resolution in accordance with the Bankruptcy Code and applicable orders of the Bankruptcy Court.

~~13. Subsequent Events:~~

~~Uniti Settlement Agreement~~ - As previously discussed in Note 2, on March 2, 2020, the Debtors announced that they had reached an agreement in principle with Uniti to settle any and all claims and causes that were or could have been asserted against Uniti by Windstream. Among the terms of the settlement, Uniti agreed to fund up to $1.75 billion in capital improvements to the network; pay Windstream $400 million payable in quarterly cash installments over five years, at an annual interest rate of 9.0 percent, which amount may be fully paid after one year, resulting in total cash payments ranging from $432 - $490 million; purchase certain unused and underutilized dark filer assets from Windstream and Uniti will transfer to Windstream $244.5 million of proceeds from, and conditioned upon, the sale of Uniti’s common stock to certain first lien creditors of Windstream Services. On May 8, 2020, the Bankruptcy Court approved the settlement with Uniti.

~~Plan of Reorganization~~ - As previously discussed in Note 2, on April 1, 2020, the Debtors filed a Joint Chapter 11 Plan of Reorganization (“the Plan”) with the Bankruptcy Court. On the same date, the Debtors filed a Disclosure Statement relating to the Plan, along with a motion seeking approval of the Disclosure Statement. On May 8, 2020, the Disclosure Statement was approved by the Bankruptcy Court, allowing Windstream to begin soliciting the requisite accepting votes in favor of the Plan. The Debtors retain the exclusive right to file the Plan through and including June 22, 2020, as well as the right to seek further extensions of such period up to the statutory maximum date of August 25, 2020. The Plan can be supplemented and revised based upon discussions with the Debtors’ creditors and other interested parties and in response to creditor claims and objections and the requirements of the Bankruptcy Code or the Bankruptcy Court. On June 24, 2020, the Bankruptcy Court is scheduled to hold a confirmation hearing to consider the approval of the Debtors’ Plan.

~~See Note 2 for additional information regarding the Uniti settlement agreement and the Plan.~~

3842

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, 2019, filed with the Securities and Exchange Commission (“SEC”) on May 19, 2020, 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 incorporated in the state of Delaware on May 23, 2013, and the parent of Windstream Services, LLC (“Windstream Services”), a Delaware limited liability company organized on March 1, 2004. Following its delisting on March 6, 2019, Windstream Holdings common stock no longer trades on the Nasdaq Global Select Market (“NASDAQ”) but trades on the Over-the-Counter (“OTC”) Pink Sheets market maintained by the OTC Market Group, Inc. under the trading symbol “WINMQ”. Windstream Holdings 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 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.

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, NASDAQ listing fees, other shareholder-related costs, income taxes, common stock activity, and payables from Windstream Services to Windstream Holdings. For the ~~three-month period~~three and six-month periods ended ~~March 31,~~June 30, 2020, the amount of pre-tax expenses directly incurred by Windstream Holdings was approximately ~~$0.7~~$0.5 million and $1.2 million compared to ~~$0.4~~$0.5 million and $0.9 million for the same ~~period~~periods in 2019. On an after-tax basis, expenses incurred directly by Windstream Holdings was approximately ~~$0.6~~$0.3 million and $0.9 million for the ~~three-month period~~three and six-month periods ended ~~March 31,~~June 30, 2020, compared to ~~$0.3~~$0.4 million and $0.7 million for the same ~~period~~periods in 2019. Unless otherwise indicated, the following discussion of our business strategy, trends and results of operations pertain to both Windstream Holdings and Windstream Services.

OVERVIEW

We are a leading provider of advanced network communications and technology solutions for businesses across the U.S. We also offer broadband, entertainment and security solutions to consumers and small businesses primarily in rural areas in 18 states. Additionally, we supply core transport solutions on a local and long-haul fiber network spanning approximately ~~164,000~~169,000 miles.

Our mission is to connect people and empower business in a world of infinite possibilities brought on by rapid technological change. Our vision is to provide innovative software and network solutions while consistently delivering a great customer experience.

Effective April 1, 2019, we reorganized our business operations into three segments: Kinetic, Enterprise and Wholesale. The Kinetic business unit primarily serves customers in markets in which we are the incumbent local exchange carrier (“ILEC”) and provides services over network facilities operated by us. The Enterprise and Wholesale business units primarily serve customers in markets in which we are a competitive local exchange carrier (“CLEC”) and provide services over network facilities primarily leased from other carriers. As a result of this reorganization, we improved the alignment of our customer base within our ILEC and CLEC markets. The significant changes to our previous segment structure included: (1) shifting certain business customers with operations in ILEC-only markets from the Enterprise segment to the Consumer & Small Business segment, which was renamed Kinetic; (2) shifting governmental and resale customers from Wholesale to Enterprise; (3) shifting wholesale customers and related services in ILEC markets from Wholesale to Kinetic; and (4) allocating certain corporate expenses, primarily property taxes, to the segments. Prior period segment information has been revised to reflect these changes for all periods presented.

3943

BANKRUPTCY AND RELATED DEVELOPMENTS

On February 15, 2019, Judge Jesse Furman of the United States District Court for the Southern District of New York issued an adverse ruling in litigation relating to a noteholder’s allegations that our 2015 spin-off of certain assets into a publicly-traded real estate investment trust resulted in one or more defaults of certain covenants under one of Windstream Services’ existing indentures. The findings resulted in a cross default under Windstream Services’ senior secured credit agreement governing its secured term and revolving loan obligations and a cross-acceleration event of default under the indentures governing Windstream Services’ other series of secured and unsecured notes. As a result, on February 25, 2019, Windstream Holdings and all of its subsidiaries, including Windstream Services (collectively the “Debtors”), filed voluntary petitions (the “Chapter 11 Cases”) for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). The Chapter 11 Cases are being jointly administered under the caption In re Windstream Holdings, Inc., et al., No 19-22312 (RDD).Windstream has continued to operate its business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

In connection with the Chapter 11 Cases, the Debtors analyzed the contractual arrangement with Uniti, and on July 25, 2019, the Debtors filed a complaint in the Chapter 11 Cases seeking, among other things, to recharacterize the Uniti arrangement from a lease to a financing. After engaging in a months-long mediation process with Uniti and its creditors regarding the litigation, on March 2, 2020, Windstream, along with certain of their creditors, announced an agreement in principle with Uniti to settle any and all claims and causes that were or could have been asserted against Uniti by Windstream. Among the terms of the settlement, Uniti agreed to fund up to $1.75 billion in capital improvements to the network, which will allow us to deliver 1-Gigabytes per second (“Gbps”) to more than half of our Kinetic footprint. Uniti also agreed to pay Windstream $400 million payable in quarterly cash installments over five years, at an annual interest rate of 9.0 percent, which amount may be fully paid after one year, resulting in total cash payments ranging from $432 - $490 million. Uniti will also purchase certain unused and underutilized dark fiber assets from Windstream and Uniti will transfer to Windstream $244.5 million of proceeds from, and conditioned upon, the sale of Uniti’s common stock to certain first lien creditors of Windstream Services. In conjunction with the announcement, Windstream filed a motion seeking approval from the Bankruptcy Court of the proposed settlement, and a hearing on the motion was held on May 7-8, 2020, at which time the Bankruptcy Court approved the settlement with Uniti. The approved settlement is subject to certain regulatory approvals and conditions precedent, including Uniti's receipt of satisfactory “true lease” and REIT opinions, which remain outstanding. Additionally, on May 26, 2020, UMB Bank, National Association, and U.S. Bank National Association, trustees under certain of Windstream’s Senior Notes, filed a notice of appeal regarding the order approving the settlement with Uniti. No briefing schedule has been established or further action taken since the appeal was lodged. Finally, inIn conjunction with the settlement with Uniti, Windstream also entered into a plan support agreement with Elliott Investment Management, L.P., (“Elliott”) and certain consenting first lien creditors of Windstream Services outlining certain terms included in Windstream’s plan of reorganization.

WeOn April 1, 2020, the Debtors filed a ~~plan~~Joint Chapter 11 Plan of ~~reorganization and disclosure statement~~Reorganization (“the Plan”) with the Bankruptcy Court. On the same date, the Debtors filed a Disclosure Statement relating to the Plan. The Plan was approved by the Bankruptcy Court on ~~April 1, 2020. The plan of reorganization~~June 25, 2020 and provides for the reduction of more than $4 billion of our existing debt. ~~A confirmation hearing~~Pending receipt of regulatory approvals, we expect to ~~review the plan of reorganization has been set by the Bankruptcy Court for June 24, 2020. There can be no assurance that the Debtors will be able to secure the requisite accepting votes~~emerge from ~~creditors for the plan of reorganization or the confirmation of the plan by the Bankruptcy Court.~~bankruptcy as a private company later this summer.

For more information regarding the impact of the Chapter 11 Cases, settlement with Uniti and our plan of reorganization see Note 2 to the consolidated financial statements and “Financial Condition, Liquidity and Capital Resources” below.

CORONAVIRUS, COVID-19, CONSIDERATIONS AND IMPACTS TO OUR BUSINESS

During ~~the first quarter of~~ 2020 in response to the COVID-19 global pandemic, we implemented various actions across our organization to mitigate the spread and impact of the virus and to meet the needs of our customers. Certain impacts to our operations and actions by us in response to COVID-19 include the following

~~Taking~~Took comprehensive action to keep our employees safe, including implementing a work-from-home strategy for employees whose jobs can be performed remotely, including call center support, sales and marketing, finance and other administrative functions. We also implemented processes and procedures to limit face-to-face interactions between our field technicians and customers and provided ~~gloves, face masks and hand sanitizer~~personal protection equipment to our technicians to allow them to continue to work safely while responding to an increase in demand for our broadband services.

~~Participating~~Participated in the Federal Communications Commission (“FCC”) Keep Americans Connected Pledge not to turn-off service or charge late fees due to a customer’s inability to pay their bill due to circumstances related to COVID-19 functions. ~~We have extended our commitments under the FCC Pledge through June 30, 2020.~~

Through constant communication with our vendors and suppliers and managing our existing inventory, we have avoided any significant disruptions to our supply chain.

Our broadband network is well equipped to handle the expected incremental demand given our past efforts to modernize our network and provide high-speed IP/Ethernet services. We have experienced increased demand for data services within our Kinetic business segment driven by our enhanced speed capabilities combined with families working and managing essential functions from their homes to lessen the impact of COVID-19.

During the second quarter of 2020, we ~~have seen higher demand~~incurred $4.5 million of incremental costs related to COVID-19, primarily consisting of supplemental premium pay and benefits for our ~~OfficeSuite© HD meetings in our Enterprise business segment, as~~technicians and the ~~need for video conferencing services expands. Kinetic network data traffic has increased approximately 30 percent above pre-COVID-19 levels, while our OfficeSuite© HD total meeting minutes~~cost of ~~usage have nearly tripled since early March 2020.~~

personal protection supplies, including gloves, masks and hand sanitizer. The ongoing impacts of COVID-19 on our business are uncertain due to many factors and could have a material adverse impact on our future results of operations, cash flows and financial position.

EXECUTIVE SUMMARY

To execute on our mission and achieve our vision, we have the following key priorities for 2020:

Focus on growth.

We plan on exiting our restructuring in 2020 with a new capital structure, which will allow for continued strategic investments in our Kinetic business and increase speed capabilities to more of our Kinetic footprint.

Maintain product and software leadership.

We will continue to maintain our leadership positions in telecommunications products and software. Our 2020 focus will be on continuing to expand our broadband speed capabilities, continuing to enhance our SD-WAN and UCaaS products, expanding our metro fiber and long-haul network services, and enhancing our customer-facing digital experience through our customer portals and interfaces.

Deliver consistent excellence in the customer experience.

In 2019, we saw dramatic improvements in our net promoter scores, customer satisfaction surveys and industry awards. We will continue this momentum in 2020 by enhancing network visibility and design for our customers and expanding software tools and automation efforts to better and more efficiently serve our customers.

Drive adoption of strategic products.

We have made significant progress transitioning from legacy products and services to our industry-leading SD-WAN and UCaaS products. We expect to achieve solid growth in our strategic revenues as we continue to aggressively work to convert existing customers from legacy to strategic products and services.

Manage costs aggressively.

Our biggest single cash cost consists of interconnection payments we make to other telecommunications carriers to utilize their networks to deliver our products and services to customers. We continue to reduce those payments by approximately 10 percent annually, a trend expected to continue. In addition, we are focused on reducing expenses associated with network real estate and collocation facilities.

Our focused operational strategy for each business segment has the overall objective to slow the decline in adjusted OIBDA, which is defined as operating income (loss) before depreciation and amortization and goodwill impairment and adjusted to exclude the impacts of straight-line expense under the contractual arrangement with Uniti, ~~merger, integration~~share-based compensation, restructuring and other ~~costs, restructuring~~ charges, and ~~share-based compensation.~~certain other costs.

4145

During the second quarter and first ~~quarter~~half of 2020, we achieved the following related to these initiatives:

~~Grew high-speed Internet customers for the eighth consecutive quarter as we~~We added ~~18,000~~22,100 net broadband customers ~~or a 58 percent increase year-over-year, which accelerated throughout~~during the second quarter of 2020, surpassing last quarter as the single highest quarterly customer growth in more than a decade and marking the ninth consecutive quarter that we ~~added nearly 10,000~~grew high-speed Internet customers. With over 40,000 net subscribers added in the ~~month~~first half of ~~March alone. We currently~~2020, we now expect to add ~~approximately 40,000~~60,000 net high-speed Internet customers for the full year of 2020. This growth in market share has been driven by our continued improvement in our broadband speed capability. As of ~~March 31,~~June 30, 2020, 71 percent of our broadband customer base enjoy speeds of 25 Mbps or greater, ~~a 900-basis point improvement~~up 1,000-basis points from the end of 2018. We have nearly tripled the availability of 100 megabytes per second (“Mbps”) speeds across our footprint and now 43 percent of our households can receive speeds of 100 Mbps or greater, up from 15 percent at the end of 2018, and 5456 percent of our households have access to speeds of 25 Mbps or ~~greater.~~greater, up from 47 percent a year ago. Additionally, we have enabled 1-Gigabyte per second (“Gbps”) capability to over 100,000 commercial locations across our footprint. Increasing penetration of faster speeds across our customer base remains a key priority for us to continue to drive subscriber growth and higher average monthly revenue per customer. Currently, only 3640 percent of our Kinetic households capable of receiving 25 Mbps or greater speeds and only 1513 percent of such households with access to 1 Gbps speeds are enjoying those speeds. Year-to-date contribution margin in our Kinetic segment was ~~58.2~~57.2 percent.

In our Enterprise business, our emphasis on growing revenues from our strategic products continues to help offset the continued pressure on our core and legacy product offerings. We remain the nation’s largest Software Defined Wide Area Network (“SD-WAN”) service provider with over 3,200 SD-WAN customers under contract representing over 29,000 endpoint locations. OfficeSuite© demand also remains strong as we now have approximately ~~540,000~~5,500 Unified Communications as a Service (“UCaaS”) seats installed, Our total annualized strategic product revenue reached ~~$322~~$334 million in the ~~first~~second quarter of 2020, representing 2824 percent year-over-year growth and now represents 1415 percent of our total Enterprise service revenues. Contribution margin in our Enterprise segment was ~~18.9~~19.7 percent for the first ~~quarter~~half of 2020, up slightly from the same period a year ago.

Year-to-date contribution margin in our Wholesale segment was ~~73.3~~72.4 percent and reflected our continued focus on expense management.

During the first quarter of 2020, we announced several new products and services in each of our three business segments. In our Kinetic segment, we announced a partnership with YouTube TV that will allow our Kinetic customers to access an affordable and innovative streaming solution for both live and on-demand content from 70-plus top networks. Enrollment in this service includes free unlimited DVR cloud storage and the service can be accessed from any screen. In our Enterprise segment, we launched a new WE Connect Partners portal for our channel partners, which provides them the ability to easily manage and configure end-user services, gain critical analytical insight in real time, and access customer support whenever needed. Finally, in our Wholesale segment, we completed a successful trial with Infinera Corporation to commercially offer 400 Gigabit Ethernet wave services to support our customers’ high-bandwidth needs and positions us to be an industry leader in optical infrastructure.

~~During the first three~~six months of 2020, our total annualized interconnection, ~~expense~~network facility and fiber expenses decreased by 2014 percent on a year-over-year basis to an annualized amount of approximately ~~$900 million~~$1.1 billion as of ~~March 31,~~June 30, 2020. This annual interconnection expense amount still includes approximately ~~$450~~$700 million of TDM-related expenses including network facility expense, which remain the focus for future cost reductions.

ASee “Consolidated Results of Operations” section below for a detailed discussion and analysis of our second quarter and year-to-date consolidated operating ~~results is presented below.~~results.

4246

CONSOLIDATED RESULTS OF OPERATIONS

The following table reflects the consolidated operating results of Windstream Holdings:


	Three Months Ended March 31,						Increase (Decrease)					Three Months Ended June 30,						Increase (Decrease)					Six Months Ended June 30,						Increase (Decrease)
(Millions)	2020			2019			Amount			%		2020			2019			Amount			%		2020			2019			Amount			%
Revenues and sales:
Service revenues	$	1,178.9		$	1,302.2		$	(123.3	)	(9	)	$	1,164.6		$	1,270.2		$	(105.6	)	(8	)	$	2,343.5		$	2,572.4		$	(228.9	)	(9	)
Product and fiber sales	22.0			18.4			3.6			20		20.7			16.3			4.4			27		42.7			34.7			8.0			23
Total revenues and sales	1,200.9			1,320.6			(119.7		)	(9	)	1,185.3			1,286.5			(101.2		)	(8	)	2,386.2			2,607.1			(220.9		)	(8	)
Costs and expenses:
Cost of services (a)	749.8			861.1			(111.3		)	(13	)	751.8			852.1			(100.3		)	(12	)	1,501.6			1,713.2			(211.6		)	(12	)
Cost of product and fiber sales	21.5			16.9			4.6			27		21.7			15.2			6.5			43		43.2			32.1			11.1			35
Selling, general and administrative	176.5			198.3			(21.8		)	(11	)	161.5			185.9			(24.4		)	(13	)	338.0			384.2			(46.2		)	(12	)
Depreciation and amortization	232.6			271.5			(38.9		)	(14	)	219.9			276.0			(56.1		)	(20	)	452.5			547.5			(95.0		)	(17	)
Goodwill impairment (b)	—			2,339.0			(2,339.0		)	(100	)	—			373.3			(373.3		)	(100	)	—			2,712.3			(2,712.3		)	(100	)
Restructuring and other charges (c)	6.4			15.1			(8.7		)	(58	)	5.6			6.9			(1.3		)	(19	)	12.0			22.0			(10.0		)	(45	)
Total costs and expenses	1,186.8			3,701.9			(2,515.1		)	(68	)	1,160.5			1,709.4			(548.9		)	(32	)	2,347.3			5,411.3			(3,064.0		)	(57	)
Operating income (loss)	14.1			(2,381.3		)	2,395.4			(101	)	24.8			(422.9		)	447.7			106		38.9			(2,804.2		)	2,843.1			101
Other income (expense), net	5.7			(1.0		)	6.7			*		1.7			(9.2		)	10.9			118		7.4			(10.2		)	17.6			173
Reorganization items, net (d)	(40.5		)	(104.9		)	(64.4		)	61		(114.4		)	(85.4		)	29.0			34		(154.9		)	(190.3		)	(35.4		)	(19	)
Interest expense	(73.1		)	(91.9		)	(18.8		)	(20	)	(66.0		)	(80.8		)	(14.8		)	(18	)	(139.1		)	(172.7		)	(33.6		)	(19	)
Loss before income taxes	(93.8		)	(2,579.1		)	(2,485.3		)	(96	)	(153.9		)	(598.3		)	(444.4		)	(74	)	(247.7		)	(3,177.4		)	(2,929.7		)	(92	)
Income tax (expense) benefit	(7.8		)	268.8			(276.6		)	103		(8.5		)	54.2			62.7			116		(16.3		)	323.0			339.3			105
Net loss	$	(101.6	)	$	(2,310.3	)	$	(2,208.7	)	(96	)	$	(162.4	)	$	(544.1	)	$	(381.7	)	(70	)	$	(264.0	)	$	(2,854.4	)	$	(2,590.4	)	(91	)

* Not meaningful


(a)	Excludes depreciation and amortization included below.

(b)

~~As discussed in Note 1 to the consolidated financial statements, in~~In connection with our adoption of ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), effective January 1, 2019, we recognized a cumulative effect adjustment to our opening accumulated deficit balance of approximately $3.0 billion, primarily due to changing the accounting treatment of our contractual arrangement with Uniti Group, Inc. (“Uniti”) from a financing transaction to an operating lease. Due to recording the cumulative effect adjustment and the resulting increase in the carrying value of our reporting units, we performed a quantitative goodwill impairment test and recorded a goodwill impairment charge of $2,339.0 million, representing the aggregate excess of the carrying values of the reporting units to their fair values.

Effective April 1, 2019, we implemented a new business unit organizational structure resulting in a change in our reportable operating segments and reporting units and reallocated remaining goodwill on a relative fair value to our Kinetic, Enterprise and Wholesale reporting units and performed a quantitative goodwill impairment test, which indicated that the carrying values of our Kinetic and Enterprise reporting units exceeded their fair values. Accordingly, during the second quarter of 2019, we recorded an impairment of all goodwill allocated to our Kinetic and Enterprise reporting units totaling $373.3 million.


(c)	See Note 8 for discussion related to restructuring and other charges recorded in each period.


(d)	See Note 2 for discussion related to reorganization items, net recorded in each period.

4347

Service Revenues

The following table reflects the primary drivers of the changes in service revenues compared to the same period a year ago:

Three Months Ended
March 31, 2020
Increase (Decrease)
(Millions) Amount
%
Decrease in Wholesale service revenues (a) $ (8.2 )
Decrease in Kinetic service revenues (b) (8.8 )
Decrease in Enterprise service revenues (c) (106.3 )
Net decrease in service revenues $ (123.3 ) (9 )



	Three Months Ended June 30, 2020					Six Months Ended June 30, 2020
	Increase (Decrease)					Increase (Decrease)
(Millions)	Amount			%		Amount			%
Decreases in Wholesale service revenues (a)	(2.6		)			$	(10.8	)
Decreases in Kinetic service revenues (b)	(6.9		)			(15.7		)
Decreases in Enterprise service revenues (c)	(96.1		)			(202.4		)
Net decreases in service revenues	$	(105.6	)	(8	)	$	(228.9	)	(9	)


(a)	~~Decrease was~~Decreases were primarily due to reductions in ~~non-recurring~~switched access revenues and usage for voice-only services and lower demand for dedicated copper-based circuits, as carriers continue to migrate traffic to fiber-based connections. These decreases were partially offset by price increases implemented in January 2020.

(b)

~~Decrease was~~Decreases were primarily due to lower demand for consumer voice-only services, a decline in small business revenues reflecting a reduction in customers served, primarily due to the impacts of competition, and reductions in switched access revenues and state USF and access recovery support attributable to the effects of intercarrier compensation reform. These decreases were partially offset by an increase in high-speed Internet bundle revenues attributable to growth in net broadband customers and higher wholesale revenues resulting from a price increase implemented January 2020.

(c)

~~Decrease was~~Decreases were primarily due to adverse effects of operating a business while in bankruptcy and the resulting increase in customer churn. As a result, service revenues reflect reductions in traditional voice, long-distance and data and integrated services, declines in long-distance usage, partially offset in growth in strategic revenues and increased demand for video conferencing services.

See “Segment Operating Results” for a further discussion of changes in Kinetic, Enterprise, and Wholesale revenues.

Product and Fiber Sales

Product sales consist of product sales of various types of communications equipment to our customers including network equipment to contractors on a wholesale basis. Enterprise product sales include high-end data and communications equipment which facilitate the delivery of advanced data and voice services to our enterprise customers. Consumer product sales include home networking equipment, computers and phones. Wholesale fiber sales consist of amounts recognized from sales-type leases where control of the fiber has transferred to the customer.

The following table reflects the primary drivers of the changes in product and fiber sales compared to the same period a year ago:

Three Months Ended
March 31, 2020
Increase (Decrease)
(Millions) Amount
%
Increase in Kinetic product sales (a) $ 5.7

Increase in Wholesale fiber sales 0.7

Decrease in Enterprise product sales (b) (2.8 )
Net increase in product and fiber sales $ 3.6
20



	Three Months Ended June 30, 2020				Six Months Ended June 30, 2020
	Increase (Decrease)				Increase (Decrease)
(Millions)	Amount			%	Amount			%
Increases in Kinetic product sales (a)	$	6.3			$	12.0
Increases in Wholesale fiber sales	1.2				1.9
Decreases in Enterprise product sales (b)	(3.1		)		(5.9		)
Net increases in product and fiber sales	$	4.4		27	$	8.0		23


(a)	~~Increase was~~Increases were due to higher sales of network equipment on a wholesale basis to contractors due to increased demand.


(b)	~~Decrease was~~Decreases were primarily due to lower equipment installations.

4448

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 expenses consist of third-party costs for ancillary voice and data services, business and financial services, bad debt and business taxes.

The following table reflects the primary drivers of the changes in cost of services compared to the same period a year ago:

Three Months Ended
March 31, 2020
Increase (Decrease)
(Millions) Amount
%
Decrease in bad debt expense (a) $ (5.3 )
Decrease in federal USF expense (b) (6.5 )
Decrease in network and other operations (c) (10.7 )
Decreases in interconnection expense (d) (88.8 )
Net decrease in cost of services $ (111.3 ) (13 )



	Three Months Ended June 30, 2020					Six Months Ended June 30, 2020
	Increase (Decrease)					Increase (Decrease)
(Millions)	Amount			%		Amount			%
Changes in network and other operations (a)	$	2.0				$	(8.7	)
Decreases in federal USF expense (b)	(3.4		)			(9.9		)
Decreases in bad debt expense (c)	(24.7		)			(30.0		)
Decreases in interconnection expense (d)	(74.2		)			(163.0		)
Net decreases in cost of services	$	(100.3	)	(12	)	$	(211.6	)	(12	)

(a)

~~Decrease~~These expenses include $4.5 million of incremental costs related to COVID-19, primarily ~~due to improvement~~consisting of supplemental premium pay and benefits for our technicians and the cost of personal protection supplies, including gloves, masks and hand sanitizer. These incremental costs were partially offset in the ~~collection of our trade receivables, when compared to the corresponding~~three-month period of ~~2019.~~


~~(b)~~	~~Decrease reflects~~2020 and fully offset in the ~~overall decline in revenues.~~


~~(c)~~	~~Decrease was primarily attributable to cost savings and other expense management initiatives, including~~six-month period of 2020 by reductions in labor costs attributable to work force reductions completed in 2020 and 2019.


(b)	Decreases reflect the overall decline in revenues.

(c)

Decreases reflect improvement in the collection of our trade receivables, when compared to the corresponding periods of 2019. The three and six-month periods of 2019 also included a reserve of $19.7 million for funding denial from Universal Service Administrative Company (“USAC”) pursuant to funding for the years 2012 to 2017 related to a large customer participating in the Universal Service Rural Healthcare Telecommunications Program.

(d)

~~Decrease~~Decreases in interconnection expense ~~was~~were attributable to rate reductions and cost improvements from the continuation of network efficiency projects, increased customer churn, and lower long-distance usage as well as, ~~a reduction~~reductions in the three and six-month periods of ~~$28.1~~2020 of $29.5 million and $57.7 million, respectively, in incremental costs incurred related to spend commitment penalties under certain carrier discount ~~plans.~~plans, when compared to the same prior-year periods.

Cost of Product and Fiber Sales

Cost of product and fiber sales represents the associated cost of equipment and fiber sales to customers. The following table reflects the primary drivers of the changes in cost of sales compared to the same period a year ago:

Three Months Ended
March 31, 2020
Increase (Decrease)
(Millions) Amount
%
Increase in sales to Kinetic customers $ 6.4

Decrease in sales to Enterprise customers (1.8 )
Net increase in cost of product and fiber sales $ 4.6
27



	Three Months Ended June 30, 2020				Six Months Ended June 30, 2020
	Increase (Decrease)				Increase (Decrease)
(Millions)	Amount			%	Amount			%
Increases in sales to Kinetic customers	$	6.6			$	13.0
Increases in Wholesale fiber sales	0.5				0.5
Decreases in sales to Enterprise customers	(0.6		)		(2.4		)
Net increases in cost of product and fiber sales	$	6.5		43	$	11.1		35

The changes in cost of product and fiber sales were generally consistent with the net increases in product and fiber sales.

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 to our customers.

The following table reflects the primary drivers of the changes in SG&A expenses compared to the same period a year ago:

Three Months Ended
March 31, 2020
Increase (Decrease)
(Millions) Amount
%
Decrease in share-based compensation $ (1.4 )
Decrease in pre-bankruptcy legal and consulting fees (a) (3.2 )
Decrease in occupancy rent (b) (4.2 )
Decrease in salaries and other benefits (c) (5.3 )
Decrease in other costs (7.7 )
Net decrease in SG&A $ (21.8 ) (11 )



	Three Months Ended June 30, 2020					Six Months Ended June 30, 2020
	Increase (Decrease)					Increase (Decrease)
(Millions)	Amount			%		Amount			%
Increases in share-based compensation	$	2.0				$	0.6
Decreases in sales and marketing	(1.5		)			(1.9		)
Changes in pre-bankruptcy legal and consulting fees (a)	0.2					(3.0		)
Decreases in billing postage	(1.3		)			(3.4		)
Decreases in salaries and other benefits (b)	(5.1		)			(10.4		)
Decreases in occupancy rent, utilities and maintenance costs (c)	(6.6		)			(12.8		)
Decreases in other costs (b)	(12.1		)			(15.3		)
Net decreases in SG&A	$	(24.4	)	(13	)	$	(46.2	)	(12	)


(a)	Represents amounts incurred prior to the filing of the Chapter 11 Cases.


(b)	~~Decrease was~~Decreases were primarily attributable to workforce reductions completed in 2020 and 2019.


(c)	Decreases were primarily attributable to cost savings and other expense management initiatives.


~~(c)~~	~~Decrease was primarily attributable to workforce reductions completed in 2020 and 2019.~~

Depreciation and Amortization

Depreciation and amortization expense includes the depreciation of property, plant and equipment and the amortization of intangible assets. The following table reflects the primary drivers of the changes in depreciation and amortization expense compared to the same period a year ago:

Three Months Ended
March 31, 2020
Increase (Decrease)
(Millions) Amount
%
Decrease in amortization expense (a) $ (9.2 )
Decrease in depreciation expense (b) (29.7 )
Net decrease in depreciation and amortization expense $ (38.9 ) (14 )



	Three Months Ended June 30, 2020					Six Months Ended June 30, 2020
	Increase (Decrease)					Increase (Decrease)
(Millions)	Amount			%		Amount			%
Decreases in amortization expense (a)	$	(9.1	)			$	(18.3	)
Decreases in depreciation expense (b)	(47.0		)			(76.7		)
Net decreases in depreciation and amortization expense	$	(56.1	)	(20	)	$	(95.0	)	(17	)


(a)	~~Decrease reflects~~Decreases reflect 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 period as the intangible assets amortize.


(b)	~~Decrease~~Decreases primarily ~~reflects~~reflect the beneficial impact from no longer recording depreciation expense on assets still in service which became fully depreciated or were retired from service subsequent to the end of the first quarter of 2019.

Operating Income (Loss)

We reported operating income of ~~$14.1~~$24.8 million and $38.9 million for the ~~three-month period~~three and six-month periods ended ~~March 31,~~June 30, 2020, as compared to an operating ~~loss~~losses of ~~$2,381.3~~$422.9 million and $2,804.2 million for the same ~~period~~periods in 2019. The operating ~~loss~~losses for the ~~three-month period~~three and six-month periods of 2019 ~~was~~were primarily due to the goodwill impairment ~~charge~~charges of ~~$2,339.0~~$373.3 million ~~previously discussed.~~

and $2,712.3 million, respectively.

4650

Interest Expense

Set forth below is a summary of interest expense:


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
(Millions)	2020			2019			2020			2019			2020			2019
Superpriority debtor-in-possession facility	$	6.6		$	1.4
Superpriority debtor-in-possession facilities							$	7.2		$	5.7		$	13.8		$	7.1
Senior secured credit facility, Tranche B	39.9			34.4			34.8			44.7			74.7			79.1
Senior secured credit facility, revolving line of credit	14.9			13.0			12.5			17.8			27.4			30.8
Senior secured first and second lien notes	13.0			30.7			12.9			13.0			25.9			43.7
Senior unsecured notes	—			12.6			—			—			—			12.6
Notes issued by subsidiaries	1.7			1.7			1.7			1.7			3.4			3.4
Leaseback of real estate contributed to pension plan	1.5			1.6			1.6			1.5			3.1			3.1
Impacts of interest rate swaps	(3.3		)	(2.9		)	(3.3		)	(3.0		)	(6.6		)	(5.9		)
Interest on finance leases and other	0.8			0.9			0.6			1.4			1.4			2.3
Less capitalized interest expense	(2.0		)	(1.5		)	(2.0		)	(2.0		)	(4.0		)	(3.5		)
Total interest expense	$	73.1		$	91.9		$	66.0		$	80.8		$	139.1		$	172.7

The ~~decrease~~decreases for the three and six-month periods of 2020 in ~~2020 primarily reflects lower~~ interest expense ~~attributable~~related to our debt obligations under the senior ~~unsecured~~secured credit facility, senior secured first and second lien notes primarily reflect a March 2020 reduction in federal borrowing rates in response to the COVID-19 pandemic, which decreased ~~$12.6 million~~interest rates by approximately 150 basis points. Interest expense in the ~~three-month~~six-month period of 2020 ~~primarily~~also decreased $12.6 million due to no longer recording interest expense on ~~these obligations~~our unsecured senior notes after the filing of the Chapter 11 Cases. ~~This decrease was~~The decreases in both periods of 2020 were partially offset by additional interest associated with borrowings under our superpriority debtor-in-possession ~~facility, as well as higher interest cost applicable to borrowings outstanding under the senior secured credit~~ facility. Following our default under the senior secured credit facility, interest rates charged on these borrowings reset to applicable default rates, which are comparatively higher than the non-default interest rates.

Income Taxes

During the ~~first quarter of~~three and six-month periods ended June 30, 2020, we recognized income tax expense of ~~$7.8~~$8.5 million and $16.3 million, respectively, as compared to income tax benefits of ~~$268.8~~$54.2 million and $323.0 million for the same ~~period~~periods in 2019. The income tax expense recorded in the ~~first quarter~~six-month period of 2020 reflected discrete tax expense of ~~$8.5~~$34.4 million related to our bankruptcy reorganization and discrete tax expense of ~~$21.5~~$41.2 million related to the increase in our valuation allowance. Comparatively, the income tax benefit recorded ~~for~~in the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2019 reflected the loss before taxes offset by discrete tax expense of ~~$368.0~~$455.6 million related to our goodwill impairment. Our effective tax ~~rate was (8.3)~~rates were (5.5) percent and (6.6) percent for the ~~three-month period~~three and six-month periods ended ~~March 31,~~June 30, 2020, respectively, as compared to ~~10.4~~9.1 percent inand 10.2 percent for the same ~~period~~periods in ~~2019.~~2019, respectively. The effective rates for the ~~three-month~~six-month periods ended ~~March 31,~~June 30, 2020 and 2019 were impacted by the discrete items discussed above.

As of ~~March 31,~~June 30, 2020, we were in a net deferred tax liability position and recorded an income tax benefit on non-discrete items during the ~~first~~second quarter of 2020. We will monitor our deferred tax asset position each quarter and determine the appropriate income tax benefit to record based upon the reversal of taxable temporary differences. For 2020, our annualized effective income tax rate is expected to range between 24.0 and 25.0 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.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law in the United States. The enactment of the CARES Act did not have a material impact to our consolidated results of operations during the ~~first~~second quarter of 2020, nor do we expect it to have a material impact in the future.

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SEGMENT OPERATING RESULTS

For financial reporting purposes, our segments consist of:

4852

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. Operating expenses associated with regulatory and other revenues have also been assigned to our segments. We do not assign depreciation and amortization expense, goodwill impairment, restructuring and other charges, straight-line expense under the contractual arrangement with Uniti, share-based compensation, ~~business transformation expenses, and~~ spend commitment penalties incurred under certain carrier discount plans, and reserves for funding denials from USAC to our segments because these expenses are centrally managed and/or are not monitored by or reported to the chief operating decision maker (“CODM”) by segment. Similarly, certain costs related to ~~centrally-managed~~centrally managed administrative functions, such as accounting and finance, information technology, network management, legal and human resources, are not assigned to our segments. Interest expense has also been excluded from segment operating results because we manage our financing activities on a total company basis and have not assigned any debt or lease obligations to the segments. Other income (expense), net, reorganization items, net, and income tax (expense) benefit are not monitored as a part of our segment operations and, therefore, these items also have been excluded from our segment operating results.

See Note 11 to the consolidated financial statements for a reconciliation of total segment income to our consolidated net loss.

KINETIC SEGMENT

As of ~~March 31,~~June 30, 2020, the Kinetic segment includes approximately ~~1.2~~1.3 million residential customers. This segment generated ~~$518.5~~$1,034.6 million in revenue and ~~$301.8~~$592.3 million in segment income, or contribution margin, during the first ~~three months~~half of 2020.

Strategy

To be competitive in the marketplace and retain existing customers and grow market share through new customer acquisition, we have made significant investments in our broadband network. We expect the fiber investments in our business footprint to drive increased sales and lower churn by creating a premium customer experience and enabling more robust solutions for our Kinetic Business product, such as cloud voice services, next-generation networking and affordable business continuity plans. Our network investments will also power bandwidth-intensive applications such as video conferencing, file-sharing and high-definition (“HD”) content consumption. Connect America Fund (“CAF”) funding will also provide support and allow us to expand our broadband capabilities.

We expect the fiber investments in our business footprint to drive increased sales and lower churn by creating a premium customer experience and enabling more robust solutions for our Kinetic Business product, such as cloud voice services, next-generation networking and affordable business continuity plans. Our network investments will also power bandwidth-intensive applications such as video conferencing, file-sharing and high-definition (“HD”) content consumption.

~~First~~

Second Quarter 2020 Operational Highlights

During the ~~first~~second quarter of 2020, we grew high-speed Internet customers for the ~~eighth~~ninth consecutive quarter as we added ~~18,000~~22,100 net broadband customers, or ~~a 58 percent~~an increase ~~year-over-year. In the month~~ of ~~March 2020, we added nearly 10,000 net subscribers.~~more than 1,000-basis points year-over-year. As of ~~March 31,~~June 30, 2020, 71 percent of our broadband customer base enjoy speeds of 25 Mbps or greater, a ~~900-basis~~1000-basis point improvement from the end of 2018. We have nearly tripled the availability of 100 Mbps speeds across our footprint and now 43 percent of our households can receive speeds of 100 Mbps or greater and 5456 percent of our households have access to speeds of 25 Mbps or greater. Additionally, we have enabled 1-Gbps capability to over 100,000 commercial locations across our footprint.

The graph below highlights our growth in net broadband customers.

The graph below highlights our significant improvement in speed capabilities since the end of 2018.

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Results of Operations

The following table reflects the Kinetic segment results of operations:


	Three Months Ended March 31,				Increase (Decrease)					Three Months Ended June 30,				Increase (Decrease)					Six Months Ended June 30,				Increase (Decrease)
(Millions)	2020		2019		Amount			%		2020		2019		Amount			%		2020		2019		Amount			%
Revenues and sales:
Service revenues:
High-speed Internet bundles (a)	$	255.0	$	253.1	$	1.9		1		$	258.1	$	253.2	$	4.9		2		$	513.1	$	506.3	$	6.8		1
Voice-only (b)	23.3		28.6		(5.3		)	(19	)	22.7		28.1		(5.4		)	(19	)	46.0		56.7		(10.7		)	(19	)
Video and miscellaneous (c)	7.9		10.1		(2.2		)	(22	)	6.6		10.1		(3.5		)	(35	)	14.5		20.2		(5.7		)	(28	)
Total consumer	286.2		291.8		(5.6		)	(2	)	287.4		291.4		(4.0		)	(1	)	573.6		583.2		(9.6		)	(2	)
Small business (d)	74.1		79.9		(5.8		)	(7	)	72.0		78.4		(6.4		)	(8	)	146.1		158.3		(12.2		)	(8	)
Wholesale (e)	59.6		52.3		7.3			14		58.1		52.3		5.8			11		117.7		104.6		13.1			13
Switched access (f)	5.4		6.3		(0.9		)	(14	)	5.8		6.2		(0.4		)	(6	)	11.2		12.5		(1.3		)	(10	)
CAF Phase II funding and frozen federal USF (f)	43.9		45.4		(1.5		)	(3	)	43.8		44.4		(0.6		)	(1	)	87.7		89.8		(2.1		)	(2	)
State USF and ARM support (g)	19.9		22.1		(2.2		)	(10	)	19.9		21.7		(1.8		)	(8	)	39.8		43.8		(4.0		)	(9	)
End user surcharges (g)	15.7		15.8		(0.1		)	(1	)	14.8		14.3		0.5			3		30.5		30.1		0.4			1
Total service revenues	504.8		513.6		(8.8		)	(2	)	501.8		508.7		(6.9		)	(1	)	1,006.6		1,022.3		(15.7		)	(2	)
Product sales (h)	13.7		8.0		5.7			71		14.3		8.0		6.3			79		28.0		16.0		12.0			75
Total revenues and sales	518.5		521.6		(3.1		)	(1	)	516.1		516.7		(0.6		)	—		1,034.6		1,038.3		(3.7		)	—
Costs and expenses(i)	216.7		212.8		3.9			2		225.6		213.4		12.2			6		442.3		426.2		16.1			4
Segment income	$	301.8	$	308.8	$	(7.0	)	(2	)	$	290.5	$	303.3	$	(12.8	)	(4	)	$	592.3	$	612.1	$	(19.8	)	(3	)


(a)	~~Increase~~Increases reflected growth in broadband customers, partially offset by the effects of competitively priced rate plans ~~aimed at improving~~designed to improve customer ~~churn~~churn.


(b)	~~Decrease was~~Decreases were primarily attributable to lower demand for voice-only services.


(c)	Decreases reflect lower revenues from satellite, cable and IP television offerings due to declines in customers subscribing to these services.


(d)	~~Decrease was~~Decreases were primarily attributable to lower usage for voice-only and high-speed Internet services and declines in customers due to the impacts of competition.


(e)	~~Increase~~Increases due to higher recurring revenues resulting from a price increase implemented in January 2020.

(f)

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 use of our network facilities. The decreases were primarily due to the effects of intercarrier compensation reform. See “Regulatory Matters” for a further discussion.

(g)

Universal Service Fund (“USF”) revenues are government subsidies designed to partially offset the cost of providing wireline services in high-cost areas. CAF Phase II funding is provided for the purpose of expanding and supporting broadband service in rural areas and effectively replaces frozen federal USF support in those states in which we elected to receive the CAF Phase II funding. The access recovery mechanism (“ARM”) is additional federal universal service support available to help mitigate revenue losses from intercarrier compensation reform. The ~~decrease~~decreases in state USF and ARM support in 2020 ~~was~~were primarily due to the effects of intercarrier compensation reform. See “Regulatory Matters” for a further discussion of state and federal regulatory actions impacting these revenues and our election of CAF Phase II funding.


(h)	~~Increase was~~Increases were primarily due to higher sales of network equipment on a wholesale basis to contractors due to increased demand.


(i)	Increases reflect $4.0 million of incremental costs related to COVID-19, primarily consisting of supplemental premium pay and benefits for our technicians and the cost of personal protection supplies and increases in sales commission expense consistent with the growth in broadband customers.

The following table reflects the Kinetic segment operating metrics:


	Consumer Operating Metrics:				Consumer Operating Metrics:
(Thousands)	Households served (a)		High-speed Internet customers (b)		Households served (a)		High-speed Internet customers (b)
June 30, 2020					1,262.7		1,089.4
March 31, 2020	1,247.2		1,067.3		1,247.2		1,067.3
December 31, 2019	1,238.0		1,049.3
Increase in customers	9.2		18.0		15.5		22.1

June 30, 2019					1,244.0		1,034.3
March 31, 2019	1,250.6		1,032.4		1,250.6		1,032.4
December 31, 2018	1,247.9		1,021.0
Increase in customers	2.7		11.4
Decrease (increase) in customers					(6.6	)	1.9

Year-over-Year metrics:
(Decrease) increase in customers	(3.4	)	34.9
Percentage (decrease) increase	—	%	3	%
Increase in customers					18.7		55.1
Percentage increase					2	%	5	%

(a)

~~Increase~~Increases in the number of consumer households served ~~was~~were primarily attributable to the increase in high-speed Internet customers discussed below. For the ~~three-month period~~three and six-month periods ended ~~March 31,~~June 30, 2020, consumer households served increased by ~~9,200,~~15,500 and 24,700, compared to ~~an increase~~decreases of ~~2,700,~~6,600 and 3,900, for the same ~~period~~periods in 2019.

(b)

~~Increase~~Increases in consumer high-speed Internet customers ~~was~~were primarily due to the improved sales and customer retention efforts primarily attributable to offering faster, more competitive speeds. As of ~~March 31,~~June 30, 2020, we provided high-speed Internet service to all 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~~three and six-month periods ended ~~March 31,~~June 30, 2020, consumer high-speed Internet customers increased by ~~18,000,~~22,100 and 40,100, compared to an increase of ~~11,400~~1,900 and 13,300 for the same ~~period~~periods in 2019.

ENTERPRISE SEGMENT

Our Enterprise segment provides advanced communications services to enterprise customers. During the first ~~three months~~half of 2020, the Enterprise segment generated ~~$597.3~~$1,179.8 million in revenue and ~~$113.1~~$232.0 million in contribution margin.

Strategy

We will continue to exploit opportunities to leverage our own network facilities to reduce third-party network access costs. We will also continue to improve employee productivity with targeted system and process enhancements. To grow profitability, we are focused on leveraging the latest technology in offering next-generation products that deliver significant value to our customers while also generating strong incremental sales margins. Software Defined Wide Area Network (“SD-WAN”) and Unified Communication as a Service (“UCaaS”) represent two examples of next-generation solutions where we are seeing significant sales and revenue growth. 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. Furthermore, 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 marketplace.

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~~First~~Second Quarter 2020 Operational Highlights

Our emphasis on growing revenues from our strategic products continues to help offset the continued pressure on our core and legacy product offerings. We remain the nation’s largest SD-WAN service provider and we continue to see demand in the marketplace for our strategic product offerings, including OfficeSuite© and UCaaS as highlighted below.

Results of Operations

As further presented in the table below, our Enterprise segment’s operating results for 2020 were adversely impacted by the effects of operating a business while in bankruptcy, which has resulted in increased customer churn and has limited our ability to transition existing customers to our higher margin next-generation products, such as OfficeSuite®, SD-WAN and UCaaS. In addition to the disruption caused by bankruptcy, our Enterprise segment continues to be impacted by the effects of competition from other large communications services providers who offer similar services, from traditional voice to advanced data and technology services using similar facilities and technologies and compete directly with us for customers of all size.

The following table reflects the Enterprise segment results of operations:


	Three Months Ended March 31,				Increase (Decrease)					Three Months Ended June 30,				Increase (Decrease)					Six Months Ended June 30,				Increase (Decrease)
(Millions)	2020		2019		Amount			%		2020		2019		Amount			%		2020		2019		Amount			%
Revenues and sales:
Service revenues:
Core (a)	$	259.8	$	321.4	$	(61.6	)	(19	)	$	248.7	$	308.8	$	(60.1	)	(19	)	$	508.5	$	630.2	$	(121.7	)	(19	)
Strategic (b)	80.6		63.0		17.6			28		83.1		69.5		13.6			20		163.7		132.5		31.2			24
Legacy (c)	111.6		140.5		(28.9		)	(21	)	109.7		133.4		(23.7		)	(18	)	221.3		273.9		(52.6		)	(19	)
Other (d)	111.9		140.5		(28.6		)	(20	)	112.6		134.8		(22.2		)	(16	)	224.5		275.3		(50.8		)	(18	)
End user surcharges	25.8		30.6		(4.8		)	(16	)	23.2		26.9		(3.7		)	(14	)	49.0		57.5		(8.5		)	(15	)
Total service revenues	589.7		696.0		(106.3		)	(15	)	577.3		673.4		(96.1		)	(14	)	1,167.0		1,369.4		(202.4		)	(15	)
Product sales	7.6		10.4		(2.8		)	(27	)	5.2		8.3		(3.1		)	(37	)	12.8		18.7		(5.9		)	(32	)
Total revenues and sales	597.3		706.4		(109.1		)	(15	)	582.5		681.7		(99.2		)	(15	)	1,179.8		1,388.1		(208.3		)	(15	)
Costs and expenses (e)	484.2		573.8		(89.6		)	(16	)	463.6		542.5		(78.9		)	(15	)	947.8		1,116.3		(168.5		)	(15	)
Segment income	$	113.1	$	132.6	$	(19.5	)	(15	)	$	118.9	$	139.2	$	(20.3	)	(15	)	$	232.0	$	271.8	$	(39.8	)	(15	)


(a)	Core revenues consist of dynamic Internet protocol, dedicated Internet access, multi-protocol label switching services, integrated voice and data, long distance, and managed services. The ~~decrease was~~decreases were primarily attributable to lower sales and higher customer churn in data and integrated services.


(b)	Strategic revenues consist of SD-WAN, UCaaS, OfficeSuite©, and associated network access products and services. Growth in these revenues was primarily due to increased demand for these product offerings.


(c)	Legacy revenues consist of TDM voice and data services. The ~~decrease was~~decreases were primarily due to lower demand and higher customer churn in voice services.


(d)	Other revenues primarily consist of administrative service fees, subscriber line charges, and non-recurring usage-based long-distance revenues. The ~~decrease reflects~~decreases reflect the adverse effects of higher customer churn.

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(e)	Decreases were primarily due to lower interconnection expense from the continuation of network efficiency projects, reduced labor costs due to workforce reductions, lower sales and marketing costs, and an overall decrease in the number of customers served.

WHOLESALE SEGMENT

The Wholesale segment leverages our nationwide network to provide 100 Gbps wave and transport services to wholesale customers, including telecommunications companies, content providers, and cable and other network operators. The Wholesale business segment produced ~~$85.1~~$171.8 million in revenue and ~~$62.4~~$124.4 million in contribution margin for the first ~~three months~~half of 2020.

Strategy

To maintain our contribution margins in our Wholesale business, we will continue to leverage our network assets, offer advanced products and solutions, target our core customers and control costs through our disciplined approach to capital and expense management.

Results of Operations

The following table reflects the Wholesale segment results of operations:


	Three Months Ended March 31,				Increase (Decrease)					Three Months Ended June 30,				Increase (Decrease)					Six Months Ended June 30,				Increase (Decrease)
(Millions)	2020		2019		Amount			%		2020		2019		Amount			%		2020		2019		Amount			%
Revenues and sales:
Service revenues:
Core services (a)	$	78.8	$	85.1	$	(6.3	)	(7	)	$	80.7	$	80.5	$	0.2		—		$	159.5	$	165.6	$	(6.1	)	(4	)
Switched access (b)	5.6		7.5		(1.9		)	(25	)	4.8		7.6		(2.8		)	(37	)	10.4		15.1		(4.7		)	(31	)
Total service revenues	84.4		92.6		(8.2		)	(9	)	85.5		88.1		(2.6		)	(3	)	169.9		180.7		(10.8		)	(6	)
Fiber sales	0.7		—		0.7			*		1.2		—		1.2			*		1.9		—		1.9			*
Total revenues and sales	85.1		92.6		(7.5		)	(8	)	86.7		88.1		(1.4		)	(2	)	171.8		180.7		(8.9		)	(5	)
Costs and expenses (c)	22.7		29.9		(7.2		)	(24	)	24.7		23.1		1.6			7		47.4		53.0		(5.6		)	(11	)
Segment income	$	62.4	$	62.7	$	(0.3	)	—		$	62.0	$	65.0	$	(3.0	)	(5	)	$	124.4	$	127.7	$	(3.3	)	(3	)

(a)

Core services primarily include revenues from providing special access circuits, fiber connections, data transport and wireless backhaul services. The decrease in the six-month period of 2020 was primarily attributable to lower non-recurring revenue, lower usage for voice-only services and higher disconnect activity as a result of carriers migrating to fiber-based networks, partially offset by price increases implemented in January 2020.


(b)	Decreases were primarily attributable to the effects of intercarrier compensation reform.

(c)

~~Decreases were~~Increase in the three-month period of 2020 primarily reflects the related costs of the fiber sales for the period. The decrease in the six-month period of 2020 was primarily related to lower interconnection expense, reductions in long-distance usage by our wholesale customers and rate reductions and costs improvements from the continuation of network efficiency ~~projects.~~projects offset by an increase in cost of products sold in the second quarter of 2020.

Regulatory Matters

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

On occasion, federal and state legislation is introduced 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

USF Reform

In 2015, Windstream accepted Connect America Fund (“CAF”) Phase II support offers for 17 of its 18 states where it is an incumbent provider, totaling approximately $175.0 million in annual funding, and such support continues through 2021. Windstream is 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 greatly exceeded the funding offer. Windstream is on track to meet all of its deployment obligations due at the end of 2020.

A summary of CAF Phase II and frozen USF support we have received or expect to receive is as follows:



(Millions)	2019		2020		2021
CAF Phase II support	$	174.9	$	174.9	$	174.9
New Mexico Frozen USF support	0.6		0.6		0.6
Total	$	175.5	$	175.5	$	175.5

The Rural Digital Opportunity Fund

On April 12, 2019, FCC Chairman Pai announced his intent to create the Rural Digital Opportunity Fund (“RDOF”), which will invest $20.4 billion over a ten-year period in rural high-speed broadband networks over the next decade. Through a reverse auction, the funds will be allocated to service providers to deliver up to gigabit-speed broadband in unserved and underserved rural areas.

On January 30, 2020, the FCC approved the RDOF program, which is the FCC’s most significant effort to close the digital divide to date and will connect millions of rural homes and small businesses to high-speed broadband networks. This fund will be the successor to the current CAF Phase II that Windstream participates in. Windstream advocated for the development of an economically sound funding and auction structure that delivers continuing and much-needed support for further broadband expansion in rural areas. The FCC will conduct a two-phase reverse auction to award the $20.4 billion funding. Phase I will award $16.0 billion and Phase II will award $4.4 billion. The Phase I auction will begin on October 29, 2020 and no date for the Phase II auction has been determined. Phase I will target those areas that current data confirm are wholly unserved at 25 Mbps download and 3 Mbps upload speeds, and Phase II will target unserved locations within areas that data demonstrates are only partially served, as well as any areas not won in Phase I. Windstream plans to actively pursue the opportunities offered through the RDOF program.

Intercarrier Compensation

In 2011, the FCC reformed intercarrier compensation by establishing a multi-year transition to bill and keep for terminating access charges and they capped intrastate and interstate originating access rates but otherwise deferred further reforms to the originating access regime.

In June 2017, the FCC invited interested parties to refresh the record on issues raised by the Order with respect to access charges for 8YY (toll free) calls, which are under the umbrella of originating access. On June 7, 2018, the FCC adopted a Further Notice of Proposed Rulemaking seeking comment on reforms to “curb abuses” in the 8YY toll-free access regime. Currently 8YY service providers pay access charges to the carrier whose customer makes an 8YY call and compensate that originating carrier for an 8YY database query necessary to route the call correctly. The FCC proposes to move interstate and intrastate originating 8YY end office, tandem switching and transport access charges to bill-and-keep over a three-year period. The FCC also proposes to address concerns about excessive and irrationally priced rates for database query charges by capping those charges nationwide at the lowest rate currently charged by any price cap local exchange carrier and allowing only one database query charge per 8YY call. The FCC will also consider whether incumbent local exchange carriers should be able to recover their lost access charge revenues from their end users and whether it should provide any additional revenue recovery. Windstream has been working with other industry participants on proposals to address the FCC’s policy directive. We cannot now reasonably predict the timing or level of reductions, if any, the FCC may choose.

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Set forth below is a summary of intercarrier compensation revenue and federal USF and CAF Phase II support included in regulatory revenues within the consolidated statements of operations:

Three Months Ended
March 31,
(Millions) 2020
2019
Intercarrier compensation revenue and ARM support $ 11.1
$ 15.3
Federal universal service and CAF Phase II support $ 43.4
$ 45.5

~~IntraMTA Switched Access Litigation~~

Several of our subsidiaries are defendants in approximately 25 lawsuits filed by Verizon and Sprint long-distance companies (IXCs) alleging that our subsidiaries 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. These suits were consolidated in a single federal district court in Texas, including a suit filed in 2016 by fifty-five Windstream subsidiaries in Kansas federal district court to collect late payment assessments on amounts Sprint previously withheld, and to ensure consistent application of any adjudication among the subsidiaries. The district court dismissed Verizon and Sprint’s federal law claims in November 2015 and in March 2016, the plaintiffs were denied permission to appeal the dismissal. Verizon and Sprint’s state law claims and the defendants’ counterclaims for return of all withholdings (including those involving Windstream) continued in federal district court along with several lawsuits filed against Level 3 (another long-distance company) and became part of the consolidated case (but not involving Windstream). The parties filed summary judgment motions in March 2018, which were granted by the court on May 15, 2018. The interexchange carriers filed an appeal to the 5th Circuit Court of Appeals on June 29, 2018. The Appeals Court recently affirmed the district court’s rulings against the interexchange carriers and remanded the case back to the district court for clarification of certain issues immaterial to Windstream. The subject matter of the above suits remains a topic of a pending petition for declaratory ruling before the FCC. The outcome of the disputes is currently not predictable due to uncertainty surrounding what the interexchange carriers will do in light of the appellate rulings and FCC action.



	Three Months Ended June 30,				Six Months Ended June 30,
(Millions)	2020		2019		2020		2019
Intercarrier compensation revenue and ARM support	$	10.5	$	15.0	$	21.6	$	30.3
Federal universal service and CAF Phase II support	$	44.3	$	44.3	$	87.7	$	89.8

Last-Mile Access

Windstream has actively engaged in policy advocacy in various FCC proceedings that address the rates, terms and conditions for access to the “last-mile” facilities (i.e., special access and unbundled network elements (“UNEs”)) we need to serve retail business customers through our competitive companies. We incur approximately $900.0 million in annual 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 utilize connections owned by 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 standards, or business data service (“BDS”) inputs, widely available from incumbents but subject to more flexible regulatory standards. Windstream’s purchase of business data service inputs may be subject to volume and term commitments and associated fees and penalties.

In April 2017, the FCC adopted comprehensive reforms to its BDS rules (“BDS Order”). After an appeal by the parties, including Windstream, on August 28, 2018, the United States Court of Appeals for the 8th Circuit upheld the FCC’s rules but, based on a lack of adequate notice, it vacated and remanded the FCC’s finding that transport was sufficiently competitive to deregulate. On October 2, 2018, in response to the 8th Circuit’s remand, the FCC issued a Second Further Notice of Proposed Rulemaking on the topic of transport deregulation and requested that the 8th Circuit issue a stay of its decision vacating the transport in deference to the FCC issuing new rules regarding same. At its July 10, 2019 Open Meeting, the FCC approved a Report and Order revisiting the remanded issues and granting forbearance from ex ante regulation of BDS transport services, subject to a transition period that will end on August 1, 2020.

Additionally, on May 4, 2018, the United States Telecommunications Association (“USTA”) filed a Petition for Forbearance Pursuant to 47 U.S.C. Sec. 160(c) to Accelerate Investment in Broadband and Next-Generation Networks with the FCC. Among other requests, USTA, on behalf of some of its members, sought relief from the requirement to provide unbundled network elements (“UNEs”) and resale discounts to other telecommunications providers. At its July 10, 2019 Open Meeting, the FCC, as part of the same Order granting BDS transport forbearance, granted forbearance from DS1 and DS3 UNE transport obligations, subject to a three-year transition ending August 2, 2022.

On November 22, 2019, the FCC approved a Notice of Proposed Rulemaking to update certain unbundling rules. Specifically the FCC proposes to remove unbundling requirements for: (1) DS1 and DS3 loops in counties and study areas deemed competitive in the BDS Order with an exemption for DS1 loops used to provide residential broadband service and telecommunications service in rural areas; (2) DS0 loops in urban census blocks; (3) narrowband voice-grade loops; and (4) dark fiber transport in wire centers within a half-mile of alternative fiber. The proposal includes a three-year transition for existing customers and a six-month transition for new orders. Windstream has actively participated in industry negotiations to address our concerns with this proposal. We cannot now reasonably predict the timing or substance of any final action on this item.

Windstream is pursuing a strategy to accelerate the transition of its customers from TDM to packet-based services, which is consistent with the underlying goal of the FCC’s reform of business data services and current market trends. However, we believe the BDS order (and the original USTA forbearance proposal) present unnecessary risk of disruption to the market by not allowing an adequate transition period. Customers such as small businesses, schools and libraries are at greatest risk to this disruption, which could occur in the form of price increases for TDM services, the forced transition to purchase new packet-based communications equipment and systems, and the forced obsolescence and write-off of legacy TDM communication systems. Our strategy is to position Windstream for this transition through investments to extend the reach of our metro fiber networks directly to more buildings using fiber and fixed wireless facilities and to negotiate with providers other than the ILECs for last mile access, and to develop next generation, value-added solutions such as SD-WAN and UCaaS. The BDS reforms and UNE proceedings could negatively impact Windstream due to increased expenses to purchase business data services and UNEs, the need for greater capital investments to retain our competitiveness, and increased customer and revenue churn due to increasing prices.

Rural Healthcare Funding

Windstream and one of its Enterprise customers entered into an agreement in which Windstream provided communication services to several of the customer’s locations. The majority of funding for the services was administered by USAC pursuant to the Universal Service Rural Health Care Telecommunications Program which offers reduced rates for broadband and telecommunications services to rural health care facilities. In March 2017, USAC issued a funding denial to the customer on the basis that certain rules of the FCC were violated with the selection of Windstream as the service provider. Due to an alleged conflict of interest created by a third-party Windstream channel partner that acted as a consultant for the customer regarding the agreement, USAC asserted that Windstream’s selection was not based upon a fair and open competitive bidding process. USAC’s denial addressed accrued funding of approximately $16.6 million, as well as funding of approximately $6.0 million previously remitted to us. Windstream, along with the customer, appealed the denial; USAC rejected the appeal on June 29, 2018, upholding its previous denial of funding. Windstream appealed the denial to the FCC in August 2018. The FCC has yet to rule on the appeal and timing of a decision by the FCC is unknown. As previously discussed, we recorded a reserve for the funding denial from USAC during the second quarter of 2019, and as a result, we have no additional loss exposure related to this matter.

Windstream did not file a Suggestion of Bankruptcy as a result of the filing of the Chapter 11 Cases with regard to this matter as it was determined it falls under a regulatory exception and is precluded from the automatic stay. USAC filed a proof of claim in the Chapter 11 Cases for approximately $6.0 million, reflecting the amount of funding previously remitted to Windstream as referenced ~~above.~~above; Windstream has filed an objection to this proof of claim.

State Regulation and Legislation

State Universal Service

We recognize revenue from the receipt of state universal service funding in a limited number of states in which we operate: Texas, Georgia, Pennsylvania, New Mexico, Oklahoma, South Carolina, Alabama, Nebraska, and Arkansas. For the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2020, we recognized ~~$19.9~~$39.8 million (the majority of which came from the Texas USF). in state USF support. 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 first ~~three~~six months of 2020, we received ~~$9.4~~$18.9 million from the large company program and ~~$1.0~~$2.0 million from the small company program. The Texas USF is currently running a continuing quarterly deficit. Absent reform, ~~at this rate it~~the fund’s cash reserve is expected to ~~exhaust its cash reserve~~be exhausted by the end of 2020. ~~The~~Windstream is actively working with industry members and state legislatures to ensure that the Public Utility Commission ~~is currently examining remedies~~of Texas takes action to restore stability to the ~~fund, and Windstream is actively involved in those discussions.~~fund.

In Nebraska, the high-cost Nebraska Universal Service Fund (“NUSF”) support available for 2020 ~~will increase such that our funding will increase~~increased from $4.6 million ~~received~~ in 2019 to $5.9 million in 2020. This funding increase is directly related to the Nebraska Public Service Commission’s change from a revenue-based assessment model to a connections-based assessment model. The ~~Nebraska Public Service~~ Commission recently opened a docket proposing reform to the state USF funding process for price cap carriers. The proposed reform would use a cost model to determine funding at the exchange level and carriers would have an obligation to provide service to currently unserved areas within each exchange where the funds are accepted. The proposal also contemplates that areas not elected for funding by carriers would be put up for funding via a reverse auction ~~of future NUSF funding. Most commenters have argued that~~mechanism. The Commission has requested comments on the ~~proposed rules regarding that reverse auction~~proposal, which are ~~impermissibly vague. To date, no further action has been directed by the Commission.~~due July 30, 2020 and Windstream is actively participating in this proceeding.

In 2017, New Mexico enacted a statute to reform the New Mexico State Rural Universal Service Fund (“SRUSF”). Among other things, the legislation authorizes an annual broadband fund in addition to the access replacement fund from which we will continue to receive support. Beginning in 2018, the amount of support is determined by adjusting the 2014 support amount by a carrier’s change in access line count and imputing the affordability benchmark, which is currently based on the FCC’s residential rate benchmark. We will be required to use at least 60 percent of this support to deploy and maintain broadband service in rural areas of the state. Our support for 2019 was $5.0 million and is expected to be $4.9 million in 2020.

~~Historically, we have received $3.4 million from the Oklahoma High Cost Fund (“OHCF”) on an annual basis. On February 8, 2018, the~~The Oklahoma Corporation Commission ~~issued an order phasing out~~has a proceeding to examine changing the ~~OHCF. As of February 28, 2019,~~current funding ~~was cut 25 percent per year, with all funding terminating on February 28, 2022. However, in December 2018, we received notice that our application~~mechanism for ~~replacement funds from~~ the Oklahoma Universal Service Fund ~~(“OUSF”) was approved. Accordingly, we will continue~~from an intrastate revenue process to ~~receive $3.4 million annually from~~one based on connections. Windstream is actively participating in this proceeding and supports the change to a ~~combination of OHCF and OUSF support through February 28, 2022, and thereafter solely from the OUSF.~~connections-based assessment model.

Universal service reform is also possible in Pennsylvania. Windstream currently receives $13.3 million annually from that fund and cannot estimate the financial impact that would result from changes, if any.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Liquidity After Filing the Chapter 11 Cases

The filing of the Chapter 11 Cases constituted an event of default that accelerated the obligations under our debt agreements. Due to the Chapter 11 Cases, however, our creditors’ ability to exercise remedies under our debt agreements were stayed as of the date of the Chapter 11 petition filing. In general, as debtors-in-possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Pursuant to first day motions filed with the Bankruptcy Court, the Bankruptcy Court authorized us to conduct our business activities in the ordinary course. During the pendency of the Chapter 11 Cases, our principal sources of liquidity are expected to be limited to cash flow from operations, cash on hand and borrowings under our debtor-in-possession facilities discussed below. Our ability to maintain adequate liquidity through the reorganization process and beyond depends on successful operation of our business, and appropriate management of operating expenses and capital spending. Our anticipated liquidity needs are highly sensitive to changes in each of these and other factors.

“Debtor-in-Possession” Financing

On the Petition Date, Windstream Holdings and Windstream Services entered into a commitment letter (as amended, the “DIP Commitment Letter”) dated as of February 25, 2019 with Citigroup Global Markets Inc. (together with Barclays Bank, PLC, Credit Suisse Loan Funding, Deutsche Bank Securities Inc., Goldman Sachs Bank USA and JPMorgan Chase Bank, N.A., the “Arrangers”), pursuant to which the Arrangers or their affiliates committed to provide senior secured superpriority debtor-in-possession credit facilities in an aggregate principal amount of $1.0 billion, subject to conditions described therein. In connection with the Chapter 11 Cases and in accordance with the DIP Commitment Letter, Windstream Holdings and Windstream Services entered into a Superpriority Secured Debtor-in-Possession Credit Agreement, dated as of March 13, 2019 (the “DIP Credit Agreement”), by and among Windstream Services, as the borrower (the “Borrower”), Windstream Holdings, the other guarantors party thereto, the lenders party thereto (together with such other financial institutions from time to time party thereto, the “DIP Lenders”) and Citibank, N.A., as administrative agent and collateral agent (the “Agent”). The DIP Credit Agreement provides for $1.0 billion in superpriority secured debtor-in-possession credit facilities comprising of (i) a superpriority revolving credit facility in an aggregate amount of $500.0 million (the “Revolving Facility”) and (ii) a superpriority term loan facility in an aggregate principal amount of $500.0 million (the “Term Loan Facility” and, together with the Revolving Facility, the “DIP Facilities”), subject to the terms and conditions set forth therein.

On February 26, 2019, the date that the Debtors filed a motion for the approval of the DIP Facilities with the Bankruptcy Court, which was granted (the “Effective Date”), a portion of the Term Loan Commitments in an amount equal to $300.0 million and a portion of the Revolving Facility in an amount equal to $100.0 million became available to Windstream Services. On April 16, 2019, in connection with our Second Day Hearing, Windstream Services received access to an additional $600.0 million of financing for a total of $1.0 billion available to us under the DIP Facilities. In March 2020, Windstream Services borrowed $400.0 million under the Revolving Facility to assist with working capital and other general corporate purposes during the COVID-19 global pandemic. According, as of ~~March 31,~~June 30, 2020, $500.0 million was outstanding under the Term Loan Facility and $400.0 million borrowings were outstanding under the Revolving Facility. Considering letters of credit of ~~$28.7~~$28.8 million and ~~$58.4~~$63.5 million reserved for potential professional fees, the amount available for borrowing under the Revolving Facility was ~~$12.9~~$7.7 million as of ~~March 31,~~June 30, 2020.

The maturity date of the DIP Facilities is February 26, 2021. Loans under the Term Facility and the Revolving Facility will bear interest, at the option of Windstream Services, at (1) 1.50 percent plus a base rate of the highest of (i) Citibank, N.A.’s base rate, (ii) the Federal funds effective rate plus 1/2 of 1 percent and (iii) the one-month LIBOR plus 1.00 percent per annum; or (2) 2.50 percent plus LIBOR. From and after the Effective Date, a non-refundable unused commitment fee will accrue at the rate of 0.50 percent per annum on the daily average unused portion of the Revolving Facility (whether or not then available).

acquisitions, pay dividends and distributions and make payments in respect of junior or pre-petition indebtedness, in each case subject to customary exceptions for debtor-in-possession loan agreements of this type.

The DIP Credit Agreement also includes certain customary representations and warranties, affirmative covenants and events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, certain events under ERISA, unstayed judgments in favor of a third party involving an aggregate liability in excess of $25 million, change of control, specified governmental actions having a material adverse effect or condemnation or damage to a material portion of the collateral. Certain bankruptcy-related events are also events of default, including, but not limited to, the dismissal by the Bankruptcy Court of any of the Chapter 11 Cases, the conversion of any of the Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code, the appointment of a trustee pursuant to Chapter 11 of the Bankruptcy Code, the final order approving the DIP Facilities failing to have been entered within 60 days after the Petition Date and certain other events related to the impairment of the DIP Lenders’ rights or liens granted under the DIP Credit Agreement.

The foregoing description of the DIP Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the DIP Credit Agreement.

Historical Cash Flows

We rely largely on operating cash flows to provide for our liquidity requirements. As noted above, we also have access to and available borrowing capacity under our DIP Facilities. We have assessed our current and expected funding requirements and our current and expected sources of liquidity, and have determined, based on our forecasted financial results and financial condition as of ~~March 31,~~June 30, 2020, that cash on hand and cash expected to be generated from operating activities will be sufficient to fund our ongoing working capital requirements, planned capital expenditures, scheduled debt service requirements, and payments due under the contractual arrangement with Uniti. We incurred a goodwill impairment ~~charge~~charges of ~~$2,339.0~~$2,712.3 million in the first ~~quarter~~half of 2019 based on the results of interim goodwill impairment assessments. While these non-cash charges reduced our reported operating results, the charges had no effect on our immediate or near-term liquidity position. Any future impairment charges could materially adversely affect our financial results in the periods in which they are recorded.

The following table summarizes our cash flow activities for the ~~three~~six months ended ~~March 31:~~June 30:


(Millions)	2020			2019			2020			2019
Cash flows provided from (used in):
Operating activities	$	101.7		$	218.2		$	121.7		$	293.9
Investing activities	(234.2		)	(197.0		)	(491.6		)	(415.7		)
Financing activities	395.4			57.5			388.1			231.3
Increases in cash, cash equivalents and restricted cash	$	262.9		$	78.7		$	18.2		$	109.5

Our cash position increased by ~~$262.9~~$18.2 million to ~~$462.5~~$217.8 million at ~~March 31,~~June 30, 2020, from $199.6 million at December 31, 2019, as compared to an increase of ~~$78.7~~$109.5 million during the same period in 2019. Cash inflows in the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2020 were primarily from operating activities and incremental debt proceeds from our DIP Facilities. These inflows were partially offset by cash outflows for capital expenditures, purchase of FCC spectrum licenses and payments under our finance lease obligations.

Cash Flows - Operating Activities

Cash provided from operations is our primary source of funds. Cash flows provided from operating activities decreased by ~~$116.5~~$172.2 million in the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2020, as compared to the same period in 2019, primarily due to an adverse change in the payment of accounts payable, reflecting the favorable effects realized in the first ~~quarter~~half of 2019 from no longer paying pre-petition trade accounts payable subsequent to the filing of the Chapter 11 Cases. This adverse impact on cash provided from operations in the first ~~quarter~~half of 2020 was partially offset by improved collection of trade accounts receivable and other favorable changes in working capital.

We are currently utilizing net operating loss carryforwards (“NOLs”) and other income tax initiatives to lower our cash income tax obligations during 2020. We expect to remain a minimal cash taxpayer for the foreseeable future due to our ability under current tax law to extend the time frame we have to use NOLs generated after December 31, 2017.

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 ~~$37.2~~$75.9 million in the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2020, as compared to the same period in 2019, primarily due to an increase in our capital spending. Capital expenditures were ~~$232.4~~$480.1 million for the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2020 compared to ~~$192.8~~$407.4 million for the same period in 2019, an increase of ~~$39.6~~$72.7 million.

Cash Flows - Financing Activities

Cash provided from financing activities was ~~$395.4~~$388.1 million for the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2020 compared to ~~$57.5~~$231.3 million for the same period in 2019.

Proceeds from ~~new~~ issuances of debt during the first ~~three~~six months of 2020 were $400.0 million, consisting of ~~new~~ borrowings under our DIP Revolving Facility. Comparatively, proceeds from ~~new~~ issuances of long-term debt during the first ~~three~~six months of 2019 were ~~$455.0~~$655.0 million, which consisted of ~~$300.0~~$500.0 million of ~~new~~ borrowings under our DIP Term Loan Facility and additional borrowings of $155.0 million under Windstream Services’ revolving line of credit prior to the filing of the Chapter 11 Cases.

There were no debt repayments during the first ~~quarter~~half of 2020. Debt repayments for the ~~three months~~six-month period ended ~~March 31,~~June 30, 2019, totaled $372.4 million and primarily consisted of repayments of $370.0 million of borrowings under Windstream Services’ revolving line of credit prior to the filing of the Chapter 11 Cases. On January 3, 2019, Windstream Services repaid $312.0 million of these borrowings using proceeds received from the December 31, 2018 sale of the Consumer CLEC business.

Pension and Employee Savings Plan Contributions

For 2020, the expected employer contributions for pension benefits consists of $52.8 million to the qualified pension plan to satisfy our remaining 2019 and 2020 funding requirements. During the first ~~three months~~quarter of 2020, we made our required quarterly employer contribution of $3.4 million in cash. The remaining required quarterly and annual employer contributions due in 2020 will be funded no later than December 31, 2020, as permitted under certain relief provisions included in the CARES Act. The amount and timing of future contributions to the qualified pension plan are dependent upon a myriad of factors including future investment performance, changes in future discount rates and changes in the demographics of the population participating in the plan. We also expect to make cash contributions in 2020 totaling $0.9 million to fund the expected benefit payments of our unfunded supplemental executive retirement pension plans.

Debt

Windstream Holdings has no debt obligations. All of our debt 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,~~June 30, 2020, we had $6,499.3 million in debt outstanding. Except for the DIP Facilities, all of our debt has been classified as liabilities subject to compromise in the accompanying consolidated balance sheets (see Note 3).

As discussed in Note 2, Judge Furman’s findings and filing of the Chapter 11 Cases constitute events of default under certain of Windstream Services’ and its subsidiaries’ debt instruments (the “Debt Instruments”). Any efforts to enforce payment obligations under the Debt Instruments and other obligations of the Debtors are automatically stayed as a result of the filing of the Chapter 11 Cases and holders’ rights of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code.

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

Following the issuance of $400.0 million of borrowings under the DIP Revolving Facility, our contractual obligations and commitments changed from December 31, 2019. The table below presents our principal and interest payments on our DIP Facilities as of ~~March 31,~~June 30, 2020.


	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
DIP Facilities	$	900.0	$	—	$	—	$	—	$	900.0	$	900.0	$	—	$	—	$	—	$	900.0
Interest payments on DIP Facilities	29.5		—		—		—		29.5		16.1		—		—		—		16.1
Total	$	929.5	$	—	$	—	$	—	$	929.5	$	916.1	$	—	$	—	$	—	$	916.1

Supplemental Guarantor Financial Information

In connection with the issuance of 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. Windstream Holdings is not a guarantor of any Windstream Services debt instruments.

The following tables present summarized financial information for Windstream Services and the Guarantors, on a combined basis, after elimination of intercompany transactions and balances between Windstream Services, the Guarantors and the Non-Guarantors.

Summarized and combined balance sheet information was as follows:


(Millions)	March 31, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Current assets	$	688.8	$	426.1	$	441.9	$	426.1
Noncurrent assets	$	3,103.7	$	3,119.2	$	3,095.7	$	3,119.2
Current liabilities	$	1,128.6	$	718.2	$	1,200.0	$	718.2
Noncurrent liabilities (a)	$	7,482.2	$	7,523.6	$	7,447.7	$	7,523.6


(a)	Includes ~~$7,478.0~~$7,439.5 million and $7,100.5 million of liabilities classified as subject to compromise at ~~March 31,~~June 30, 2020 and December 31, 2019, respectively.

Summarized and combined results of operations for the ~~three months~~six-month period ended ~~March 31,~~June 30, 2020 was as follows:


(Millions)
Revenues and sales	$	237.1		$	467.6
Operating loss	$	20.5
Operating income				$	37.8
Loss before income taxes	$	(79.6	)	$	(205.2	)
Net loss	$	(82.0	)	$	(214.2	)

Reconciliation of Non-GAAP Financial Measures

From time to time, we will reference certain non-GAAP measures in our filings including a non-GAAP measure entitled operating income before depreciation and amortization (“OIBDA”). OIBDA can be calculated directly from our consolidated financial statements prepared in accordance with GAAP by taking operating (loss) income and adding back goodwill impairment and depreciation and amortization expense. Management considers OIBDA to be useful to investors as we believe it provides for comparability and evaluation of our ongoing operating performance and trends by excluding the impact of non-cash depreciation and amortization from capital investments and non-cash goodwill impairment charges which are not indicative of our ongoing operating performance. 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 a non-GAAP financial measure titled OIBDA to the most closely related financial measure reported under GAAP referenced in this filing.


	Three Months Ended March 31,					Three Months Ended June 30,					Six Months Ended June 30,
(Millions)	2020		2019			2020		2019			2020		2019
Operating income (loss)	$	14.1	$	(2,381.3	)	$	24.8	$	(422.9	)	$	38.9	$	(2,804.2	)
Depreciation and amortization	232.6		271.5			219.9		276.0			452.5		547.5
Goodwill impairment	—		2,339.0			—		373.3			—		2,712.3
OIBDA	$	246.7	$	229.2		$	244.7	$	226.4		$	491.4	$	455.6

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, 2019, 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 calculating depreciation and amortization expense and evaluating the useful lives of property, plant and equipment, assessing goodwill for impairment, accounting for pension benefits, and accounting for deferred income taxes and related tax contingencies. There were no material changes to these critical accounting policies during the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2020.

Recently Adopted Authoritative Guidance

~~During the first quarter of~~Effective January 1, 2020, we adopted the following authoritative guidance:

Financial Instruments - Credit Losses

Implementation Costs in Cloud Computing Arrangements

See Note 1 for further discussion of this guidance and the related impacts to our consolidated financial statements.

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 to the consolidated financial statements.

Income Taxes

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 for this Quarterly Report on Form 10-Q.

This report contains various forward-looking statements which represent our expectations or beliefs concerning future events, including, without limitation, our future performance, our ability to comply with the covenant in the agreements governing our indebtedness and the availability of capital and terms thereof. Statements expressing expectations and projections with respect to future matters are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We caution that these forward-looking statements involve a number of risks and uncertainties and are subject to many variables which could impact our future performance. These statements are made on the basis of management’s views, estimates, projections, beliefs and assumptions, as of the time the statements are made, regarding future events and results. There can be no assurance, however, that management’s expectations will necessarily come to pass. 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.

A wide range of factors could cause actual results to differ materially from those contemplated in our forward-looking statements, including, but not limited to:

adverse changes in economic, political or market conditions in the areas that we serve, the U.S. and globally, including but not limited to, changes resulting from epidemics, pandemics and outbreaks of contagious diseases, including the COVID-19 global pandemic as declared by the World Health Organization on March 11, 2020, or other adverse public health developments;

potential adverse impacts of the COVID-19 global pandemic on our employees’ health, safety, and their opportunities to perform job tasks due to social distancing or working remotely, on the performance of our network, on our relationships with our current or prospective customers and vendors and their abilities to perform under current or proposed arrangements with us, and on our supply chain;

risks and uncertainties relating to the Chapter 11 Cases, including completion of our Chapter 11 Cases and timing of our emergence from the bankruptcy process that is dependent on several factors, including approval of our Plan of Reorganization and obtaining necessary regulatory approvals related to the emergence process, and the impact of these risks and uncertainties on our business;

our ability to obtain Bankruptcy Court approval with respect to our Plan of Reorganization, that includes any Plan supplements or exhibits, or any of our motions filed in the Chapter 11 Cases from time to time;

our ability to pursue our business strategies during the pendency of the Chapter 11 Cases;

our ability to generate sufficient cash to fund our operations during the pendency of the Chapter 11 Cases;

our ability to implement a business plan;

the diversion of management's attention as a result of the Chapter 11 Cases;

increased levels of employee attrition as a result of the Chapter 11 Cases;

our ability to continue as a going concern;

volatility of our financial results as a result of the Chapter 11 Cases;

the conditions to which our debtor-in-possession financing is subject to and the risk that these conditions may not be satisfied for various reasons, including for reasons outside of our control;

the impact of any challenge by creditors or other parties to our proposed Plan of Reorganization and previously completed transactions or other restructuring issues, along with risks associated with our ability to defend motions filed presenting these challenges;

the potential adverse effects of the Chapter 11 Cases on our liquidity or results of operations and increased legal and other professional costs necessary to execute our reorganization;

trading price and volatility of our common stock, including the stock trading on the OTC Pink Sheets as maintained by the OTC Market Group, Inc.;

our substantial debt could adversely affect our cash flow and impair our ability to raise additional capital on favorable terms;

the potential for incumbent carriers to impose monetary penalties for failure to meet specific volume and term commitments under their special access pricing and tariff plans, which Windstream uses to lease last-mile connections to serve its retail business data service customers, without FCC action;

the impact of the FCC’s comprehensive business data services reforms that were confirmed by an appellate court, which may result in greater capital investments and customer and revenue churn because of possible price increases by our ILEC suppliers for certain services we use to serve customer locations where we do not have facilities;

the impact of new, emerging or competing technologies and our ability to utilize these technologies to provide services to our customers;

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;

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

our election to accept statewide offers under the FCC’s Connect America Fund, Phase II, and the impact of such election on our future receipt of federal universal service funds and capital expenditures, and any return of support received pursuant to the program or future versions of the program implemented by the FCC, including but not limited to the Rural Digital Opportunity Fund;

our ability to make payments under the current or future arrangements with Uniti, which may be affected by results of operations, changes in our cash requirements, cash tax payment obligations, or overall financial position;

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

unfavorable rulings by state public service commissions in current and further proceedings regarding universal service funds, intercarrier 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 or other actuarial assumptions;

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

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

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

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

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

other risks and uncertainties referenced from time to time in our Annual Report on Form 10-K for the year ended December 31, 2019, including those additional factors under “Risk Factors” in Item 1A of Part 1, and in other filings of ours with the SEC at www.sec.gov or not currently known to us or that we do not currently deem to be material.

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.

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WINDSTREAM HOLDINGS, INC.

WINDSTREAM SERVICES, LLC

FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is comprised of three elements: interest rate risk, equity risk and foreign currency risk. We continue to have exposure to market risk from changes in interest rates, as further discussed below. Because we do not own any marketable equity securities nor operate in foreign countries denominated in foreign currencies, we are not exposed to equity or 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 on our DIP Facilities and under Windstream Services’ senior secured credit facility. Subsequent to the filing of the Chapter 11 Cases, Windstream Services has not entered into any derivative financial instruments to hedge its exposure to changes in variable interest rates. ~~In March 2020, Windstream Services borrowed $400.0 million under the DIP Revolving Facility.~~ As of ~~March 31,~~June 30, 2020 and 2019, the unhedged portion of our variable rate debt was $3,450.9 million and ~~$2,850.9~~$3,050.9 million, respectively. 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 increased annual interest expense by approximately $34.5 million and ~~$28.5~~$30.5 million for the ~~three-month periods~~six-month period ended ~~March 31,~~June 30, 2020 and 2019, respectively. Actual results may differ from this estimate.

Item 4. Controls and Procedures

Controls and Procedures for Windstream Holdings, Inc.


(a)	Evaluation of Disclosure Controls and Procedures

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Windstream Holdings’ disclosure controls and procedures as of the end of the period covered by this quarterly report (the “Evaluation Date”). 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. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such disclosure controls and procedures were not effective as of ~~March 31,~~June 30, 2020, due to the material weakness in its internal control over financial reporting that was previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 and described below.

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A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of an entity’s annual or interim financial statements will not be prevented or detected on a timely basis.

The Company did not design and maintain effective controls over analyzing, validating and concluding on key assumptions provided by third-party valuation firms and used in the Company’s accounting for leases. Specifically, the Company did not have effective controls to assess the reasonableness of certain assumptions used in the determination of the lease classification, including to identify and evaluate contrary information, resulting in the untimely resolution of our lease classification conclusion.

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While this control deficiency did not result in a material misstatement to the Company’s consolidated interim or annual financial statements, management concluded this control deficiency could result in a misstatement to the lease-related account balances or disclosures that would result in a material misstatement to interim or annual consolidated financial statements that would not be prevented or detected. Accordingly, management concluded that this control deficiency constituted a material weakness.


(b)	Remediation Plan

In response to the material weakness described above, management is currently designing and implementing enhancements to our process and controls related to the review and validation, including consideration of contrary evidence, of the analysis prepared by third-party valuation firms used for purposes of lease accounting to ensure that the assumptions are properly reviewed, validated and accounted for, and management can effectively evaluate analyses conducted by third-party valuation firms that perform analyses to provide assumptions that support lease accounting.

Management believes that the implementation of the above changes and resulting improvements in internal control over financial reporting will remediate the identified material weakness; however, the material weakness cannot be considered fully remediated until the changes in internal control processes and procedures have been in operation for a period of time and subject to control testing by management.


(c)	Changes in Internal Control over Financial Reporting

There have been no changes to our internal control over financial reporting (defined in Exchange Act Rule 13a-15(f)) that occurred during the quarter ended ~~March 31,~~June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Controls and Procedures for Windstream Services, LLC


(a)	Evaluation of Disclosure Controls and Procedures

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Windstream Services’ disclosure controls and procedures as of the end of the period covered by these quarterly reports (the “Evaluation Date”). 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. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such disclosure controls and procedures were not effective as of ~~March 31,~~June 30, 2020, due to the material weakness in its internal control over financial reporting that was previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 and described below.

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(b)	Remediation Plan


(c)	Changes in Internal Control over Financial Reporting

~~Table of Contents~~

WINDSTREAM HOLDINGS, INC.

WINDSTREAM SERVICES, LLC

FORM 10-Q

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Litigation

that, in effecting the Spin-Off, we failed to comply with the covenants set forth in Section 4.19 of the 2013 Indenture restricting certain sale and leaseback transactions;

that our breaches of Section 4.19 constitute a “Default” under 2013 Indenture;

that the 6.375 percent notes issued in the 2017 exchange and consent transactions do not constitute “Additional Notes” under the 2013 Indenture;

that the notice of default with respect to the foregoing breaches was valid and effective;

that those breaches ripened into “Events of Default” as defined in the 2013 Indenture on December 6, 2017;

enjoining us from taking any further action to issue new notes in contravention of, or to otherwise violate, the 2013 Indenture;

awarding Aurelius a money judgment in an amount of $310,459,959.10 plus interest from and after July 23, 2018; and

dismissing our counterclaims with prejudice.

While the plaintiffs in the Murray case filed a proof of claim for an undetermined monetary amount, neither the plaintiffs in the Yadegarian nor Graham cases submitted proof of claims.

Other Matters

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, 2019, filed with the SEC on May 19, 2020.

~~Item 5~~.~~Other Information~~

In connection with the Settlement (as defined and discussed below), Windstream Holdings, Inc. and its direct and indirect subsidiaries (collectively, “Windstream”), certain of Windstream’s creditors (the “Windstream Creditors”), and Uniti Group Inc. and its direct and indirect subsidiaries (collectively, “Uniti,” and together with Windstream and the Windstream Creditors, the “Parties”) entered into a Plan Support Agreement dated as of March 2, 2020 (as amended on March 9, 2020 and March 13, 2020, the “Plan Support Agreement”). Pursuant to the Plan Support Agreement, the Parties agreed to support the Settlement and the approval of a plan of reorganization for Windstream (the “Plan”) on the terms and subject to the conditions described therein. The parties to the Plan Support Agreement expect the Plan to become effective, and for Windstream to emerge from bankruptcy, by August 29, 2020.

On May 12, 2020, following approval by the U.S. Bankruptcy Court for the Southern District of New York and its issuance of its formal order approving the terms of the Settlement, Windstream and Uniti entered into the Settlement Agreement to resolve any and all claims and causes of action that have been or may be asserted by Windstream against Uniti, including all litigation brought by Windstream and certain of Windstream’s creditors (the “Settlement”). The effectiveness of the Settlement is subject to finalization and execution of definitive documentation, certain regulatory approvals, and other conditions precedent, including receipt of certain legal opinions as to federal tax compliance. Following satisfaction of all such conditions precedent, consummation of the Settlement will occur on the earlier of Windstream’s emergence from bankruptcy and February 28, 2021. All litigation between Windstream and Uniti is stayed while the parties implement the Settlement.

The foregoing descriptions are qualified in their entirety by reference to the Plan Support Agreement, Amendment No. 1 thereto, Amendment No. 2 thereto and the Settlement Agreement, copies of which is attached to this Quarterly Report on Form 10-Q as Exhibits 10.1, 10.2, 10.3 and 10.4 and are incorporated by reference herein.

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Item 6. Exhibits

INDEX OF EXHIBITS

Form 10-Q Exhibit No.	Description of Exhibits

~~10.1~~2.1	Order Confirming the First Amended Joint Chapter 11 Plan ~~Support Agreement, dated as~~ of ~~March 2, 2020, by and among~~Reorganization of Windstream Holdings, Inc. et al., Pursuant to Chapter 11 of the Bankruptcy Code, including such First Amended Joint Chapter 11 Plan of Organization (incorporated herein by reference to Exhibit 2.1 to Windstream Holdings, Inc.’s and Windstream Services, ~~LLC and their subsidiaries party thereto,~~LLC’s Current Report on Form 8-K filed with the ~~creditors party thereto, Elliott Investment Management LP and its affiliated funds, and Uniti Group, Inc.~~SEC on July 1, 2020).	~~(a)~~*

~~10.2~~	~~Amendment No. 1, dated as of March 9, 2020, to the Chapter 11 Plan Support Agreement.~~	~~(a)~~

~~10.3~~	~~Amendment No. 2, dated as of March 13, 2020, to the Chapter 11 Plan Support Agreement.~~	~~(a)~~

~~10.4~~10.1	Settlement Agreement, dated as of April 20, 2020, by and among Windstream Holdings, Inc., Windstream Services, LLC and their subsidiaries party thereto and Uniti Group, Inc. and their subsidiaries party ~~thereto.~~thereto (incorporated herein by reference to Exhibit 10.4 to Windstream Holdings, Inc.’s and Windstream Services, LLC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 filed with the SEC on June 9, 2020).	~~(a)~~*

31(a)	Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~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	The following financial information from the combined quarterly report on Form 10-Q of Windstream Holdings, Inc. and Windstream Services, LLC for the quarter ended ~~March 31,~~June 30, 2020 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Income (Loss), (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Shareholders Equity (Deficit), and (vi) Notes to the Consolidated Financial Statements.	(a)

104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).	(a)



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

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, these registrants 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)
~~June 9,~~July 30, 2020		~~June 9,~~July 30, 2020

7375



	Three Months Ended March 31, 2020
	Increase (Decrease)
(Millions)	Amount			%
Decrease in Wholesale service revenues (a)	$	(8.2	)
Decrease in Kinetic service revenues (b)	(8.8		)
Decrease in Enterprise service revenues (c)	(106.3		)
Net decrease in service revenues	$	(123.3	)	(9	)