Windstream Corporation
WINDSTREAM CORP (Form: 10-K, Received: 02/20/2013 06:03:18)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________ to __________________________________                                                                                                       
Commission file number 1-32422
WINDSTREAM CORPORATION

 (Exact name of registrant as specified in its charter)
DELAWARE
  
20-0792300
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
 
 
 
4001 Rodney Parham Road, Little Rock, Arkansas
  
72212
(Address of principal executive offices)
  
(Zip Code)
Registrant’s telephone number, including area code              (501) 748-7000                 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
  
Name of each exchange on which registered
Common Stock ($0.0001 par per share)
  
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: 
NONE
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     ý   YES    ¨  NO
    
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.      ¨   YES   ý   NO   

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                            ý   YES    ¨  NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                         ý   YES    ¨  NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

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

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

Aggregate market value of voting stock held by non-affiliates as of June 30, 2012 - $5,681,407,313
Common shares outstanding, February 11, 2013 - 590,484,782
DOCUMENTS INCORPORATED BY REFERENCE
Document
  
Incorporated Into     
Proxy statement for the 2013 Annual Meeting of Stockholders
  
Part III           
The Exhibit Index is located on pages 30 to 34.
  
 


Table of Contents

Windstream Corporation
Form 10-K, Part I
Table of Contents
 
 
Page No.
 
Part I
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Part II
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
 
Part III
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
 
Part IV
 
 
 
 
Item 15.




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Windstream Corporation
Form 10-K, Part 1


 
Item 1. Business
THE COMPANY

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

OVERVIEW

Windstream's vision is to become the premier enterprise communications and services provider in the United States while maintaining our strong, stable consumer business. Windstream provides advanced communications and technology solutions, including managed services and cloud computing, to businesses nationwide. In addition to business services, we offer broadband, voice and video services to consumers in primarily rural markets. We have operations in 48 states and the District of Columbia, a local and long-haul fiber network spanning approximately 115,000 miles, a robust business sales division and 23 data centers.

Strategy

Our strategy is to maximize growth opportunities with our enterprise business customers while optimizing our cost structure and stabilizing the performance of our heritage consumer business. Our goal from these actions is to generate solid and sustainable cash flow over the long-term, and we intend to return a significant portion of this cash flow to our shareholders through our current dividend practice.

To accomplish our strategy, we are transitioning our revenue streams away from traditional consumer voice services to strategic growth areas of business services and consumer broadband. This diversification of our revenue stream helps us to offset revenue declines driven by consumer customer losses and wholesale revenue declines driven by intercarrier compensation reform.
 
The transition of our revenue streams has required a period of heavy capital expenditures, which will begin to decline in 2013 as our capital spend returns to more normalized levels. These investments allow us to expand our business service offerings and increase broadband speeds and capacity in our consumer markets.
The expansion of our fiber transport network, through acquisitions and organic growth, enhances our ability to provide wireless transport, or backhaul services. As cellular customers consume more wireless data, wireless carriers need more bandwidth on the wireline transport network. Many wireless towers are still served by copper facilities, but we are rapidly rolling out fiber to accommodate the wireless carriers' additional bandwidth needs. We expect wireless data usage to continue to increase, which will drive the need for additional wireless backhaul capacity.
While providing these services requires an initial capital investment, we make these investments only after securing long-term contracts with wireless carriers, typically for a period of five years, and believe these contracts and the expected growth in wireless bandwidth needs will provide an attractive return on our capital outlay. These capital investments are made up front, and there is a short lag period between the initial capital spend and the realization of associated revenues.
We are also making significant investments in data centers to broaden the technology-based services we offer, including cloud computing and managed services. We opened two new data centers during 2012, and we operated 23 data centers as of the end of the year, December 31, 2012.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

On the consumer front, we continue to make investments to increase broadband speeds and capacity throughout our territories. Although new customer growth is slowing as the market becomes more heavily penetrated, we expect increases in real-time streaming video and traditional Internet usage to motivate customers to upgrade to faster broadband speeds with a higher price. As of December 31, 2012, we could deliver speeds of 3 Megabits per second ("Mbps") to approximately 97 percent of our

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addressable lines, and speeds of 6 Mbps, 12 Mbps and 24 Mbps are available to approximately 73 percent , 48 percent and 13 percent of our addressable lines, respectively. We also actively promote value-added Internet services, such as security and online back-up, to take advantage of the broadband speeds we offer.

We are also expanding broadband services to unserved and underserved areas through a combination of our own investment and grant funds received as a result of the American Recovery and Reinvestment Act of 2009 ("broadband stimulus"). Under our existing grant agreements with the Rural Utilities Service ("RUS"), we expect to receive up to $181.3 million in broadband stimulus funding. Our share for these projects will total at least $60.4 million . These investments are expected to add 75,000 new addressable broadband lines to our service areas, and the projects will be substantially complete by the end of 2013.

In spite of our ongoing efforts to gain market share, our consumer business remains under pressure due to competition from wireless carriers, cable television companies and other companies using emerging technologies. For the year ended December 31, 2012 , our consumer voice lines decreased by 86,000 lines, or 4.5 percent , as compared to the prior year. Given these realities, we must stabilize our consumer revenue and remain squarely focused on expanding business and broadband services to drive top-line growth. By doing so, we expect to continue to create significant value for both our customers and our shareholders.

Dividend

Our goal from our business strategy is to generate solid and sustainable cash flow over the long-term, and we intend to return a significant portion of this cash flow to our shareholders through our current dividend practice. Our current practice is to pay a quarterly dividend of $0.25 per common share, which equates to $1 per common share and a 10.1 percent yield on an annual basis, based on our stock price as of February 11, 2013 . We cannot assure you we will continue paying dividends at the current rate. See Item 1A, "Risk Factors", for more information.

History

We were created in July 2006 through the spin-off of Alltel Corporation's landline division and merger with VALOR Communications. At the time, we operated in just 16 states with less than 24,000 miles of fiber, a modest business sales organization, and only a handful of lower-tier data centers. Like other traditional telephone companies, we faced two important challenges: consumers were abandoning wireline voice connections in favor of wireless services and cable television companies were increasingly competing for both voice and Internet customers. These challenges led to a decline in revenue and shrinking cash flows and had the potential to impair our ability to maintain the dividend. As a short-term solution to manage these pressures, we completed acquisitions of other traditional telephone companies, which improved our size, scale and cost structure. However, the core problems, presented by a shrinking customer base, still remained.

We had to consider several factors in response to this pressure. First, businesses were experiencing a growing need for advanced data services, including integrated voice and data services, multi-site networking and managed data services. Second, wireless customers were using more and more wireless data, requiring the wireless carriers to obtain additional bandwidth on the wireline network that transports their wireless traffic. Third, consumers were demanding faster broadband speeds at home to accommodate their growing use of streaming video and other Internet-based services. It quickly became apparent that we would have to build a stronger company with increased scale and a more diverse portfolio of product offerings.

In early 2010, we made a critical move to accelerate the transformation of the company when we acquired NuVox Inc. ("NuVox"), a leading regional business services provider based in Greenville, South Carolina. NuVox added a broad portfolio of Internet protocol ("IP") based services and an aggressive sales force. This acquisition marked an important step in positioning the company to better serve business customers.

Two more acquisitions quickly followed in late 2010. On December 1, we purchased Hosted Solutions Acquisition, LLC ("Hosted Solutions") of Raleigh, N.C., a data center operator in the eastern United States. Hosted Solutions provided us the infrastructure to offer many advanced data services, such as cloud computing, managed hosting and managed services, on a wide scale. We gained five state-of-the-art data centers and approximately 600 business customers. On December 2, we completed the acquisition of Q-Comm Corporation's ("Q-Comm") wholly-owned subsidiaries Kentucky Data Link, a regional transport services provider with 30,000 miles of fiber, and Norlight, a business services provider with approximately 5,500 customers. This transaction significantly expanded our fiber network, allowing us to reach more business customers and to compete for more wireless backhaul contracts. KDL's fiber transport network also provided opportunities for substantial operating synergies by allowing us to carry more traffic on our own network rather than paying other carriers for this service.

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Finally, we took another significant step in the transformation of our company on November 30, 2011, when we acquired PAETEC Holding Corp. ("PAETEC"). PAETEC added an attractive base of medium to large-sized business customers, approximately 36,700 fiber route miles, seven data centers, and an experienced sales force focused on serving enterprise-level customers. This transaction significantly enhanced our capabilities in broadband and business - our strategic growth areas.

Our revenue mix has shifted significantly toward our growth areas as a result of these strategic activities. Revenues from businesses and consumer broadband were approximately 69 percent of total revenue for the year ended December 31, 2012 , as compared to 42 percent in 2008. Having successfully repositioned the business in growth segments, our focus has shifted to the organic growth of our strategic revenue streams.

OTHER MERGERS AND ACQUISITIONS

We have completed a number of mergers and acquisitions in the last five years. Most notably, we completed a series of strategic acquisitions which have assisted in the transformation of our company from a traditional telephone company into an advanced communications and technology service provider focused on enterprise business customers. These acquisitions included PAETEC, Q-Comm, Hosted Solutions and NuVox; the reasons for these acquisitions and their meaning to our operations are discussed in the preceding section.

The following acquisitions were also important steps in the evolution of our company. Although each involved traditional telephone companies, with a profile similar to ours prior to the transformative acquisitions noted above, each acquisition provided us increased scale, significant synergies and expanded operating presence in contiguous markets.

Iowa Telecom - On June 1, 2010 , we completed the acquisition of Iowa Telecommunications Services, Inc. ("Iowa Telecom"), a regional communications services provider. This acquisition added 247,000 voice lines, 96,000 high-speed Internet customers and 25,000 video customers in Iowa and Minnesota. Iowa Telecom expanded our operating presence in contiguous markets in the midwestern United States.

Lexcom - On December 1, 2009 , we completed the acquisition of Lexcom, Inc. ("Lexcom"), a local communications company in Lexington, North Carolina. The transaction added approximately 22,000 voice lines, 9,000 high-speed Internet customers and 12,000 cable television customers.

D&E Communications - On November 10, 2009, we completed a merger with D&E Communications, Inc. ("D&E"). The transaction added approximately 145,000 voice lines, 45,000 high-speed Internet customers and 9,000 cable television customers in Pennsylvania.

SERVICES AND PRODUCTS

We offer a robust portfolio of services and products to meet the communications and technology needs of our customers. Our basic offerings are outlined below.

Business

We believe advanced communications and technology services required by today's businesses present our most substantial opportunity for growth. Through our targeted acquisition strategy and organic growth, we have built a portfolio of advanced communications services which meet all customers' communications needs.

We serve business customers of all sizes. Our enterprise customers typically subscribe to services such as multi-site networking, data center, managed services, and other integrated voice and data services. Enterprise customers also include government contracts, including those under programs such as E-Rate. Small businesses traditionally are served by high-speed Internet, integrated voice and data and traditional voice services, among others.

Our key business service offerings include:

Integrated voice and data services: Our integrated services deliver voice and data over a single connection, which helps our customers manage voice and data usage and related costs. These services are delivered over an Internet connection, as opposed to a traditional voice line, and can be managed through equipment at the customer premise or through hosted equipment options, which we are able to provide.

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Multi-site networking: Our advanced network provides private, secure multi-site connections for large businesses with multiple locations.

Data center services: Our data centers offer cloud computing, colocation, dedicated server and disaster recovery solutions. Our data center services offer the highest level of security, reliability and scalability to business customers.

Managed services: Through our data centers, we provide a breadth of managed services including managed WAN, managed LAN, managed security and managed voice services that allow our customers to focus on running their business and not running their network.

High-speed Internet: We offer high-speed broadband Internet access options designed to help our customers reduce costs and boost productivity. We also offer low cost, high-speed broadband Internet access with reliable connections at speeds up to 24 Mbps.

Voice: Voice services consist of basic telephone services, including voice, long-distance and related features delivered over a traditional copper line.

Carrier services: Carrier services provide network bandwidth to other telecommunications carriers. These include special access services, which provide access and network transport services to end users, and Ethernet transport up to 10 Gigabits per second ("Gbps"). Carrier services also include fiber-to-the-tower connections to support the growing wireless backhaul market.

In addition to the services offered above, we sell and lease customized communications equipment systems tailored specifically to our business customers' needs. We also offer ongoing maintenance plans to support those systems.

Consumer

Our consumer services primarily consist of high-speed Internet, voice and video services. We are committed to providing high-speed broadband and additional value-added services to our consumer base, as well as bundling our service offerings to provide a comprehensive solution to meet our customers' needs at a competitive value.

Our consumer broadband services are described further as follows:

High-speed Internet access: We offer high-speed Internet access with speeds up to 24 Mbps.

Internet security services: Our Security Suite offers customers critical Internet security services, including anti-virus protection, spyware blocking, file back up and restoration.

Online backup services: Our online backup service allows consumers to back up and restore important files through the Internet. Additionally, our backup services provide consumers with the ability to store and share files on network-based storage devices. Files can be accessed from any computer with an Internet connection.

Consumer voice services include basic local telephone services, features and long-distance services. Features include call waiting, caller identification, call forwarding and others. We also offer a variety of long distance plans, including rate plans based on minutes of use, flexible or unlimited long distance calling services.

We offer consumer video services primarily through a relationship with Dish Network LLC ("Dish Network"). We also own and operate cable television franchises in some of our service areas. Our video offerings allow us to provide comprehensive bundled services to our consumer base, helping insulate our customers from competitors.

We sell certain equipment to support our consumer high-speed Internet and voice offerings, including broadband modems, home networking gateways and personal computers. We also sell home phones to support voice services.


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Wholesale

We provide switched access services to long-distance companies and other local exchange carriers for access to our network in connection with the completion of long-distance calls. We also receive compensation from wireless and other local exchange carriers for the use of our facilities.
 
Certain Universal Service Fund ("USF") revenues are also included in our wholesale revenues. In addition, we supplement our business services with wholesale offerings of voice and data carrier services to other communications providers and to larger-scale purchasers of network capacity.

Other

Other revenues include USF surcharges and other costs passed through to our customers, certain consumer revenues in areas where we no longer offer new service, and other miscellaneous revenue streams.

SALES AND MARKETING

In order to best serve our customers, we have separate, dedicated business and consumer sales and marketing organizations.

Business Sales and Marketing

Our business sales and marketing team leads the Company's development and implementation of smart solutions and personalized service to our customers. Our business sales organization is extensive, including over 200 business sales offices throughout the United States and 2,701 sales employees focused on meeting the needs of our business customers. Our sales and marketing approach is supported by our wide array of products and services delivered over our extensive fiber transport network, leveraging other providers where necessary.

Business sales and service are conducted through:

the direct sales force, which accounts for the majority of our new sales;

our account management team, who also supports existing customers by advising and assisting them with their communications needs;

our business call centers, which provide customer service and also generate new sales and upgrades;

our indirect sales channel, which partners with third-party dealers who sell directly to customers; and

third-party agents, who refer sales of our products and services to our direct sales force.

In addition, our carrier sales team specializes in sales of special access and wireless backhaul services to other telecom carriers.

Consumer Sales and Marketing

Our consumer sales and marketing strategy is focused on driving top line revenue performance through bundled product sales and value-added account revenue growth with the goal to grow our broadband revenues and minimize household losses. We employ the following principles to achieve these goals:

Product simplification: We sell double and triple play bundle packages to consumers at competitive price points, offering high-speed Internet, voice and video services at a better value than when purchasing those services individually or from different providers.

Product enhancement: Value-added services to our high-speed Internet product and faster Internet speeds deliver more value to the consumer while growing account revenue.

Message integration: A single, consistent consumer message is delivered across all advertising mediums to generate high consumer awareness and strong sales channel interactions.

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Consumer sales are made through various distribution channels giving new and existing customers choices in how they interact and experience our products and services. Additionally, we offer customers the opportunity to order service and purchase a number of products designed to enhance their existing services, such as tablet computers, telephones and accessories at any of our 30 retail stores located in our local service areas. We augment these traditional channels with online sales and national agents.

NETWORK

We have developed a robust, flexible network allowing us to deliver advanced voice and data services. As of December 31, 2012 , our network consists of approximately 115,000 miles of fiber optic plant in both our fiber backbone and local service areas and a combination of owned and leased facilities in our local markets.

Our fiber transport network is fully integrated and allows us to offer a full suite of voice and advanced data services, including, but not limited to, multi-site networking, dedicated Internet and Ethernet solutions, high-speed Internet and VoIP services.

In certain territories, we serve business customers by leasing last-mile connections from other carriers. These connections link our business customers to our facilities-based network. In some areas, we own last-mile facilities and are able to connect to our customers directly. Where we own last-mile facilities, we are able to offer up to 10 Gbps of Ethernet managed services.

Our owned local networks consist of central office digital switches, routers, loop carriers and virtual and physical colocations interconnected primarily with fiber and copper facilities. A mix of fiber optic and copper facilities connect our customers with the core network. 

We also operate 23 data centers across the country as of December 31, 2012 . Our data center capabilities include a full line of managed hosting services, cloud computing and colocation services. Our communications network provides the connectivity and bandwidth necessary to connect our customers to our data center infrastructure. Providing both the data center services and the customer's connection to those services has great value to our customers.

Our network service areas as of December 31, 2012 are detailed in the map below:
COMPETITION

We experience intense competition in both our business and consumer markets as described below. For additional information, see "Regulation" in Item 1 and Item 1A, "Risk Factors".

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Business

The market for business customers is highly competitive. During 2012, business customers decreased by approximately 24,700 or 3.7 percent . Our growth in enterprise customers is outpaced by losses in small business customers, typically due to competition from cable companies. However, our enterprise customers are driving growth in revenue through purchases of integrated voice and data services, data center and managed services, and advanced data services such as multi-site networking.

Our primary competitors are other communications providers and cable television companies. In substantially all of our business markets, we face competition from other communications carriers. They offer similar services, from traditional voice to advanced data and technology services using similar facilities and technologies as we do, and compete directly with us for customers of all sizes.

Cable television companies compete with us primarily for small or single-location businesses. Cable companies have deployed technology to offer Internet services to their customers and offer competing voice and data services over the Internet connection. In addition, their networks are capable of supporting wireless backhaul services.

To compete effectively in our business markets, we are investing in our network and service offerings to offer the most technologically advanced solutions available. We rely on scalable, customizable solutions and a suite of services that allows us to meet all of our business customers' communications needs.

Consumer

We experience intense competition for consumer services. During 2012 , we lost approximately 86,000 consumer voice lines, or 4.5 percent of our total. Sources of competition in our consumer service areas include, but are not limited to, the following:

Cable television companies: Cable television providers are aggressively offering high-speed Internet, voice and video services in our service areas. These services are typically bundled and offered to our customers at competitive prices.

Wireless carriers: Wireless providers primarily compete for voice services in our consumer markets. Consumers continue to disconnect residential voice service in favor of wireless service. In addition, wireless companies continue to expand their high-speed Internet offerings, which may result in more intense competition for our high-speed Internet customers.

Communications carriers: We are required to lease our facilities and capacity in our consumer areas to other communications carriers. These companies compete with us by providing voice and high-speed Internet services to consumers.

We are generally subject to more stringent regulation than our competitors in our consumer markets. For example, as a provider of last resort, we are required to provide basic phone service to customers in our service areas regardless of whether it is cost-effective to do so.

Although growth expectations are slowing due to the maturing market, we are committed to retaining customers by offering faster broadband speeds and value-added services, while also offering the convenience of bundling those services with voice and video services. During 2012 , we added approximately 7,000 consumer high speed Internet customers, an increase of 0.6 percent , as compared to the prior year.

REGULATION

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

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

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For additional information on these and other regulatory items, please refer to the Regulatory section of Management's Discussion and Analysis in this Annual Report on Form 10-K.

MANAGEMENT

Staff at our headquarters and regional offices supervise, coordinate and assist subsidiaries in management activities including investor relations, acquisitions and dispositions, corporate planning, tax planning, cash and debt management, accounting, insurance, sales and marketing support, government affairs, legal matters, human resources and engineering services.

EMPLOYEES

At December 31, 2012 , we had 13,787 employees, of which 1,722 employees are part of collective bargaining units. During 2012 , we had no material work stoppages due to labor disputes with our unionized employees (see Item 1A, "Risk Factors").

SEGMENTS

We operate as one reportable segment providing communications and technology services to our customers.

SIGNIFICANT CUSTOMERS

No single customer, or group of related customers, represented 10 percent or more of our operating revenues in 2012, 2011 or 2010.

SEASONALITY

Our business is not subject to significant seasonal fluctuations.

MATERIAL DISPOSITIONS

Wireless markets acquired from CTC
On November 21, 2008, we completed the sale of our wireless business to AT&T Mobility II, LLC for approximately $56.7 million . The completion of this transaction resulted in the divestiture of approximately 52,000 wireless customers. Also included in the sale were spectrum licenses, cell sites and six retail stores. Operations covered a four county area of North Carolina with a population of approximately 450,000 at the time of the sale.

MORE INFORMATION

Our web site address is www.windstream.com . We file with, or furnish to, the Securities and Exchange Commission (the "SEC") annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to those reports, as well as various other information. This information can be found on the SEC website at www.sec.gov . In addition, we make available free of charge through the Investor Relations page of our web site our annual reports, quarterly reports, and current reports, and all amendments to any of those reports, as soon as reasonably practicable after providing such reports to the SEC. In addition, on the corporate governance section of the Investor Relations page of our web site, we make available our Code of Ethics, the Board of Directors’ Amended and Restated Corporate Governance Board Guidelines, and the charters for our Audit, Compensation, and Governance Committees. We will provide to any stockholder a copy of the Code of Ethics, Governance Board Guidelines and the Committee charters, without charge, upon written request to Investor Relations, Windstream Corporation, 4001 Rodney Parham Road, Little Rock, Arkansas 72212.


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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 Annual Report on Form 10-K. Forward-looking statements are subject to uncertainties that could cause actual future events and results to differ materially from those expressed in the forward-looking statements. Forward-looking statements include, but are not limited to, statements about our expectation to return a significant portion of our cash flow to shareholders through our dividend, our expectation to maintain our current dividend practice at the current rate of dividend, expected levels of support from universal service funds or other government programs, expected rates of loss of voice lines or intercarrier compensation, expected increases in high-speed Internet and business data connections, our expected ability to fund operations, expected required contributions to our pension plan, capital expenditures and certain debt maturities from cash flows from operations, expected synergies and other benefits from completed acquisitions, expected effective federal income tax rates, expected annualized savings from the management restructuring, the amounts expected to be received from the Rural Utilities Service to fund a portion of our broadband stimulus projects and the expected benefit of those projects, and forecasted capital expenditure amounts. These and other forward-looking statements are based on estimates, projections, beliefs, and assumptions that we believe are reasonable but are not guarantees of future events and results. Our actual future events and results may differ materially from those expressed in these forward-looking statements as a result of a number of important factors.

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

further adverse changes in economic conditions in the markets;

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

the impact of new, emerging or competing technologies;

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

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

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

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

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

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

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

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

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

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


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

continued loss of consumer voice lines;

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

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

those additional factors under the caption "Risk Factors" in Item 1A of this annual report and in subsequent filings with the Securities and Exchange Commission at www.sec.gov.

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

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


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Item 1A. Risk Factors
Risks Relating to Our Business

The following discussion of "Risk Factors" identifies the most significant factors that may adversely affect our business, results of operations or financial position. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included in this report. The following discussion of risks is not all-inclusive but is designed to highlight what we believe are important factors to consider when evaluating our business and expectations. These factors could cause our future results to differ materially from our historical results and from expectations reflected in forward-looking statements. Additionally, this discussion should not be construed as a listing of risks by order of potential magnitude or probability to occur. 

Competition in our business markets could adversely affect our results of operations and financial condition.

We serve business customers in markets across the country, competing against other communications providers and cable television companies for business customers. Competition in our business markets could adversely affect growth in business revenues and ultimately have a material adverse impact on our results of operations and financial condition. If we are unable to compete effectively, we may be forced to lower prices or increase our sales and marketing expenses. In addition, we may need to make significant capital expenditures in order to keep up with technological advances and offer competitive services. For additional information, see the risk factor "Rapid changes in technology could affect our ability to compete for business customers."

In certain markets where we serve business customers, we lease significant amounts of network capacity in order to provide service to our customers. We lease these facilities from companies competing directly with us for business customers. For additional information, see the risk factor "In certain operating territories, we are dependent on other carriers to provide facilities which we use to provide service to our customers."

Competition in our consumer service areas could reduce our market share and adversely affect our results of operations and financial condition.

We face intense competitive pressures in our consumer service areas. If we continue to lose consumer voice lines as we have historically, our results of operations and financial condition could be adversely affected. During 2012 , our consumer voice lines declined 4.5 percent .

Sources of competition include, but are not limited to, wireless companies, cable television companies and other communications carriers. Many of our competitors, especially wireless and cable television companies, have advantages over us, including substantially larger operational and financial resources, larger and more diverse networks, less stringent regulation and superior brand recognition. For additional discussion regarding competition, see "Competition" in Item 1.

Cable television companies have aggressively expanded in our consumer markets, offering voice and high-speed Internet services in addition to video services. Some of our customers have chosen to move to cable television providers for their voice, high-speed Internet and television bundles. Cable television companies are subject to less stringent regulations than our consumer operations. For more information, refer to the risk factor, "Our competitors, especially cable television companies, in our consumer markets are subject to less stringent industry regulations."

Wireless competition has contributed to a reduction in our voice lines and generally has caused pricing pressure in the industry. Some customers have chosen to stop using traditional wireline phone service and instead rely solely on wireless service. We anticipate that this trend toward solely using wireless services will continue, particularly if wireless prices continue to decline and the quality of wireless services improves.

Competition in our consumer markets could affect our revenues and profitability in several ways, including accelerated consumer voice line loss, reductions by customers in usage-based services or shifts to less profitable services and a need to lower our prices on unregulated services or increase marketing expenses to stay competitive.

Rapid changes in technology could affect our ability to compete for business customers.

The technology used to deliver communications services has changed rapidly in the past and will likely continue to do so in the future. If we are unable to keep up with such changes, we may not be able to offer competitive services to our business

12




customers. This could adversely affect our ability to compete for business customers, which, in turn, would adversely affect our results of operations and financial condition.

New technologies may affect our ability to compete in our consumer markets.

Wireless companies are aggressively developing networks using next-generation data technologies, which are capable of delivering high-speed Internet service via wireless technology to a large geographic footprint. If these technologies continue to expand in availability and reliability, they could become an effective alternative to our high-speed Internet services. In addition, cable operators may be able to take advantage of certain technology to deploy faster broadband speeds more rapidly than Windstream.

In addition to broadband technology, evolving voice technologies, such as Voice over Internet Protocol ("VoIP"), may effectively compete with voice and long-distance services in our consumer markets.

These and other new and evolving technologies could result in greater competition for our voice and high-speed Internet services. If we cannot develop new services and products to keep pace with technological advances, or if such services and products are not widely embraced by our customers, our results of operations could be adversely affected.

In certain operating territories, we are dependent on other carriers to provide facilities which we use to provide service to our customers.

In certain markets, especially where we provide services to businesses, we lease a significant portion of our network capacity from other carriers. These carriers compete directly with us for customers.

The prices for network capacity are negotiated or purchased pursuant to tariff terms and conditions. These may be changed but must be approved by the appropriate regulatory agency before they go into effect. In addition, whenever we enter a new market, and an existing agreement expires, interconnection agreements must be negotiated. If they cannot be negotiated on favorable terms, or at all, we may invoke binding arbitration by state regulatory agencies. This process is expensive and time consuming, and the results of arbitration may be unfavorable to us. The inability to obtain interconnection on favorable terms could have a material adverse effect on our competitive position and results of operations.

Where we lease network capacity, communications services are susceptible to changes in the availability and pricing of the provider's facilities and services. If the provider becomes legally entitled to deny or limit access to capacity, or if state commissions allow them to increase their rates, we may not be able to effectively compete. In addition, if the provider does not adequately maintain or timely install these facilities, which they are legally obligated to do, our service to customers may be adversely affected. As a result, our results of operations and financial condition could be materially affected.

Disruptions and congestion in our networks and infrastructure may cause us to lose customers and incur additional expenses.

Our customers depend on reliable service over our network. Some of the risks to our network infrastructure include physical damage to lines, security breaches, capacity limitations, power surges or outages, software defects and disruptions beyond our control, such as natural disasters and acts of terrorism. From time to time in the ordinary course of business, we will experience short disruptions in our service due to factors such as cable damage, inclement weather and service failures of our third party service providers. Additionally, we could face disruptions due to capacity limitations as a result of changes in our customers' high speed Internet usage patterns. These patterns have changed in recent years, for example through the increased usage of video, resulting in a significant increase in the utilization of our network.

We could experience more significant disruptions in the future. Disruptions may cause interruptions in service or reduced capacity for customers, either of which could cause us to lose customers or incur additional expenses or capital expenditures. Such results could adversely affect our results of operations and financial condition.

Disruptions in our data centers could cause service interruptions for customers using advanced data services.

Many of our advanced data products are supported by our data center infrastructure, including offerings such as colocation services, cloud computing, managed services and disaster recovery services. Risks to our data center infrastructure include, but are not limited to, natural disasters, security breaches or acts of terrorism.

13




If a disruption occurs in one of our data centers, our customers could lose access to information critical to running their businesses, which could result in a loss of customers. We may also incur significant operating or capital expenditures to restore service. As a result, disruptions could affect our results of operations and financial condition.

Increases in broadband usage may cause network capacity limitations, resulting in service disruptions or reduced capacity for customers.

Video streaming services and peer-to-peer file sharing applications use significantly more bandwidth than traditional Internet activity such as web browsing and email. As utilization rates and availability of these services continue to grow, our high-speed Internet customers may use much more bandwidth than in the past. If this occurs, we could be required to make significant capital expenditures to increase network capacity in order to avoid service disruptions or reduced capacity for customers.

Alternatively, we may choose to implement network management practices to reduce the network capacity available to bandwith-intensive activities during certain times in market areas experiencing congestion, and these actions could negatively affect customer experience and increase customer churn.

While we believe demand for these services may drive high-speed Internet customers to pay for faster broadband speeds, we may not be able to recover the costs of the necessary network investments. This could result in an adverse impact to our results of operations and financial condition.

We cannot assure you we will continue paying dividends at the current rate.

Our board of directors maintains a current dividend practice for the payment of quarterly cash dividends at a rate of $0.25 per share of common stock. This practice can be changed at any time at the discretion of the board of directors, and our common stockholders should be aware that they have no contractual or other legal right to dividends. In addition, the other risk factors described in this section could materially reduce the cash available from operations or significantly increase our capital expenditure requirements, and these outcomes could cause funds not to be available when needed in an amount sufficient to support our current dividend practice.

The amount of dividends that we may distribute is also limited by restricted payment and leverage covenants in our credit facilities and indentures, and, potentially, the terms of any future indebtedness that we may incur. The amount of dividends that we may distribute is also subject to restrictions under Delaware law. If our board of directors were to adopt a change in our current dividend practice that results in a reduction in the amount of dividends, such change could have a material and adverse effect on the market price of our common stock.

We are subject to various forms of regulation from the Federal Communications Commission ("FCC") and state regulatory commissions in the states in which we operate, which limit our pricing flexibility for regulated voice and high-speed Internet products, subject us to service quality, service reporting and other obligations and expose us to the reduction of revenue from changes to the universal service fund, the intercarrier compensation system, or access to interconnection with competitors' facilities.

As of December 31, 2012 , we had operating authority from each of the 48 states and the District of Columbia in which we conducted local service operations, and we are subject to various forms of regulation from the regulatory commissions in each of these areas as well as from the FCC. State regulatory commissions have jurisdiction over local and intrastate services including, to some extent, the rates that we charge and service quality standards. The FCC has primary jurisdiction over interstate services including the rates that we charge other telecommunications companies that use our network and other issues related to interstate service. These regulations restrict our ability to adjust rates to reflect market conditions and affect our ability to compete and respond to changing industry conditions.

Future revenues, costs, and capital investment in our wireline business could be adversely affected by material changes to or decisions regarding applicability of government requirements, including, but not limited to, changes in rules governing intercarrier compensation, state and federal USF support and other pricing and requirements. Federal and state communications laws may be amended in the future, and other laws may affect our business. In addition, certain laws and regulations applicable to us and our competitors may be, and have been, challenged in the courts and could be changed at any time. We cannot predict future developments or changes to the regulatory environment or the impact such developments or changes would have.
In addition, these regulations could create significant compliance costs for us. Delays in obtaining certifications and regulatory approvals could cause us to incur substantial legal and administrative expenses, and conditions imposed in connection with

14




such approvals could adversely affect the rates that we are able to charge our customers. Our business also may be affected by legislation and regulation imposing new or greater obligations related to, for example, assisting law enforcement, bolstering homeland and cyber-security, protecting intellectual property rights of third parties, minimizing environmental impacts, protecting customer privacy, or addressing other issues that affect our business.

If we are prohibited from participating in government programs, our results of operations could be materially and adversely affected.

We are the recipient of a material amount of end user revenue and government subsidies under various government programs and also serve as a government contractor for services for various state, local and federal agencies.  Our failure to comply with the complex government regulations and statutes applicable to the programs, or the terms of one or more of our government contracts, could result in our being suspended or disbarred from future government programs for a significant period of time or result in harm to our reputation with the government and possible restriction from future government activities.  While we have implemented compliance programs and internal controls that are reasonably designed to prevent misconduct and non-compliance relating to the government programs and contracting, we cannot eliminate the risk that our employees, partners or subcontractors may independently engage in such activities.  

If we are suspended or debarred from government programs, or if our government contracts are terminated for any reason, we could suffer a significant reduction in expected revenue which could have a material and adverse effect on our operating results.

Competitors, especially cable television companies, in our consumer markets are subject to less stringent industry regulations, which could result in voice line and revenues losses in the future.

Cable television companies are generally subject to less stringent regulations than our consumer operations. Cable voice offerings and others are subject to fewer service quality and reporting requirements than our consumer operations, and their rates are generally not subject to regulation, unlike our consumer voice services. Our consumer areas are also subject to "carrier of last resort" obligations, which generally obligate us to provide basic voice services to any person within our service area regardless of the profitability of the customer. Our competitors in these areas are not subject to such requirements.

Because of these regulatory disparities, we have less flexibility in our consumer markets than our competitors. This could result in accelerated voice line and revenue losses in the future.

Different interpretation and/or implementation of certain sections contained in the FCC’s Intercarrier Compensation and Universal Service reform order could result in additional access revenue reductions.

The FCC's reform order adopted in 2011 provides that intrastate traffic that originates in VoIP format and is delivered by long distance carriers to us for termination will be assessed interstate access charges. During 2012, we coordinated with long distance carriers to transition to these reduced interstate access rates, and this transition will result in further reductions on July 2, 2013.
In a subsequent order, the FCC determined that intrastate traffic we originate through the traditional telephone network and deliver to a customer served under a VoIP platform is subject to interstate access charges beginning on July 1, 2014. We have filed an appeal in the United States Court of Appeals for the 10 th Circuit asserting that the FCC's decision to cut originating access for such traffic without establishing a mechanism for recovering lost revenues was arbitrary, capricious, and/or inconsistent with reasoned decisionmaking. If our appeal fails or the FCC fails to create a recovery mechanism, we will incur additional access revenue reductions. In addition, due to the uncertainty surrounding the application of these rules, we cannot estimate the amount of these reductions until we can quantify the amount of traffic based on information obtained from long distance carriers.

In 2012 , we received approximately 4 percent of our revenues from state and federal USF, and any material adverse regulatory developments with respect to these funds could adversely affect our profitability.

We receive state and federal USF revenues to support the high cost of providing affordable telecommunications services in rural markets. Such support payments constituted approximately 4 percent of our revenues for the year ended December 31, 2012. A portion of such fees are based on relative cost and voice line counts, and we expect receipt of such fees to decline as

15




we continue to reduce costs and lose voice lines. Pending regulatory proceedings could, depending on the outcome, materially reduce our USF revenues.

Texas is continuing to review its USF funding mechanism, and any adverse developments could significantly affect our USF revenues. Texas state USF revenues were $88.3 million in 2012 .
We are required to make contributions to state and federal USF programs each year. Most state and federal regulations allow us to recover these contributions by including a surcharge on our customers' bills. If state and/or federal regulations change, and we become ineligible to receive support, such support is reduced, or we become unable to recover the amounts we contribute to the state and federal USF programs from our customers, our results of operations and financial condition would be directly and adversely affected.

Our operations require substantial capital expenditures, and if funds for capital expenditures are not available when needed, this could affect our service to customers and our growth opportunities.

We require substantial capital to maintain our network, and our growth strategy will require significant capital investments for network enhancements and build-out. During 2012 , we incurred $1,101.2 million in capital expenditures, and we expect to incur in excess of $800.0 million in capital expenditures in 2013 due to our significant investments in fiber-to-the-tower and other initiatives. See "Liquidity and Capital Resources" for our expected capital expenditures in 2013 .

We use a significant portion of our cash generated from operations to pay dividends to stockholders, which could limit our ability to make the capital expenditures necessary to support our business needs and growth plans. We expect to be able to fund required capital expenditures from cash generated from operations. However, other risk factors described in this section could materially reduce cash available from operations or significantly increase our capital expenditure requirements. If this occurs, funds for capital expenditures may not be available when needed, which could affect our service to customers and our growth opportunities.

Unfavorable changes in financial markets could adversely affect our pension plan investments resulting in material funding requirements to meet pension obligations.

Our pension plan invests in marketable securities, including marketable debt and equity securities denominated in foreign currencies, which are exposed to changes in the financial markets. During 2012 , the fair market value of these investments increased from $948.9 million to $999.0 million due to return on assets held of $130.0 million , or 13.5 percent . These increases were partially offset by routine benefit payments of $60.1 million and lump sum payments and administrative expenses of $19.8 million . Returns generated on plan assets have historically funded a large portion of the benefits paid under our pension plan.

We estimate that the long term rate of return on plan assets will be 7.0 percent , but returns below this estimate could significantly increase our contribution requirements, which could adversely affect our cash flows from operations. Also, historically low interest rates introduce lower discount rates, which directly increases the pension liability on our balance sheet and exposes us to greater funding obligations in the future. During the fourth quarter of 2011, we changed our policy for accounting for pension costs to immediately recognize gains or losses resulting from the return on plan assets and other true-ups to other actuarial estimates. While this change does not affect cash flows, it will introduce the potential for volatility to our earnings reported under accounting principles generally accepted in the United States ("U.S. GAAP"), especially if the return on plan assets during the year differ significantly from the estimated rate of return.

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

As of December 31, 2012 , we had approximately $8,996.5 million long-term debt outstanding, including current maturities. We may also obtain additional long-term debt to meet future financing needs or to fund potential acquisitions, subject to certain restrictions under our existing indebtedness, which would increase our total debt. Our substantial amount of debt could have negative consequences to our business. For example, it could:

Increase our vulnerability to general adverse economic and industry conditions;
 

16




Require us to dedicate a substantial portion of cash flows from operations to interest and principal payments on outstanding debt, thereby limiting the availability of cash flow to fund future capital expenditures, working capital and other general corporate requirements;
 
Limit our flexibility in planning for, or reacting to, changes in our business and the telecommunications industry;
 
Place us at a competitive disadvantage compared with competitors that have less debt; and
 
Limit our ability to borrow additional funds, even when necessary to maintain adequate liquidity.
 
In addition, our ability to borrow funds in the future will depend in part on the satisfaction of the covenants in our credit facilities and its other debt agreements. If we are unable to satisfy the financial covenants contained in those agreements, or are unable to generate cash sufficient to make required debt payments, the lenders and other parties to those arrangements could accelerate the maturity of some or all of our outstanding indebtedness.

We may not generate sufficient cash flows from operations, or have future borrowings available under our credit facilities or from other sources sufficient to enable us to make our debt payments or to fund dividends and other liquidity needs. We may not be able to refinance any of our debt, including our credit facilities, on commercially reasonable terms or at all. If we are unable to make payments or refinance our debt, or obtain new financing under these circumstances, we would have to consider other options, such as selling assets, issuing additional equity or debt, or negotiating with our lenders to restructure the applicable debt. Our credit agreement and the indentures governing our senior notes may restrict, or market or business conditions may limit, our ability to do some of these things on favorable terms or at all.

As of February 11, 2013, Moody's Investors Service ("Moody's"), S&P and Fitch Ratings ("Fitch") had granted Windstream the following senior secured, senior unsecured and corporate credit ratings:

Description
 
Moody’s  
 
S&P    
 
Fitch    
Senior secured credit rating
 
Baa3
 
BB+
 
BBB-
Senior unsecured credit rating
 
Ba3
 
B
 
BB+
Corporate credit rating
 
Ba2
 
BB-
 
BB+
Outlook
 
Negative
 
Stable
 
Stable

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

We may be unable to fully realize expected benefits from our recent acquisitions.

We expect to achieve substantial synergies, cost savings and growth opportunities as a result of our recent acquisitions. If we are unable to successfully integrate acquired businesses, or integrate them in a timely fashion, we may face material adverse affects including, but not limited to:

diversion of management's attention to and potential disruption of our ongoing businesses;

customer losses;

the loss of quality employees from the acquired companies;

adverse developments in vendor relationships;

declines in our results of operations and financial condition; and

a decline in the market price of our common stock.


17




Even if we successfully integrate these businesses, there can be no assurance that these integrations will result in the realization of the full benefit of the anticipated synergies, cost savings or growth opportunities or that these benefits will be realized within the expected time frames.

We may need to defend ourselves against lawsuits or claims that we infringe upon the intellectual property rights of others.

From time to time, we receive notices from third parties, or we are named in lawsuits filed by third parties, claiming we have infringed or are infringing upon their intellectual property rights. We may receive similar notices or be involved in similar lawsuits in the future. In certain situations, we may have the ability to seek indemnification from our vendors regarding these lawsuits or claims. If we cannot enforce our indemnification rights or if our vendors lack the financial means to indemnify us, these claims may require us to expend significant time and money defending our alleged use of the affected technology, may require us to enter into licensing agreements requiring one-time or periodic royalty payments that we would not otherwise have to pay or may require us to pay damages. If we are required to take one or more of these actions, it may result in an adverse impact to our results of operations and financial condition. In addition, in responding to these claims, we may be required to stop selling or redesign one or more of our products or services, which could adversely affect the way we conduct our business.

Weak economic conditions may decrease demand for our services.

We could be affected by economic conditions and downturns in the economy, especially in regards to our business customers. Downturns in the economy in the markets we serve could cause our existing customers to reduce their purchases of our services and make it difficult for us to obtain new customers.

Our relationships with other communications companies are material to our operations and their financial difficulties may adversely affect us.

We originate and terminate calls for long distance and other voice carriers over our network in exchange for access charges. These access charges represent a significant portion of our revenues. Additionally, we are making significant capital investments to deploy fiber-to-the-tower and other network services for wireless companies in return for long-term revenue generating contracts. If these carriers go bankrupt or experience substantial financial difficulties and we are unable to timely collect payments from them, it may have a negative effect on our results of operations and financial condition.

Key suppliers may experience financial difficulties that may affect our operations.

Windstream purchases a significant amount of equipment from key suppliers to maintain, upgrade and enhance our network facilities and operations. Should these suppliers experience financial difficulties, their issues could adversely affect our business through increased prices to source purchases through alternative vendors or unanticipated delays in the delivery of equipment and services purchased.

Adverse developments in our relationship with our employees could adversely affect our business, our results of operations and financial condition.

As of December 31, 2012 , 1,722 of our employees at various sites, or 12 percent of all of our employees, were covered by collective bargaining agreements. Our relationship with these unions generally has been satisfactory, but occasional work stoppages have occurred.

We are currently party to 24 collective bargaining agreements and one National Pension Agreement with several unions, which expire at various times. Of our existing collective bargaining agreements, ten agreements covering 612 employees are due to expire in 2013. In addition, the national pension agreement covers 612 employees. This agreement expired in 2010 but has been extended indefinitely, subject to the right of Windstream or the unions to terminate the agreement with 30 days notice. Historically, we have succeeded in negotiating new collective bargaining agreements without work stoppages; however, no assurances can be given that we will succeed in negotiating new collective bargaining agreements to replace the expiring ones without work stoppages. Increases in organizational activity or any future work stoppages could have a material adverse effect on our business, our results of operations and financial condition.


18




Cyber security incidents could have a significant operational and financial impact.

We store customers' proprietary business information in our facilities through our colocation, managed services and cloud computing services. In addition, we maintain certain sensitive customer information in our financial and operating systems. While we have implemented data security polices and other internal controls to safeguard and protect against misuse or loss of this information, if their data were compromised through a cyber security incident, it could have a significant impact on our results of operations and financial condition.



19




Item 1B. Unresolved Staff Comments

No reportable information under this item.

Item 2. Properties

Certain of our properties are pledged as collateral as discussed further in Note 15 to the consolidated financial statements. The obligations under our senior secured credit facilities are secured by liens on substantially all of our personal property assets and our subsidiaries who are guarantors of our senior secured credit facilities. A summary of our investment in property, plant and equipment is presented below.

We own property, which consists primarily of land and buildings, office and warehouse facilities, central office equipment, software, outside plant and related equipment. Outside communications plant includes aerial and underground cable, conduit, poles and wires. Central office equipment includes digital switches and peripheral equipment. As such, our properties do not provide a basis for description by character or location of principal units.

Our gross investment in property, by category, as of December 31, 2012 , was as follows:
   
(Millions)
Land
$
46.3

Building and improvements
649.4

Central office equipment
5,276.0

Outside communications plant
6,256.2

Furniture, vehicles and other equipment
1,270.8

Total
$
13,498.7


Item 3. Legal Proceedings

We are party to various legal proceedings, the ultimate resolution of which cannot be determined at this time. Management does not believe such proceedings, individually or in the aggregate, will have a material adverse effect on the future consolidated results of our income, cash flows or financial condition.

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

Item 4. Mine Safety Disclosures

Not applicable.


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Table of Contents

Windstream Corporation
Form 10-K, Part II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information, Holders and Dividends

(a)
Our common stock is traded on the NASDAQ Global Select Market under the symbol "WIN". The following table reflects the range of high, low and closing prices of our common stock as reported by Dow Jones & Company, Inc. for each quarter in 2012 and 2011:
 
Year
 
Quarter
 
High
 
Low
 
Close
 
Dividend Declared
2012
 
4th
 
$10.27
 
$7.86
 
$8.28
 
$0.25
 
 
3rd
 
$11.04
 
$9.11
 
$10.09
 
$0.25
 
 
2nd
 
$11.75
 
$9.00
 
$9.66
 
$0.25
 
 
1st
 
$12.55
 
$11.41
 
$11.71
 
$0.25
2011
 
4th
 
$12.60
 
$10.88
 
$11.74
 
$0.25
 
 
3rd
 
$13.25
 
$10.76
 
$11.65
 
$0.25
 
 
2nd
 
$13.57
 
$12.38
 
$12.96
 
$0.25
 
 
1st
 
$14.04
 
$12.05
 
$12.88
 
$0.25

As of February 11, 2013, the approximate number of holders of common stock, including an estimate for those holding shares in street name, was 227,376 .

For a discussion of certain restrictions on our ability to pay dividends under our debt instruments, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations, Financial Condition, Liquidity and Capital Resources" in the Financial Supplement to this annual report on Form 10-K.
 
(b)
Not applicable.

(c)
Not applicable.
 

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Stock Performance

Set forth below is a line graph showing comparisons of stockholder returns since December 31, 2007. The graph includes the total cumulative stockholder returns on our common stock, and comparative returns on the S&P 500 Stock Index and the S&P Telecom Index. The S&P Telecom Index consists of the following companies: AT&T Inc., CenturyLink, Inc., Crown Castle International Corp., Frontier Communications Corp., MetroPCS Communications Inc., Sprint Nextel Corp., Verizon Communications Inc., Windstream Corporation. The graph assumes that the value of the investment was $100 on December 31, 2007 and that all dividends and other distributions were reinvested.

Total Cumulative Shareholder Returns
   
 
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
Windstream
 
 
$100.00
 
$77.36
 
$102.97
 
$141.84
 
$129.48
 
$101.01
S&P 500
 
 
$100.00
 
$63.00
 
$79.68
 
$91.68
 
$93.61
 
$108.59
S&P Telecom
 
 
$100.00
 
$69.52
 
$75.74
 
$90.09
 
$95.78
 
$113.31

The graph and table above provide the cumulative change of $100.00 invested on December 31, 2007, including reinvestment of dividends, for the periods indicated.

The foregoing performance graph contained in Item 5 shall not be deemed to be soliciting material or be filed with the Securities and Exchange Commission or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.


22




Securities Authorized for Issuance Under Equity Compensation Plans

Under the our share-based compensation plans, we may issue restricted stock and other equity securities to directors, officers and other key employees. The maximum number of shares available for issuance under the Windstream 2006 Amended and Restated Equity Incentive Plan is 20.0  million shares and under the PAETEC Holding Corp. 2011 Omnibus Incentive Plan is approximately 3.6 million shares.

The following table sets forth information about our equity compensation plans as of February 11, 2013:

Equity Compensation Plan Information

Plan Category
 
Number of securities to be
issued upon exercise of outstanding options, warrants and rights [a]
Weighted-average exercise price of outstanding options, warrants and rights [b]
Number of securities
remaining available for
future issuance under
equity compensation
plans [c] (excluding
securities reflected in
column [a])
  
  
  
 
 
  
  
Equity compensation plans not approved by security holders
3,060,978


$7.22

2,456,735

  
Equity compensation plans approved by security holders


5,860,268

(1)
(2)
Total
3,060,978


$7.22

8,317,003

  
 
(1)
The Windstream Corporation 2006 Amended and Restated Equity Incentive Plan.
(2)
The PAETEC Holding Corp. 2011 Omnibus Incentive Plan.

Item 6. Selected Financial Data

For information pertaining to our Selected Financial Data, refer to page F-31 of the Financial Supplement, which is incorporated by reference herein.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

For information pertaining to Management’s Discussion and Analysis of our Financial Condition and Results of our Operations, refer to page s F-2 to F-30 of the Financial Supplement, which is incorporated by reference herein.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

For information pertaining to our market risk disclosures, refer to pa ges F-25 of t he Financial Supplement, which is incorporated by reference herein.

Item 8. Financial Statements and Supplementary Data

For information pertaining to our Financial Statements and Supplementary Data, refer to pages F-35 to F-94 of the Financial Supplement, which is incorporated by reference herein.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.
 

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Item 9A. Controls and Procedures
 
(a)
Evaluation of disclosure controls and procedures.

The term "disclosure controls and procedures" (defined in Exchange Act Rule 13a-15(e)) refers to the controls and other procedures of Windstream that are designed to ensure that information required to be disclosed by Windstream in the reports that it files or submits 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 Windstream in the reports that it files or submits under the Exchange Act is accumulated and communicated to Windstream's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Windstream's management, with the participation of the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this annual report (the "Evaluation Date"). Based on that evaluation, Windstream's Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such disclosure controls and procedures were effective.
  
(b)
Management’s report on internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting, which appears on page F-33 of the Financial Supplement, is incorporated by reference herein.
 
(c)
Changes in internal control over financial reporting.

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

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

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

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

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, have evaluated any changes in our internal control over financial reporting that occurred during the period covered by this annual report, and they have concluded that there were no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

No reportable information under this item.


24




Windstream Corporation
Form 10-K, Part III
 
Item 10. Directors, Executive Officers, and Corporate Governance

For information pertaining to our Directors refer to "Proposal No. 1 – Election of Directors" in our Proxy Statement for our 2013 Annual Meeting of Stockholders, which is incorporated herein by reference. For information pertaining to the Audit Committee financial expert and corporate governance refer to "Board and Board Committee Matters" in our Proxy Statement for our 2013 Annual Meeting of Stockholders, which is incorporated herein by reference. For information pertaining to the Audit Committee, refer to "Audit Committee Report" in our Proxy Statement for our 2013 Annual Meeting of Stockholders, which is incorporated herein by reference.

Our executive officers as of December 31, 2012 , were as follows:

Name
 
Business Experience
Age

Jeffery R. Gardner
 
President and Chief Executive Officer of Windstream since formation on July 17, 2006.
52

Brent K. Whittington
 
Chief Operating Officer of Windstream since August 10, 2009; Executive Vice President and Chief Financial Officer of Windstream from July 2006 to August 2009.
41

Anthony W. Thomas
 
Chief Financial Officer and Treasurer of Windstream since May 30, 2012; Chief Financial Officer of Windstream from August 2009 to May 2012; Controller of Windstream from July 2006 to August 2009.
41

John P. Fletcher
 
Executive Vice President, General Counsel and Secretary of Windstream since formation on July 17, 2006.
47

Cindy Nash
 
Chief Information Officer of Windstream since August 10, 2009; Senior Vice President of Information Technology of Windstream from November 2007 to August 2009; Senior Vice President of Customer Service of Windstream from July 2006 to November 2007
48

John C. Eichler
 
Vice President and Controller of Windstream since August 10, 2009; Vice President of Internal Audit from July 2006 to August 2009.
41


We have a code of ethics that applies to all employees and members of the Board of Directors. Our code of ethics, referred to as the "Working with Integrity" guidelines, is posted on the Investor Relations page of the our web site ( www.windstream.com ) under "Corporate Governance". We will disclose in the corporate governance section of the Investor Relations page on our web site amendments and waivers with respect to the code of ethics that would otherwise be required to be disclosed under Item 5.05 of Form 8-K. We will provide to any stockholder a copy of the foregoing information, without charge, upon written request to Investor Relations, Windstream Corporation, 4001 Rodney Parham Road, Little Rock, Arkansas 72212.

For information regarding compliance with Section 16(a) of the Exchange Act, refer to "Section 16 (a) Beneficial Ownership Reporting Compliance" in our Proxy Statement for our 2013 Annual Meeting of Stockholders, which is incorporated herein by reference.

25




Item 11. Executive Compensation

For information pertaining to Executive Compensation, refer to "Compensation Committee Report on Executive Compensation" and "Management Compensation" in our Proxy Statement for our 2013 Annual Meeting of Stockholders, which are incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

For information pertaining to beneficial ownership of our securities and director independence, refer to "Security Ownership of Directors and Executive Officers", "Security Ownership of Certain Beneficial Owners" and "Board and Board Committee Matters" in our Proxy Statement for our 2013 Annual Meeting of Stockholders, which are incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

For information pertaining to Certain Relationships and Related Transactions, refer to "Relationships and Certain Transactions" in our Proxy Statement for our 2013 Annual Meeting of Stockholders, which is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

For information pertaining to fees paid to our principal accountant and the Audit Committee’s pre-approval policy and procedures with respect to such fees, refer to "Audit and Non-Audit Fees" in our Proxy Statement for our 2013 Meeting of Stockholders, which is incorporated herein by reference.


26



Table of Contents

Windstream Corporation
Form 10-K, Part IV
 
Item 15. Exhibits, Financial Statement Schedules
 
(a)
The following documents are filed as a part of this report:
1.
  
Financial Statements:
Our Consolidated Financial Statements are included in the Financial Supplement, which is incorporated by reference herein:
 
 
  
 
Financial
Supplement
Page Number
 
 
 
 
 
  
F-34
 
  
F-35
 
 
F-36
 
  
F-37
 
  
F-38
 
  
F-39
 
  
F-40 - F-94
 
 
 
 
 
  
 
Form 10-K
2.
  
Financial Statement Schedules :
Page Number
 
  
28
 
  
29
 
 
 
 
3.
  
Exhibits:
 
 
  
30-34
Our separate condensed financial statements have been omitted since we meet the tests set forth in Regulation S-X Rule 4-08(e)(3). All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.


27



Table of Contents

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Windstream Corporation
Registrant
 
By
 
/s/ Jeffery R. Gardner
 
Date:
February 19, 2013
Jeffery R. Gardner, President and Chief Executive Officer
 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
By
 
/s/ Anthony W. Thomas
 
Date:
February 19, 2013
  Anthony W. Thomas, Chief Financial Officer and Treasurer
(Principal Financial Officer)
 
 
 
 
 
 
 
By
 
/s/ Jeffery R. Gardner
 
 
February 19, 2013
Jeffery R. Gardner, President and Chief Executive Officer
 
 
 
 
 
 
 
 
 
By
 
/s/ John C. Eichler
 
 
February 19, 2013
John C. Eichler, Controller (Principal Accounting Officer)
 
 
 
 
*Carol B. Armitage, Director
 
 
 
*Samuel E. Beall, III, Director
 
 
 
*Dennis E. Foster, Director
 
 
 
*Francis X. Frantz, Director
 
 
 
*Jeffrey T. Hinson, Director
 
 
 
*Judy K. Jones, Director
 
 
 
*William A. Montgomery, Director
 
 
 
*Alan L. Wells, Director
By
 
/s/ John P. Fletcher
 
 
* (John P. Fletcher,
 
 
Attorney-in-fact)
February 19, 2013

28



Table of Contents

Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule


To the Board of Directors and Shareholders of Windstream Corporation

Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated February 19, 2013 appearing in this 2012 Annual Report on Form 10-K of Windstream Corporation also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Little Rock, Arkansas
February 19, 2013

29



Table of Contents

WINDSTREAM CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Millions)
 
Column A
 
Column B
 
Column C
 
Column D
 
 
 
Column E
   
 
 
 
Additions
 
 
 
 
 
 
Description
 
Balance at
Beginning
of Period
 
Charged to
Cost and
Expenses
 
 
 
Charged
to Other
Accounts
 
Deductions
 
 
 
Balance at
End of
Period
Allowance for doubtful accounts, customers and others:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the years ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
$
29.9

 
$
59.4

 
  
 
$

 
$
46.7

 
(a) 
 
$
42.6

December 31, 2011
 
$
27.8

 
$
48.5

 
  
 
$

 
$
46.4

 
(a) 
 
$
29.9

December 31, 2010
 
$
18.5

 
$
48.9

 
  
 
$

 
$
39.6

 
(a) 
 
$
27.8

Valuation allowance for deferred tax assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the years ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
$
165.9

 
$
0.4

 
 
 
$

 
$
80.4

 
(b)
 
$
85.9

December 31, 2011
 
$
28.8

 
$
1.4

 
 
 
$
135.7

(c) 
$

 
  
 
$
165.9

December 31, 2010
 
$
24.4

 
$
0.8

 
(d) 
 
$
3.6

(e) 
$

 
  
 
$
28.8

Accrued liabilities related to merger, integration and restructuring charges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the years ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
$
12.9

 
$
92.8

 
(f)
 
$

 
$
85.4

 
(g) 
 
$
20.3

December 31, 2011
 
$
10.5

 
$
71.1

 
(f)
 
$

 
$
68.7

 
(g) 
 
$
12.9

December 31, 2010
 
$
6.6

 
$
85.0

 
(h) 
 
$

 
$
81.1

 
(g) 
 
$
10.5

Notes:
(a)
Accounts charged off net of recoveries of amounts previously written off.

(b)
Represents adjustment recorded through goodwill to valuation allowance for deferred taxes related to expected realization of net operating losses assumed from acquisition of PAETEC.

(c)
Valuation allowance for deferred taxes was established through goodwill related to expected realization of net operating losses assumed from the acquisition of PAETEC.

(d)
Valuation allowance to adjust previously recorded allowances related to prior years and the expected realization of net operating losses assumed from the acquisition of D&E.

(e)
Valuation allowance for deferred taxes was established through goodwill related to expected realization of net operating losses assumed from the acquisitions of NuVox and lowa Telecom.

(f)
Costs primarily include charges for accounting, legal, broker fees and other miscellaneous costs associated with the acquisitions of NuVox, Iowa Telecom, Hosted Solutions, Q-Comm and PAETEC. In addition, we incurred employee transition costs, primarily severance related, in conjunction with the integration of NuVox, Iowa Telecom, Hosted Solutions, Q-Comm and PAETEC.

(g)
Represents cash outlays for merger, integration and restructuring costs charged to expense.

(h)
Costs primarily include charges for accounting, legal, broker fees and other miscellaneous costs associated with the acquisitions of D&E, Lexcom, NuVox, Iowa Telecom, Hosted Solutions and Q-Comm. In addition, we incurred employee transition costs, primarily severance related in conjunction with the integration of D&E, Lexcom, NuVox and Iowa Telecom.
See Note 10, "Merger, Integration and Restructuring Charges", to the consolidated financial statements on page F-70 in the Financial Supplement, which is incorporated herein by reference, for additional information regarding the merger, integration and restructuring charges recorded by us in 2012, 2011 and 2010.

30



Table of Contents

EXHIBIT INDEX

Number and Name
 
2.1
Agreement and Plan of Merger, dated July 31, 2011, by and among Windstream Corporation, Peach Merger Sub, Inc. and PAETEC Holding Corp. (incorporated herein by reference to Exhibit 2.1 to Current Report on Form 8-K of PAETEC dated July 31, 2011).
*
 
 
 
3.1
Amended and Restated Certificate of Incorporation of Windstream Corporation (incorporated herein by reference to Exhibit 3.1 to Amendment No. 3 to the Corporation's Registration Statement on Form S-4 filed May 23, 2006).
*
 
 
 
3.2
Amended and Restated Bylaws of Windstream Corporation (incorporated herein by reference to Exhibit 3.1 to the Corporation's Current Report on Form 8-K dated February 19, 2010).
*
 
 
 
4.1
Indenture dated July 17, 2006 among Windstream Corporation (as successor to Alltel Holding Corp.), certain subsidiaries of Windstream as guarantors thereto and SunTrust Bank, as trustee (incorporated herein by reference to Exhibit 4.1 to the Corporation's Current Report on Form 8-K dated July 17, 2006), as amended by supplemental indentures to provide guarantees from additional subsidiaries who also guarantee the Corporation's revolving credit facilities (such guarantor subsidiaries are identified on Exhibit 21).
*
 
 
 
4.2
Indenture dated February 27, 2007 among Windstream Corporation, certain subsidiaries of Windstream as guarantors thereto and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 to the Corporation's Current Report on Form 8-K dated March 1, 2007), as amended by supplemental indentures to provide guarantees from additional subsidiaries who also guarantee the Corporation's revolving credit facilities (such guarantor subsidiaries are identified on Exhibit 21).
*
 
 
 
4.3
Indenture dated as of October 8, 2009 among Windstream Corporation, as Issuer, and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Corporation's Form 8-K date October 8, 2009), as amended by supplemental indentures to provide guarantees from additional subsidiaries who also guarantee the Corporation's revolving credit facilities (such guarantor subsidiaries are identified on Exhibit 21).
*
 
 
 
4.4
Indenture dated as of July 19, 2010 among Windstream Corporation, as Issuer, and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Corporation's Form 8-K dated July 19, 2010), as amended by supplemental indentures to provide guarantees from additional subsidiaries who also guarantee the Corporation's revolving credit facilities (such guarantor subsidiaries are identified on Exhibit 21).
*
 
 
 
4.5
Indenture dated as of October 6, 2010 among Windstream Corporation, as Issuer, and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Corporation's Form 8-K dated October 6, 2010), as amended by supplemental indentures to provide guarantees from additional subsidiaries who also guarantee the Corporation's revolving credit facilities (such guarantor subsidiaries are identified on Exhibit 21).
*
 
 
 
4.6
Indenture dated March 16, 2011 among Windstream Corporation, as Issuer, and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Corporation's Form 8-K dated March 16, 2011).
*
 
 
 
4.7
Indenture dated as of March 28, 2011 among Windstream Corporation, as Issuer, and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Corporation's Form 8-K dated 28, 2011).
*
 
 
 
4.8
Indenture dated as of November 22, 2011 among Windstream Corporation, as Issuer, and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Corporation's Form 8-K dated November 22, 2011).
*
 
 
 
4.9
Indenture dated as of January 23, 2013, among Windstream Corporation, as Issuer, and US Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Corporation's Form 8-K dated January 23, 2013).

*
 
 
 
4.10
Indenture dated June 29, 2009 among PAETEC Holding Corp., certain subsidiaries of PAETEC as guarantors, and The Bank of New York Mellon, trustee (incorporated herein by reference to Exhibit 4.1 to the PAETEC's Current Report on Form 8-K dated June 29, 2009).
*
 
 
 
*
Incorporated herein by reference as indicated.
 
(a)
Filed herewith.
 

31



Table of Contents

EXHIBIT INDEX , Continued
Number and Name
 
4.11
Indenture dated December 2, 2010 among PAETEC Escrow Corporation, as guarantor, and The Bank of New York Mellon Trust Company, N.A. (incorporated herein by reference to Exhibit 4.1 to the PAETEC's Current Report on Form 8-K dated December 2, 2010), as assumed by PAETEC Holding Corp. as successor issuer to PAETEC Escrow Corporation pursuant to a First Supplemental Indenture dated as of December 6, 2010.
*
 
 
 
4.12
Form of 8 1/8% Senior Note due 2013 of Windstream Corporation (as successor to Alltel Holding Corp.) (incorporated herein by reference to Note included in Exhibit 4.1 to the Corporation's Current Report on Form 8-K dated July 17, 2006).
*
 
 
 
4.13
Form of 7.0% Senior Note due 2019 of Windstream Corporation (incorporated herein by reference to Note included in Exhibit 4.1 to the Corporation's Current Report on Form 8-K dated March 1, 2007).
*
 
 
 
4.14
Form of 7.875% Senior Note due 2017 of Windstream Corporation (incorporated herein by reference to Exhibit 4.1 to the Corporation's Form 8-K date October 8, 2009).
*
 
 
 
4.15
Form of 8.125% Senior Note due 2018 of Windstream Corporation (incorporated herein by reference to Note included in Exhibit 4.1 to the Corporation's Current Report on Form 8-K dated July 19, 2010).
*
 
 
 
4.16
Form of 7.75% Senior Note due 2020 of Windstream Corporation (incorporated herein by reference to Note included in Exhibit 4.1 to the Corporation's Current Report on Form 8-K dated October 6, 2010).
*
 
 
 
4.17
Form of 7.5% Senior Notes due 2023 of Windstream Corporation (incorporated herein by reference to Note included in Exhibit 4.1 to the Corporation's Current Report on Form 8-K dated as of March 16, 2011).
*
 
 
 
4.18
Form of 7.75% Senior Notes due 2021 of Windstream Corporation (incorporated herein by reference to Note included in Exhibit 4.1 to the Corporation's Current Report on Form 8-K dated as of March 28, 2011).
*
 
 
 
4.19
Form of 7.5% Senior Notes due 2022 of Windstream Corporation (incorporated herein by reference to Note included in Exhibit 4.1 to the Corporation's Current Report on Form 8-K dated as of November 22, 2011).
*
 
 
 
4.20
Form of 6.375% Senior Notes due 2023 of Windstream Corporation (incorporated by reference to Note included in Exhibit 4.1 to the Corporation's Form 8-K dated January 23, 2013).

*
 
 
 
4.21
Form of 8 7/8% Senior Secured Notes due 2017 of PAETEC Holding Corp. (incorporated herein by reference to Note included in Exhibit 4.1 to PAETEC's Current Report on Form 8-K dated June 29, 2009).
*
 
 
 
4.22
Guaranty, dated as of December 1, 2011, by Windstream Corporation guaranteeing obligations of PAETEC Holding Corp. under its 8 7/8% Senior Secured Notes due 2017 (incorporated herein by reference to Exhibit 4.2 to the Corporation's Form 8-K date November 30, 2011).
*
 
 
 
4.23
Form of 9 7/8% Senior Notes due 2018 by PAETEC Escrow Corporation (incorporated herein by reference to Noted included in Exhibit 4.1 to PAETEC's Current Report on Form 8-K dated December 2, 2010), as assumed by PAETEC Holding Corp. as successor issuer to PAETEC Escrow Corporation pursuant to a First Supplemental Indenture dated as of December 6, 2010.
*
 
 
 
4.24
Guaranty, dated as of December 1, 2011, by Windstream Corporation guaranteeing obligations of PAETEC Holding Corp. under its 9 7/8% Senior Secured Notes due 2018 (incorporated herein by reference to Exhibit 4.3 to the Corporation's Form 8-K date November 30, 2011).
*
 
 
 
10.1
Fifth Amended and Restated Credit Agreement, dated as of January 23, 2013, among Windstream Corporation, as borrower, certain lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, certain Co-Documentation Agents, J.P. Morgan Securities, Inc., Bookrunner and Lead Arranger, and certain Joint Bookrunners and Joint Arrangers (incorporated by reference to Exhibit A to Exhibit 10.1 to the Corporation's Form 8-K dated January 23, 2013).

*
 
 
 
10.2
Director Compensation Program dated February 6, 2013.
(a)
 
 
 
10.3
Form of Restricted Shares Agreement (Non-Employee Directors) entered into between Windstream Corporation and non-employee directors (incorporated herein by reference to Exhibit 10.3 to the Corporation's Current Report on Form 8-K dated February 6, 2007).
*
 
 
 
*
Incorporated herein by reference as indicated.
 
(a)
Filed herewith.
 
 
 
 
 
 
 
 
 

32



Table of Contents

EXHIBIT INDEX , Continued
Number and Name
 
 
 
 
10.4
Windstream Corporation Performance Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.8 to the Corporation's Current Report on Form 8-K dated July 17, 2006).
*
 
 
 
10.5
Amendment No. 1 to Windstream Corporation Performance Incentive Compensation Plan (incorporated by reference to Exhibit 10.4 to the Corporation's Current Report on Form 8-K dated January 4, 2008).
*
 
 
 
10.6
Windstream Corporation Benefit Restoration Plan, amended and restated as of January 1, 2008 (incorporated herein by reference to Exhibit 10.2 to the Corporation's Current Report on Form 8-K dated January 4, 2008).
*
 
 
 
10.7
Windstream Corporation 2007 Deferred Compensation Plan, amended and restated as of January 1, 2008 (incorporated herein by reference to Exhibit 10.1 to the Corporation's Current Report on Form 8-K dated January 4, 2008).
*
 
 
 
10.8
Form of Indemnification Agreement entered into between Windstream Corporation and its directors and executive officers (incorporated herein by reference to Exhibit 10.13 to the Corporation's Current Report on Form 8-K dated July 17, 2006).
*
 
 
 
10.9
Form of Restricted Shares Agreement (Officers: Restricted Stock) entered into between Windstream Corporation and its executive officers (incorporated herein by reference to Exhibit 10.1 to the Corporation's Current Report on Form 8-K dated February 6, 2009).
*
 
 
 
10.10
Form of Restricted Shares Agreement (Officers: Performance-Based Restricted Stock) entered into between Windstream Corporation and its executive officers (incorporated herein by reference to Exhibit 10.2 to the Corporation's Current Report on Form 8-K dated February 6, 2009).
*
 
 
 
10.11
Form of Restricted Shares Agreement (Officers: Performance-Based Restricted Stock-Clawback Policy/Accrued Dividends) entered into between Windstream Corporation and its executive officers (incorporated herein by reference to Exhibit 10.2 to the Corporation's Current Report dated February 19, 2010).
*
 
 
 
10.12
Form of Restricted Shares Agreement (Officers: Restricted Stock-Clawback Policy) entered into between Windstream Corporation and its executive officers (incorporated herein by reference to Exhibit 10.1 to the Corporation's Current Report on Form 8-K dated February 19, 2010).
*
 
 
 
10.13
Form of Performance Based Restricted Stock Unit Agreement (Officers: RSU-Clawback Policy) entered into between Windstream Corporation and its executive officers (incorporated herein by reference to Exhibit 10.1 to the Corporation's Current Report on Form 8-K dated February 8, 2011).
*
 
 
 
10.14
Amended and Restated Employment Agreement, dated as of January 1, 2008, between Windstream Corporation and Jeffery R. Gardner (incorporated herein by reference to Exhibit 10.6 to the Corporation's Current Report on Form 8-K dated January 4, 2008).
*
 
 
 
10.15
Amendment to Employment Agreement, dated as of December 21, 2009, between Windstream Corporation and Jeffery R. Gardner (incorporated herein by reference to Exhibit 10.1 to Corporation's Current Report on Form 8-K dated December 21, 2009).
*
10.16
Form of Change-In-Control Agreement, dated as of January 1, 2013, entered into between Windstream Corporation and certain executive officers (incorporated by reference to Exhibit 10.1 to the Corporation's Form 8-K dated January 1, 2013).

*
 
 
 
10.17
Letter Agreement, dated as of November 7, 2006, between the Windstream Corporation and Francis X. Frantz (incorporated herein by reference to Exhibit 10.3 to the Corporation's Current Report on Form 8-K dated November 13, 2006).
*
 
 
 
10.18
Windstream 2006 Equity Incentive Plan (as amended and restated effective February 17, 2010 (incorporated by reference to Appendix A to the Corporation's Proxy Statement dated March 26, 2010)).
*
 
 
 
10.19
PAETEC Holding Corp. 2011 Omnibus Incentive Plan. (incorporated by reference to Exhibit 10.1 to PAETEC Holding Corp.'s Current Report on Form 8-K filed with the SEC on June 3, 2011) for equity awards issued on or prior to November 30, 2011.
*
 
 
 
10.20
PAETEC Holding Corp. 2011 Amended and Restated Omnibus Incentive Plan, as amended for equity awards issued after November 30, 2011.
*
 
 
 
*
Incorporated herein by reference as indicated.
 
(a)
Filed herewith.
 

33



Table of Contents

EXHIBIT INDEX , Continued
Number and Name

 
 
 
10.21
PAETEC Holding Corp. 2007 Omnibus Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the PAETEC's Form 8-K dated May 20, 2008).
*
 
 
 
10.22
PAETEC Corp. 2001 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.10.1 to the Registration Statement on Form S-4 filed by PAETEC Holding Corp. with the SEC on November 13, 2006 (SEC File No. 333-138594)).
*
 
 
 
10.23
Form of US LEC Corp. 1998 Omnibus Stock Plan, as amended (incorporated by Exhibit (d) Schedule TO filed by US LEC Corp. with the SEC on February 23, 2006 (File No. 005-54177).
*
 
 
 
10.24
McLeodUSA Incorporated 2006 Omnibus Equity Plan (incorporated by reference to Exhibit 10.1 to Registration Statement on Form S-8 filed by PAETEC Holding Corp. with the SEC on February 8, 2008 (SEC File No. 333-149130)).
*
 
 
 
10.25
PAETEC Communications, Inc. Agent Incentive Plan, as amended and restated (filed as Exhibit 4.2.1 to PAETEC Holding Corp.'s Amendment No. 2 to Registration Statement on Form S-4 (SEC File Number 333-138594).
*
 
 
 
10.26
PAETEC Holding Corp. 2009 Agent Incentive Plan (filed as Exhibit 4.7 to PAETEC Holding Corp.'s Registration Statement on Form S-3 (SEC File Number 333-159344) and incorporated herein by reference).
*
 
 
 
10.27
Registration Rights Agreement dated as of January 23, 2013 among Windstream Corporation, certain subsidiaries of Windstream, as guarantors, and Wells Fargo Securities, LLC, as representative (incorporated by reference to Exhibit 4.3 to the Corporation's Form 8-K dated January 23, 2013).


*
 
 
 
21
Listing of Subsidiaries.
(a)
 
 
 
23
Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.
(a)
 
 
 
24
Power of Attorney.
(a)
 
 
 
31(a)
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(a)
 
 
 
31(b)
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(a)
 
 
 
 
32(a)
Certification 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)
Certification 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.INS
XBRL Instance Document
(a)
 
 
 
 
 101.SCH
XBRL Taxonomy Extension Schema Document
(a)
 
 
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
(a)
 
 
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
(a)
 
 
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
(a)
 
 
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
(a)
 
 
 
 
*
Incorporated herein by reference as indicated.
 
(a)
Filed herewith.
 



34



Table of Contents


WINDSTREAM CORPORATION
FINANCIAL SUPPLEMENT
TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2012





































Table of Contents

WINDSTREAM CORPORATION
INDEX TO FINANCIAL SUPPLEMENT
TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2012
F-2
 
 
F-31
 
 
F-32
 
 
F-33
 
 
F-34
 
 
Annual Financial Statements:
 
 
 
F-35
 
 
F-36
 
 
F-37
 
 
F-38
 
 
F-39
 
 
F-40 – F-94

F-1



Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the context requires otherwise, the use of the terms "Windstream," "we," "us" and "our" in this Management's Discussion and Analysis refers to Windstream Corporation and its consolidated subsidiaries.
The following sections, to the extent practicable, 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 this annual report for a discussion of certain risk factors applicable to our business, financial condition and results of operations.
OVERVIEW

Our vision is to become the premier enterprise communications and services provider in the United States while maintaining our strong, stable consumer business. Windstream provides advanced communications and technology solutions, including managed services and cloud computing, to businesses nationwide. In addition to business services, we offer broadband, voice and video services to consumers in primarily rural markets. We have operations in 48 states and the District of Columbia, a local and long-haul fiber network spanning approximately 115,000 miles, a robust business sales division and 23 data centers.

EXECUTIVE SUMMARY

We made significant progress on our strategy to grow business and consumer broadband revenues to offset continuing pressure on our consumer voice and long-distance revenues and wholesale revenues during 2012 and 2011. Revenues from businesses and consumer broadband were 68.8 percent of total revenues for the year ended December 31, 2012, as compared to 61.2 percent in the same period in 2011.

Key strategic activities during 2012 included:

the continued integration of PAETEC, which transformed us into a national provider of business services and included an attractive customer base of medium and large businesses and significantly enhanced our capabilities in strategic growth areas, including IP based services, cloud computing and managed services;

continued focus on revenue growth opportunities in our business service areas;

significant success-based capital investments in our fiber network, designed to accommodate network capacity requirements for wireless carriers as a result of growing wireless data usage;

the review of our management structure to increase the efficiency of decision-making and position ourselves for continued success, where approximately 350 management positions were eliminated, resulting in annualized savings of approximately $40.0 million ;

activities to improve our debt profile including pushing out maturities, lowering interest costs, and creating sufficient availability under our revolver to repay 2013 debt maturities; and

the opening of new state-of-the-art data centers in Little Rock, Arkansas, and McLean, Virginia, as well as expanded our data centers in Charlotte, North Carolina, Boston, Massachusetts, and Raleigh, North Carolina, to meet the growing business demand for cloud-based and dedicated managed services and underscore our commitment to our growing business customer base nationwide.

These activities, in conjunction with the strategic acquisitions we completed in prior years, continue our focus on strategic revenue growth and cost management.

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BUSINESS TRENDS

The following discussion highlights key trends affecting our business.

Business communications services : Demand for advanced communications services is expected to drive growth in revenues from business customers. To meet this demand, we continue to expand our capabilities in integrated voice and data services, which deliver voice and broadband services over a single Internet connection. We also offer multi-site networking services which provide a fast and private connection between business locations as well as a variety of other data services. We view this as a strategic growth area, but we are subject to competition from other carriers and cable television companies, which could suppress growth. See "Competition" in Item 1 of Part I of this Annual Report for more details.

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

Wireless backhaul : As wireless data usage grows, wireless carriers need additional bandwidth on the wireline network to accommodate the additional wireless traffic. We have made significant success-based capital investments to provide backhaul services to wireless carriers. These investments include building out fiber to new wireless towers and replacing copper facilities with fiber facilities to wireless towers we already serve. We spent approximately $270.5 million in fiber-to-the-tower investments during 2012 and we expect to continue to make significant success-based capital investments in 2013 to offer additional wireless backhaul services to wireless carriers; however, fiber to the tower investments will decrease in 2013.

Consumer high-speed Internet : New consumer high-speed Internet additions are slowing as a result of our already high penetration of 71 percent of primary residential lines. We expect the pace of high-speed Internet customer growth to continue to slow as the number of households without high-speed Internet service shrinks and our penetration continues to increase. However, we believe growing customer demand for faster speeds and value-added services, such as online security and back-up, will drive growth in consumer high-speed Internet revenues. We are continuing to focus on increasing our broadband speeds available to customers. As of December 31, 2012, we could deliver speeds of 3 Megabits per second ("Mbps") to approximately 97 percent of our addressable lines, and speeds of 6 Mbps, 12 Mbps and 24 Mbps are available to approximately 73 percent , 48 percent and 13 percent of our addressable lines, respectively.

Consumer voice line losses : Voice and switched access revenues will continue to be adversely impacted by future declines in voice lines due to competition from cable television companies, wireless carriers and providers using other emerging technologies. To combat competitive pressures, we continue to emphasize our bundled products and services. Our consumers can bundle voice, high-speed Internet and video services, providing one convenient billing solution and bundle discounts. We believe that product bundles positively impact customer retention, and the associated discounts provide our customers the best value for their communications and entertainment needs. As of December 31, 2012, all of our voice lines had wireless competition and approximately 70 percent of our voice lines had fixed-line voice competition. Consumer lines decreased 86,000 , or 4.5 percent during 2012, primarily due to the effects of competition.

Synergies and operational efficiencies : We continually strive to identify opportunities for operational efficiencies, in the context of both our acquired businesses and legacy operations. During the year ended December 31, 2012, we recognized approximately $171.0 million in synergies from our acquisitions completed since the beginning of 2010, primarily related to workforce and network efficiencies. In addition to acquisition-related synergies, we also evaluate our legacy operations for operational efficiency. On May 31, 2012, we announced the review of our management structure to increase the efficiency of decision-making, to ensure our management structure is as simple and as responsive to customers as possible and position ourselves for continued success. We eliminated approximately 350 management positions as a part of the restructuring, which was completed in the third quarter of 2012 and resulted in severance related costs of $22.4 million . The changes will result in annualized savings of approximately $40.0 million . During 2010, we announced a workforce reduction which resulted in annual pretax savings of approximately $20.0 million. We expect to continue to evaluate our operations for these opportunities.


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ACQUISITIONS AND DISPOSITIONS

Recent transactions and their value to our business are discussed below. For financial details of each acquisition, refer to Note 3 of the financial statements.

Acquisitions

PAETEC - On November 30, 2011 , we completed the acquisition of PAETEC, a communications carrier focused on business customers. The PAETEC transaction enhances our capabilities in strategic growth areas, including IP-based communications services, cloud computing and managed services. It significantly advances our strategy to drive top-line revenue growth by expanding our focus on business and fiber services.

The PAETEC transaction:

adds an attractive base of medium-to-large sized business customers;
expands our existing business service offerings;
provides opportunities for approximately $100.0 million in pre-tax operating cost and $10.0 million in capital synergies;
creates a nationwide fiber network, adding 36,700 fiber miles; and
adds seven data centers.

Q-Comm - On December 2, 2010 , we completed the acquisition of Q-Comm Corporation ("Q-Comm"). The transaction included Q-Comm's wholly-owned subsidiaries Kentucky Data Link, Inc. ("KDL"), a regional fiber services provider with 30,000 fiber miles, and Norlight, Inc. ("Norlight"), a communications services provider with approximately 5,500 business customers. This transaction significantly increased the scale of our fiber network, allowing us to reach more business customers and compete for more wireless backhaul contracts. KDL's fiber network also allows for significant operating synergies, allowing us to carry more traffic on our own network and avoid incremental spend to other carriers for this service.

Hosted Solutions - On December 1, 2010 , we completed the acquisition of Hosted Solutions Acquisition, LLC ("Hosted Solutions"), which operates data centers in the eastern United States. Hosted Solutions provides the infrastructure to offer many advanced data services, such as cloud computing, managed hosting and other managed services, on a wide scale. As a result of this acquisition, we added five state-of-the-art Statement on Standards for Attestation Engagements ("SSAE") 16 certified data centers and approximately 600 business customers.

Iowa Telecom - On June 1, 2010 , we completed the acquisition of Iowa Telecommunications Services, Inc. ("Iowa Telecom"), a regional communications services provider. This acquisition added 247,000 voice lines, 96,000 high-speed Internet customers and 25,000 video customers in Iowa and Minnesota. This acquisition provided us increased scale, synergies and expanded operating presence in contiguous markets.

NuVox - On February 8, 2010 , we completed the acquisition of NuVox Inc. ("NuVox"), a communications provider based in Greenville, South Carolina. The acquisition of NuVox marked our first considerable move to execute our business-focused growth strategy and was a critical point in our transformation from a traditional telephone company to a business-focused provider of advanced data and communications services. In addition to the customers acquired and new services we were able to offer, we retained a significant number of employees with experience geared towards business customers. The NuVox acquisition added 104,000 business customers in the Southeastern and Midwestern United States.

Dispositions

On June 15, 2012 , we completed the sale of the energy business acquired as part of PAETEC, which sells electricity to business and residential customers, primarily in certain geographic regions in New York state, as a competitive electricity supplier for approximately $6.1 million in total consideration. These operations were not central to our strategic goals in our core communications business.

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ORGANIZATION AND RESULTS OF OPERATIONS

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

The following table reflects our consolidated operating results as of December 31:
(Dollars in millions) (a,b)
 
2012

 
2011

 
2010

Revenues and sales:
 
 
 
 
 
 
Service revenues:
 
 
 
 
 
 
Business
 
$
3,611.4

 
$
2,098.0

 
$
1,577.5

Consumer
 
1,339.5

 
1,378.3

 
1,372.8

Wholesale
 
708.0

 
547.3

 
555.9

Other
 
266.2

 
131.0

 
115.2

Total service revenues
 
5,925.1

 
4,154.6

 
3,621.4

Product sales
 
231.2

 
126.6

 
89.3

Total revenues and sales
 
6,156.3

 
4,281.2

 
3,710.7

Costs and expenses:
 

 

 

Cost of services (exclusive of depreciation and amortization included below)
 
2,692.4

 
1,691.1

 
1,331.9

Cost of products sold
 
210.0

 
105.3

 
74.9

Selling, general, and administrative
 
976.0

 
602.7

 
491.7

Depreciation and amortization
 
1,297.6

 
847.5

 
693.7

Merger and integration costs
 
65.4

 
69.8

 
77.3

Restructuring charges
 
27.4

 
1.3

 
7.7

Total costs and expenses
 
5,268.8

 
3,317.7

 
2,677.2

Operating income
 
887.5

 
963.5

 
1,033.5

Other income (expense), net
 
4.6

 
(0.1
)
 
(3.5
)
Gain (loss) on early extinguishment of debt
 
1.9

 
(136.1
)
 

Interest expense
 
(625.1
)
 
(558.3
)
 
(521.7
)
Income from continuing operations before income taxes
 
268.9

 
269.0

 
508.3

Income taxes
 
100.2

 
99.4

 
195.6

Income from continuing operations
 
168.7

 
169.6

 
312.7

Discontinued operations, net of tax
 
(0.7
)
 
(0.1
)
 

Net income
 
$
168.0

 
$
169.5

 
$
312.7

Operating Metrics: (Thousands)
 
 
 
 
 
 
Business Operating Metrics:
 
 
 
 
 
 
     Customers
 
 
 
 
 
 
          Enterprise
 
177.3

 
167.2

 
62.9

          Small business
 
460.8

 
495.6

 
407.7

     Total customers (c)
 
638.1

 
662.8

 
470.6

 
 
 
 
 
 
 
     Carrier special access circuits
 
107.2

 
112.0

 
102.4

 
 
 
 
 
 
 
Consumer Operating Metrics:
 
 
 
 
 
 
     Voice lines
 
1,841.9

 
1,927.9

 
2,012.4

     High-speed Internet
 
1,214.5

 
1,207.8

 
1,159.1

     Digital television customers
 
426.1

 
441.2

 
426.7

     Total consumer connections
 
3,482.5

 
3,576.9

 
3,598.2

 
(a)
Results from operations include post-acquisition results from NuVox, Iowa Telecom, Hosted Solutions, Q-Comm, and PAETEC operations, (collectively known as the "Acquired Companies"). In the discussion and analysis provided below regarding changes in consolidated revenues and expenses in 2012 and 2011, the impact of the acquisitions on

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these changes is considered to be the revenues and expenses recognized during the period of each year for which results from the acquired operations are not included in the comparative period of the prior year.

(b)
Certain prior year amounts have been reclassified to conform to the current year financial statement presentation. These reclassifications did not impact net or comprehensive income. Please see Note 2 for additional information.

(c)
Total customers include each individual business customer location to which we provide service and exclude carrier special access circuits.

Business Service Revenues

Business service revenues include revenues from integrated voice and data services, advanced data and traditional voice and long-distance services to enterprise and small-business customers. Revenues from other carriers for special access circuits and fiber connections are also included. We expect business service revenues to be favorably impacted by increasing demand for data services such as integrated data and voice services, multi-site networking and data center services. As wireless data usage grows and fourth generation ("4G") networks are expanded, we expect to provide special access services to support the capacity needs of wireless carriers.

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

For the twelve months ended December 31, 2012, business customers decreased by approximately 24,700 or 3.7 percent . Our growth in enterprise customers is outpaced by losses in small business customers, typically due to competition from cable companies. However, our enterprise customers are driving growth in overall revenue through purchases of integrated voice and data services, data center and managed services, and advanced data services such as multi-site networking.

Despite the opportunities for growth from business services, competition and weakness in the economy may have the effect of suppressing revenue growth. In addition, business voice and long-distance service revenues continue to decline due to competition and migration to more advanced integrated voice and data services.

The following table reflects the primary drivers of year-over-year changes in business service revenues:
 
 
Twelve Months Ended
December 31, 2012
 
Twelve Months Ended
December 31, 2011
(Millions)
 
Increase
(Decrease)
 
%    
 
Increase
(Decrease)    
 
%  
Due to acquired companies
 
$
1,446.0

 
 
 
$
468.7

 
 
Due to changes in data and integrated services revenues (a)
 
49.6

 
 
 
54.9

 
 
Due to increases in carrier revenues (b)
 
17.9

 
 
 
46.0

 
 
Due to increases in data center and managed service revenues (c)
 
13.1

 
 
 
2.2

 
 
Due to increases in high-speed Internet revenues
 
3.0

 
 
 
(0.2
)
 
 
Due to decreases in voice, long distance and miscellaneous
revenues (d)
 
(16.2
)
 
 
 
(51.1
)
 
 
Total changes in business revenues
 
$
1,513.4

 
72
%
 
$
520.5

 
33
%
 
(a)
Increases in data and integrated services revenues were primarily due to demand for advanced data services and customer migration to our integrated voice and data services, previously discussed.

(b)
Increases in carrier revenues, which primarily represent monthly recurring charges for dedicated circuits, were attributable to demand from wireless and other carriers, previously discussed.

(c)
Increases in data center and managed service revenues, which includes monitoring, maintenance and support services for business customers, is due to increased demand and incremental sales. We opened new data centers, as well as expanded existing data centers, during 2012 to support this increase in demand.


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(d)
Decreases in traditional voice service revenues were primarily attributable to competition and migration of existing customers to integrated services and bundled offerings. These declines were partially offset by $8.9 million due to the implementation of the access recovery charge ("ARC"), which is a monthly charge established by the FCC designed to mitigate revenue reductions resulting from intercarrier compensation reform implemented in the third quarter of 2012.

Consumer Service Revenues

Consumer service revenues are generated from the provision of high-speed Internet, voice and video services to consumers. We expect the trend of consumer voice line loss to continue as a result of competition from wireless carriers, cable television companies and other providers using emerging technologies. For the twelve months ended December 31, 2012 , consumer voice lines decreased by approximately 86,000 , or 4.5 percent. Increasing revenues from high-speed Internet and related services helped offset some of the losses in consumer voice revenues. Demand for faster broadband speeds and Internet-related services, such as virus protection and online data backup services, are expected to favorably impact consumer high-speed Internet revenues, offsetting some of the decline in consumer voice revenues.

For the twelve months ended December 31, 2012 , consumer high-speed Internet customers increased by approximately 7,000 or 0.6 percent . As of December 31, 2012 , we provided high-speed Internet service to approximately 42 percent of total voice lines in service and approximately 71 percent of primary residential lines in service. As of December 31, 2012 , approximately 77 percent of our total voice lines had high-speed Internet competition, primarily from cable service providers. We do not expect significant additional cable expansions into our service areas during 2013, but we could experience some increased competition from high-speed Internet offerings of wireless competitors. We expect the pace of high-speed Internet customer growth to slow as the number of households without high-speed Internet service shrinks and our penetration continues to increase.

To combat competitive pressures in our markets, we emphasize our bundled service strategy and enhancements to our network to offer faster Internet speeds. Service bundles provide discounts and other incentives for customers to bundle their voice, long distance, high-speed Internet and video services and have positively impacted our operating trends.

The following table reflects the primary drivers of year-over-year changes in consumer service revenues:
   
 
Twelve Months Ended
December 31, 2012
 
Twelve Months Ended
December 31, 2011
(Millions)
 
Increase
(Decrease)
 
%    
 
Increase
 (Decrease)    
 
%  
Due to acquired companies
 
$

 
 
 
$
43.1

 
 
Due to increases in high-speed Internet revenues (a)
 
17.9

 
 
 
36.3

 
 
Due to changes in miscellaneous revenues
 
(4.7
)
 
 
 
1.8

 
 
Due to decreases in voice and long distance revenues (b)
 
(52.0
)
 
 
 
(75.7
)
 
 
Total changes in consumer revenues
 
$
(38.8
)
 
(3
)%
 
$
5.5

 
%

(a)
Increases in high-speed Internet revenues were primarily due to the increase in high-speed Internet customers, continued migration to higher speeds and increased sales of value added services, as previously discussed.

(b)
Decreases in voice service revenues were primarily attributable to declines in voice lines. These declines were partially offset by $4.8 million due to the implementation of the ARC, described above.

Wholesale Service Revenues

Wholesale service revenues include switched access revenues, Universal Service Fund ("USF") revenues and voice and data services sold on a wholesale basis.

Switched access revenues include usage sensitive revenues from long distance companies and other carriers for access to our network in connection with the completion of long distance calls, as well as reciprocal compensation received from wireless and other local connecting carriers for the use of our facilities. USF revenues are government subsidies designed to partially offset the cost of providing wireline services in high-cost areas. In addition, we offer our voice and data services on a wholesale basis to other carriers.


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

The following table reflects the primary drivers of year-over-year changes in wholesale service revenues:
   
 
Twelve Months Ended
December 31, 2012
 
Twelve Months Ended
December 31, 2011
 
(Millions)
 
Increase
(Decrease)
 
%        
 
Increase
(Decrease)
 
%        
 
Due to acquired companies
 
$
234.1

 
 
 
$
43.6

 
 
 
Due to changes in federal USF revenues (a)
 
22.5

 
 
 
(6.2
)
 
 
 
Due to decreases in voice and other revenues
 
(0.4
)
 
 
 
(1.1
)
 
 
 
Due to decreases in state USF revenues (b)
 
(2.7
)
 
 
 
(7.3
)
 
 
 
Due to decreases in switched access revenues (c)
 
(92.8
)
 
 
 
(37.6
)
 
 
 
Total changes in wholesale revenues
 
$
160.7

 
29
%
 
$
(8.6
)
 
(2
)%
 
 
(a)
I ncreases in federal USF revenues were primarily due to the implementation of the access recovery mechanism ("ARM") during the third quarter of 2012. The ARM is additional federal universal service support available to help mitigate revenue losses from intercarrier compensation reform not covered by the ARC, previously discussed. Decreases in federal USF revenues in 2011 resulted from decreases in federal funds received and line loss.

(b)
Decreases in state USF revenues were attributable to the decline in voice lines and changes in eligible recoverable costs.

(c)
Decreases in switched access revenues in 2012 were primarily due to the impact of intercarrier compensation reform and continued declines in voice lines. The ARC and ARM, discussed previously, are designed to help mitigate the revenue losses resulting from intercarrier compensation reform. Decreases in 2011 were primarily due to continued declines in voice lines and the phased reduction on interstate access rates for our subsidiaries that converted to price cap regulation.

Other Service Revenues

Other service revenues include USF surcharge revenues, revenues from software, other miscellaneous services and consumer revenues generated in markets where we lease the connection to the customer premise, and we no longer offer new consumer service in those areas. As a result, we expect other service revenues to decline as existing customers disconnect.

The following table reflects the primary drivers of year-over-year changes in other service revenues:
   
 
Twelve Months Ended
December 31, 2012
 
Twelve Months Ended
December 31, 2011
 
(Millions)
 
Increase
(Decrease)
 
%        
 
Increase
(Decrease)
 
%        
 
Due to acquired companies
 
$
142.3

 
 
 
$
25.2

 
 
 
Due to increases in pass through taxes and other surcharges
 
4.5

 
 
 
1.7

 
 
 
Due to decreases in other
 
(11.6
)
 
 
 
(11.1
)
 
 
 
Total changes in other revenues
 
$
135.2

 
103
%
 
$
15.8

 
14
%
 
 
Product Sales

Product sales consist of sales of various types of communications equipment to our customers. Business product sales includes high-end data and communications equipment which facilitate the delivery of advanced data and voice services to our business customers. Consumer product sales include high-speed Internet modems, home networking equipment, computers and phones. We also sell network equipment to contractors on a wholesale basis.


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The following table reflects the primary drivers of year-over-year changes in product sales:  
   
 
Twelve Months Ended
December 31, 2012
 
Twelve Months Ended
December 31, 2011
(Millions)
 
Increase
(Decrease)
 
%        
 
Increase
(Decrease)
 
%         
Due to acquired companies
 
$
108.7

 
 
 
$
20.8

 
 
Due to increases in contractor sales (a)
 
16.5

 
 
 
14.5

 
 
Due to decreases in consumer product sales
 
(11.9
)
 
 
 
(1.5
)
 
 
Due to changes in business product sales
 
(8.7
)
 
 
 
3.5

 
 
Total changes in product sales
 
$
104.6

 
83
%
 
$
37.3

 
42
%

(a)
Increases in contractor sales were primarily due to increased sales of outside plant materials.

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, benefits, materials, contractor costs and IT support. Interconnection consists of charges incurred to access the public switched network and transport traffic to the Internet, including charges to lease network components required for service delivery in markets where we do not own the primary network infrastructure.

The following table reflects the primary drivers of year-over-year changes in cost of services:
   
 
Twelve Months Ended
December 31, 2012
 
Twelve Months Ended
December 31, 2011
(Millions)
 
Increase
(Decrease)
 
%    
 
Increase
(Decrease)
 
%    
Due to acquired companies
 
$
1,045.0

 
 
 
$
276.1

 
 
Due to increases in third-party costs for ancillary services (a)
 
11.2

 
 
 
12.8

 
 
Due to increases in interconnection expense (b)
 
6.2

 
 
 
1.1

 
 
Due to increases in federal USF expenses (c)
 
5.5

 
 
 
2.1

 
 
Due to changes in postretirement expense (d)
 
2.7

 
 
 
(14.5
)
 
 
Due to changes in other
 
4.2

 
 
 
(4.9
)
 
 
Due to changes in pension expense (e)
 
(73.5
)
 
 
 
86.5

 
 
Total changes in cost of services
 
$
1,001.3

 
59
%
 
$
359.2

 
27
%
 
(a)
Increases in charges incurred to provide third-party services driven by sales of ancillary products as well as costs incurred for product offerings.

(b)
Increases in interconnection expense were attributable to increased purchases of circuits, including circuits to service the growth in data customers, as well as higher capacity circuits to service existing customers and increase the transport capacity of our network, partially offset by the favorable impact of network efficiency projects and rate reductions.

(c)
Increases in federal USF contributions in 2012 and 2011 were primarily due to an increase in the USF contribution factor from 12.9 percent to 15.3 percent to 17.4 percent for the years ended December 31, 2010, 2011 and 2012, respectively. This increase resulted in a proportionate increase in surcharge revenues which is included in other service revenues.

(d)
Decreases in 2011 postretirement expense were primarily attributable to a curtailment gain recognized during the third quarter of 2011 as a result of the elimination of basic retiree life insurance coverage for certain and future retirees effective January 1, 2012. During the second quarter of 2012 there was a curtailment gain recognized related to the elimination of all benefits for certain current and future retirees.


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(e)
The decrease in 2012 was primarily due to our pension plan assets performing better than expected, partially offset by a decrease in the discount rate from 4.64 percent to 3.85 percent . The increase in pension expense in 2011 was primarily due to a decline in the discount rate from 5.31 percent to 4.64 percent . Lower returns on pension plan assets also contributed to the increase in pension expense in 2011.

Cost of Products Sold

Cost of products sold represents the cost of equipment sales to customers.

The following table reflects the primary drivers of year-over-year changes in cost of products sold:  
   
 
Twelve Months Ended
December 31, 2012
 
Twelve Months Ended
December 31, 2011
(Millions)
 
Increase
(Decrease)
 
%    
 
Increase
(Decrease)
 
%    
Due to acquired companies
 
$
93.1

 
 
 
$
16.3

 
 
Due to increases in costs of contractor sales (a)
 
17.4

 
 
 
14.1

 
 
Due to decreases in consumer costs of products sold
 
(1.1
)
 
 
 
(3.5
)
 
 
Due to changes in equipment sales to business customers
 
(4.7
)
 
 
 
3.5

 
 
Total increases in cost of products sold
 
$
104.7

 
99
%
 
$
30.4

 
41
%
 
(a)
Increases in contractor cost of products sold for both periods were consistent with the changes in contractor sales in 2012 and 2011.

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 associated salaries, wages and employee benefits not directly associated with the provision of services.

The following table reflects the primary drivers of year-over-year changes in SG&A expenses:  
   
 
Twelve Months Ended
December 31, 2012
 
Twelve Months Ended
December 31, 2011
(Millions)
 
Increase
(Decrease)
 
%    
 
Increase
(Decrease)
 
%    
Due to acquired companies
 
$
400.9

 
 
 
$
83.2