Windstream Corporation
WINDSTREAM HOLDINGS, INC. (Form: 10-Q, Received: 05/08/2014 15:42:19)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 



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


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

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



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

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

As of April 30, 2014, 602,659,992 sha res of common stock of Windstream Holdings, Inc. and 1,000 shares of common stock of Windstream Corporation were outstanding. All of Windstream Corporation’s outstanding common stock, for which there is no trading market, is held by Windstream Holdings, Inc.

This Form 10-Q is a combined quarterly report being filed separately by two registrants: Windstream Holdings, Inc. and Windstream Corporation. Windstream Corporation is a direct, wholly-owned subsidiary of Windstream Holdings, Inc. Accordingly, Windstream Corporation meets the conditions set forth in general instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format. Unless the context indicates otherwise, the use of the terms "Windstream," "we," "us" or "our" shall refer to Windstream Holdings, Inc. and its subsidiaries, including Windstream Corporation, and the term "Windstream Corp." shall refer to Windstream Corporation and its subsidiaries.
The Exhibit Index is located on page 64 .
  
 




Table of Contents


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





1



Table of Contents



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


Item 1 Financial Statements

WINDSTREAM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
 
 
Three Months Ended
March 31,
(Millions, except per share amounts)
 
 
 
 
 
2014

 
2013

Revenues and sales:
 
 
 
 
 
 
 
 
Service revenues:
 
 
 
 
 
 
 
 
Business
 
 
 
 
 
$
910.0

 
$
915.7

Consumer
 
 
 
 
 
313.0

 
326.9

Wholesale
 
 
 
 
 
141.7

 
151.9

Other
 
 
 
 
 
55.0

 
56.8

Total service revenues
 
 
 
 
 
1,419.7

 
1,451.3

Product sales
 
 
 
 
 
45.2

 
45.2

Total revenues and sales
 
 
 
 
 
1,464.9

 
1,496.5

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization
    included below)
 
 
 
 
 
644.6

 
641.2

Cost of products sold
 
 
 
 
 
41.1

 
42.6

Selling, general and administrative
 
 
 
 
 
252.2

 
237.5

Depreciation and amortization
 
 
 
 
 
338.9

 
329.3

Merger and integration costs
 
 
 
 
 
7.4

 
5.1

Restructuring charges
 
 
 
 
 
12.9

 
4.9

Total costs and expenses
 
 
 
 
 
1,297.1

 
1,260.6

Operating income
 
 
 
 
 
167.8

 
235.9

Other income, net
 
 
 
 
 
0.9

 
2.3

Loss on early extinguishment of debt
 
 
 
 
 

 
(13.8
)
Interest expense
 
 
 
 
 
(141.9
)
 
(168.9
)
Income from continuing operations before income taxes
 
 
 
 
 
26.8

 
55.5

Income taxes
 
 
 
 
 
10.8

 
3.5

Income from continuing operations
 
 
 
 
 
16.0

 
52.0

Discontinued operations
 
 
 
 
 

 
0.3

Net income
 
 
 
 
 
$
16.0

 
$
52.3

Basic and diluted earnings per share:
 
 
 
 
 
 
 
 
From continuing operations
 
 
 
 
 

$.02

 

$.09

From discontinued operations
 
 
 
 
 

 

Net income
 
 
 
 
 

$.02

 

$.09








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

2



Table of Contents


WINDSTREAM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
 
 
Three Months Ended
March 31,
(Millions)
 
 
 
 
 
2014

 
2013

Net income
 
 
 
 
 
$
16.0

 
$
52.3

Other comprehensive loss:
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
Changes in designated interest rate swaps
 
 
 
 
 
(6.9
)
 
(0.5
)
Amortization of unrealized losses on de-designated interest rate swaps
 
 
 
 
 
4.2

 
13.2

Income tax benefit (expense)
 
 
 
 
 
1.0

 
(4.8
)
Unrealized holding (loss) gain on interest rate swaps
 
 
 
 
 
(1.7
)
 
7.9

Postretirement and pension plans:
 
 
 
 
 
 
 
 
Change in net actuarial gain for postretirement plan
 
 
 
 
 
(0.8
)
 

Plan curtailment
 
 
 
 
 
(9.5
)
 
(19.8
)
Amounts included in net periodic benefit cost:
 
 
 
 
 
 
 
 
Amortization of net actuarial loss
 
 
 
 
 

 
0.7

Amortization of prior service credits
 
 
 
 
 
(1.7
)
 
(2.8
)
Income tax benefit
 
 
 
 
 
4.5

 
8.3

Change in postretirement and pension plans
 
 
 
 
 
(7.5
)
 
(13.6
)
Other comprehensive loss
 
 
 
 
 
(9.2
)
 
(5.7
)
Comprehensive income
 
 
 
 
 
$
6.8

 
$
46.6































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

3



Table of Contents


WINDSTREAM HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Millions, except par value)
 
March 31,
2014

 
December 31,
2013

Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
70.0

 
$
48.2

Restricted cash
 
10.6

 
9.7

Accounts receivable (less allowance for doubtful
 
 
 
 
accounts of $38.4 and $40.0, respectively)
 
632.7

 
635.3

Inventories
 
70.4

 
67.7

Deferred income taxes
 
167.5

 
241.5

Prepaid income taxes
 
24.1

 
29.7

Prepaid expenses and other
 
168.1

 
152.7

Total current assets
 
1,143.4

 
1,184.8

Goodwill
 
4,331.4

 
4,331.4

Other intangibles, net
 
1,954.5

 
2,020.1

Net property, plant and equipment
 
5,610.1

 
5,702.6

Other assets
 
200.4

 
205.7

Total Assets
 
$
13,239.8

 
$
13,444.6

Liabilities and Shareholders’ Equity
 
 
 
 
Current Liabilities:
 
 
 
 
Current maturities of long-term debt
 
$
88.7

 
$
85.0

Current portion of interest rate swaps
 
30.8

 
30.0

Accounts payable
 
355.9

 
385.9

Advance payments and customer deposits
 
222.0

 
223.5

Accrued dividends
 
151.9

 
151.1

Accrued taxes
 
89.0

 
104.2

Accrued interest
 
170.1

 
103.5

Other current liabilities
 
319.2

 
362.4

Total current liabilities
 
1,427.6

 
1,445.6

Long-term debt
 
8,617.6

 
8,622.2

Deferred income taxes
 
1,968.0

 
2,038.3

Other liabilities
 
503.9

 
498.3

Total liabilities
 
12,517.1

 
12,604.4

Commitments and Contingencies (See Note 6)
 


 


Shareholders’ Equity:
 
 
 
 
Common stock, $0.0001 par value, 1,000.0 shares authorized,
 
 
 
 
602.7 an d  596.2 shares issued and outstanding, respectively
 
0.1

 
0.1

Additional paid-in capital
 
703.3

 
811.6

Accumulated other comprehensive income
 
19.3

 
28.5

Retained earnings
 

 

Total shareholders’ equity
 
722.7

 
840.2

Total Liabilities and Shareholders’ Equity
 
$
13,239.8

 
$
13,444.6







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

4



Table of Contents


WINDSTREAM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended
March 31,
(Millions)
 
2014

 
2013

Cash Provided from Operations:
 
 
 
 
Net income
 
$
16.0

 
$
52.3

Adjustments to reconcile net income to net cash provided from operations:
 
 
 
 
Depreciation and amortization
 
338.9

 
329.5

Provision for doubtful accounts
 
12.3

 
16.1

Share-based compensation expense
 
13.7

 
12.4

Deferred income taxes
 
9.3

 
26.9

Unamortized net premium on retired debt
 

 
(38.7
)
Amortization of unrealized losses on de-designated interest rate swaps
 
4.2

 
13.2

Plan curtailment and other, net
 
(4.9
)
 
(22.6
)
Changes in operating assets and liabilities, net
 
 
 
 
Accounts receivable
 
(9.7
)
 
3.9

Prepaid income taxes
 
5.6

 
(3.3
)
Prepaid expenses and other
 
(20.1
)
 
(25.6
)
Accounts payable
 
(46.1
)
 
(69.2
)
Accrued interest
 
66.0

 
47.2

Accrued taxes
 
(15.2
)
 
(8.1
)
Other current liabilities
 
(32.4
)
 
(31.6
)
Other liabilities
 
(3.3
)
 
(16.1
)
Other, net
 
(14.5
)
 
18.3

Net cash provided from operations
 
319.8

 
304.6

Cash Flows from Investing Activities:
 
 
 
 
Additions to property, plant and equipment
 
(153.0
)
 
(243.5
)
Broadband network expansion funded by stimulus grants
 
(7.1
)
 
(11.9
)
Changes in restricted cash
 
(0.9
)
 
7.6

Grant funds received for broadband stimulus projects
 
11.4

 
13.3

Grant funds received from Connect America Fund
 
26.0

 

Net cash used in investing activities
 
(123.6
)
 
(234.5
)
Cash Flows from Financing Activities:
 
 
 
 
Dividends paid to shareholders
 
(150.2
)
 
(148.1
)
Repayments of debt and swaps
 
(331.6
)
 
(2,164.9
)
Proceeds of debt issuance
 
325.0

 
2,195.0

Debt issuance costs
 

 
(19.6
)
Payments under capital lease obligations
 
(7.8
)
 
(4.0
)
Other, net
 
(9.8
)
 
(6.1
)
Net cash used in financing activities
 
(174.4
)
 
(147.7
)
Increase (decrease) in cash and cash equivalents
 
21.8

 
(77.6
)
Cash and Cash Equivalents:
 
 
 
 
Beginning of period
 
48.2

 
132.0

End of period
 
$
70.0

 
$
54.4

Supplemental Cash Flow Disclosures:
 
 
 
 
Interest paid
 
$
74.7

 
$
105.2

Income taxes (refunded) paid, net
 
$
(1.0
)
 
$
0.5


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

5



Table of Contents


WINDSTREAM HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(Millions, except per share amounts)
 
Common Stock
and Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
Balance at December 31, 2013
 
$
811.7

 
$
28.5

 
$

 
$
840.2

Net income
 

 

 
16.0

 
16.0

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

 
(7.5
)
 

 
(7.5
)
Amortization of unrealized losses on de-designated
    interest rate swaps
 

 
2.6

 

 
2.6

Changes in designated interest rate swaps
 

 
(4.3
)
 

 
(4.3
)
Comprehensive (loss) income
 

 
(9.2
)
 
16.0

 
6.8

Share-based compensation expense
 
6.5

 

 

 
6.5

Stock options exercised
 
0.4

 

 

 
0.4

Stock issued to 401(k) plan (See Note 7)
 
21.6

 

 

 
21.6

Stock issued to qualified pension plan (See Note 7)
 
8.3

 

 

 
8.3

Taxes withheld on vested restricted stock and other
 
(10.3
)
 

 

 
(10.3
)
Dividends of $0.25 per share declared to shareholders
 
(134.8
)
 

 
(16.0
)
 
(150.8
)
Balance at March 31, 2014
 
$
703.4

 
$
19.3

 
$

 
$
722.7


































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

6



Table of Contents



WINDSTREAM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 
 
 
 
Three Months Ended
March 31,
(Millions)
 
 
 
 
 
2014

 
2013

Revenues and sales:
 
 
 
 
 
 
 
 
Service revenues:
 
 
 
 
 
 
 
 
Business
 
 
 
 
 
$
910.0

 
$
915.7

Consumer
 
 
 
 
 
313.0

 
326.9

Wholesale
 
 
 
 
 
141.7

 
151.9

Other
 
 
 
 
 
55.0

 
56.8

Total service revenues
 
 
 
 
 
1,419.7

 
1,451.3

Product sales
 
 
 
 
 
45.2

 
45.2

Total revenues and sales
 
 
 
 
 
1,464.9

 
1,496.5

Costs and expenses:
 
 
 
 
 
 
 
 
Cost of services (exclusive of depreciation and amortization
    included below)
 
 
 
 
 
644.6

 
641.2

Cost of products sold
 
 
 
 
 
41.1

 
42.6

Selling, general and administrative
 
 
 
 
 
251.7

 
237.5

Depreciation and amortization
 
 
 
 
 
338.9

 
329.3

Merger and integration costs
 
 
 
 
 
7.4

 
5.1

Restructuring charges
 
 
 
 
 
12.9

 
4.9

Total costs and expenses
 
 
 
 
 
1,296.6

 
1,260.6

Operating income
 
 
 
 
 
168.3

 
235.9

Other income, net
 
 
 
 
 
0.9

 
2.3

Loss on early extinguishment of debt
 
 
 
 
 

 
(13.8
)
Interest expense
 
 
 
 
 
(141.9
)
 
(168.9
)
Income from continuing operations before income taxes
 
 
 
 
 
27.3

 
55.5

Income taxes
 
 
 
 
 
11.0

 
3.5

Income from continuing operations
 
 
 
 
 
16.3

 
52.0

Discontinued operations
 
 
 
 
 

 
0.3

Net income
 
 
 
 
 
$
16.3

 
$
52.3



















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

7



Table of Contents


WINDSTREAM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
 
 
Three Months Ended
March 31,
(Millions)
 
 
 
 
 
2014

 
2013

Net income
 
 
 
 
 
$
16.3

 
$
52.3

Other comprehensive loss:
 
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
 
Changes in designated interest rate swaps
 
 
 
 
 
(6.9
)
 
(0.5
)
Amortization of unrealized losses on de-designated interest rate swaps
 
 
 
 
 
4.2

 
13.2

Income tax benefit (expense)
 
 
 
 
 
1.0

 
(4.8
)
Unrealized holding (loss) gain on interest rate swaps
 
 
 
 
 
(1.7
)
 
7.9

Postretirement and pension plans:
 
 
 
 
 
 
 
 
Change in net actuarial gain for postretirement plan
 
 
 
 
 
(0.8
)
 

Plan curtailment
 
 
 
 
 
(9.5
)
 
(19.8
)
Amounts included in net periodic benefit cost:
 
 
 
 
 
 
 
 
Amortization of net actuarial loss
 
 
 
 
 

 
0.7

Amortization of prior service credits
 
 
 
 
 
(1.7
)
 
(2.8
)
Income tax benefit
 
 
 
 
 
4.5

 
8.3

Change in postretirement and pension plans
 
 
 
 
 
(7.5
)
 
(13.6
)
Other comprehensive loss
 
 
 
 
 
(9.2
)
 
(5.7
)
Comprehensive income
 
 
 
 
 
$
7.1

 
$
46.6































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

8



Table of Contents


WINDSTREAM CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Millions, except number of shares)
 
March 31,
2014

 
December 31,
2013

Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
70.0

 
$
48.2

Restricted cash
 
10.6

 
9.7

Accounts receivable (less allowance for doubtful
 
 
 
 
accounts of $38.3 and $40.0, respectively)
 
632.7

 
635.3

Inventories
 
70.4

 
67.7

Deferred income taxes
 
167.5

 
241.5

Prepaid income taxes
 
24.1

 
29.7

Prepaid expenses and other
 
168.1

 
152.7

Total current assets
 
1,143.4

 
1,184.8

Goodwill
 
4,331.4

 
4,331.4

Other intangibles, net
 
1,954.5

 
2,020.1

Net property, plant and equipment
 
5,610.1

 
5,702.6

Other assets
 
200.4

 
205.7

Total Assets
 
$
13,239.8

 
$
13,444.6

Liabilities and Shareholders’ Equity
 
 
 
 
Current Liabilities:
 
 
 
 
Current maturities of long-term debt
 
$
88.7

 
$
85.0

Current portion of interest rate swaps
 
30.8

 
30.0

Accounts payable
 
355.9

 
385.9

Payable to Windstream Holdings, Inc.
 
151.0

 
150.7

Advance payments and customer deposits
 
222.0

 
223.5

Accrued taxes
 
89.3

 
104.3

Accrued interest
 
170.1

 
103.5

Other current liabilities
 
319.2

 
362.4

Total current liabilities
 
1,427.0

 
1,445.3

Long-term debt
 
8,617.6

 
8,622.2

Deferred income taxes
 
1,968.0

 
2,038.3

Other liabilities
 
503.9

 
498.3

Total liabilities
 
12,516.5

 
12,604.1

Commitments and Contingencies (See Note 6)
 
 
 
 
Shareholders’ Equity:
 
 
 
 
Common stock, 1,000 shares issued and outstanding (See Note 1)
 

 

Additional paid-in capital
 
704.0

 
812.0

Accumulated other comprehensive income
 
19.3

 
28.5

Retained earnings
 

 

Total shareholders’ equity
 
723.3

 
840.5

Total Liabilities and Shareholders’ Equity
 
$
13,239.8

 
$
13,444.6








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

9



Table of Contents


WINDSTREAM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended
March 31,
(Millions)
 
2014

 
2013

Cash Provided from Operations:
 
 
 
 
Net income
 
$
16.3

 
$
52.3

Adjustments to reconcile net income to net cash provided from operations:
 
 
 
 
Depreciation and amortization
 
338.9

 
329.5

Provision for doubtful accounts
 
12.3

 
16.1

Share-based compensation expense
 
13.7

 
12.4

Deferred income taxes
 
9.3

 
26.9

Unamortized net premium on retired debt
 

 
(38.7
)
Amortization of unrealized losses on de-designated interest rate swaps
 
4.2

 
13.2

Plan curtailment and other, net
 
(4.9
)
 
(22.6
)
Changes in operating assets and liabilities, net
 
 
 
 
Accounts receivable
 
(9.7
)
 
3.9

Prepaid income taxes
 
5.6

 
(3.3
)
Prepaid expenses and other
 
(20.1
)
 
(25.6
)
Accounts payable
 
(46.1
)
 
(69.2
)
Accrued interest
 
66.0

 
47.2

Accrued taxes
 
(15.0
)
 
(8.1
)
Other current liabilities
 
(32.4
)
 
(31.6
)
Other liabilities
 
(3.3
)
 
(16.1
)
Other, net
 
(14.5
)
 
18.3

Net cash provided from operations
 
320.3

 
304.6

Cash Flows from Investing Activities:
 
 
 
 
Additions to property, plant and equipment
 
(153.0
)
 
(243.5
)
Broadband network expansion funded by stimulus grants
 
(7.1
)
 
(11.9
)
Changes in restricted cash
 
(0.9
)
 
7.6

Grant funds received for broadband stimulus projects
 
11.4

 
13.3

Grant funds received from Connect America Fund
 
26.0

 

Net cash used in investing activities
 
(123.6
)
 
(234.5
)
Cash Flows from Financing Activities:
 
 
 
 
Dividends paid to shareholders
 

 
(148.1
)
Distributions to Windstream Holdings, Inc.
 
(150.7
)
 

Repayments of debt and swaps
 
(331.6
)
 
(2,164.9
)
Proceeds of debt issuance
 
325.0

 
2,195.0

Debt issuance costs
 

 
(19.6
)
Payments under capital lease obligations
 
(7.8
)
 
(4.0
)
Other, net
 
(9.8
)
 
(6.1
)
Net cash used in financing activities
 
(174.9
)
 
(147.7
)
Increase (decrease) in cash and cash equivalents
 
21.8

 
(77.6
)
Cash and Cash Equivalents:
 
 
 
 
Beginning of period
 
48.2

 
132.0

End of period
 
$
70.0

 
$
54.4

Supplemental Cash Flow Disclosures:
 
 
 
 
Interest paid
 
$
74.7

 
$
105.2

Income taxes (refunded) paid, net
 
$
(1.0
)
 
$
0.5

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

10



Table of Contents


WINDSTREAM CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(Millions, except per share amounts)
 
Common Stock
and Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
Balance at December 31, 2013
 
$
812.0

 
$
28.5

 
$

 
$
840.5

Net income
 

 

 
16.3

 
16.3

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

 
(7.5
)
 

 
(7.5
)
Amortization of unrealized losses on de-designated
    interest rate swaps
 

 
2.6

 

 
2.6

Changes in designated interest rate swaps
 

 
(4.3
)
 

 
(4.3
)
Comprehensive (loss) income
 

 
(9.2
)
 
16.3

 
7.1

Share-based compensation expense
 
6.5

 

 

 
6.5

Stock options exercised
 
0.4

 

 

 
0.4

Stock issued to 401(k) plan (See Note 7)
 
21.6

 

 

 
21.6

Stock issued to qualified pension plan (See Note 7)
 
8.3

 

 

 
8.3

Taxes withheld on vested restricted stock and other
 
(10.3
)
 

 

 
(10.3
)
Distributions payable to Windstream Holdings, Inc.
 
(134.5
)
 

 
(16.3
)
 
(150.8
)
Balance at March 31, 2014
 
$
704.0

 
$
19.3

 
$

 
$
723.3


































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

11



Table of Contents


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  

1. Preparation of Interim Financial Statements:

In these consolidated financial statements, unless the context requires otherwise, the use of the terms "Windstream," "we," "us" or "our" shall refer to Windstream Holdings, Inc. and its subsidiaries, including Windstream Corporation, and the term "Windstream Corp." shall refer to Windstream Corporation and its subsidiaries.
 
Organizational Structure – Windstream Holdings, Inc. ("Windstream Holdings") is a publicly traded holding company and the parent of Windstream Corporation ("Windstream Corp."). Windstream Holdings common stock trades on the Nasdaq Global Select Market under the ticker symbol "WIN". Windstream Corp. common stock, consisting of 1,000 shares outstanding, all of which are held by Windstream Holdings, does not trade on any stock market. Windstream Corp. and its guarantor subsidiaries are the sole obligors of all outstanding debt obligations and, as a result also file periodic reports with the Securities and Exchange Commission (“SEC”). Windstream Holdings is not a guarantor of nor subject to the restrictive covenants included in any of Windstream Corp.’s debt agreements. The Windstream Holdings board of directors and officers oversee both companies.
   
Description of Business – We are a leading provider of advanced communications and technology solutions, including managed services and cloud computing, to businesses nationwide. In addition to business services, we offer broadband, voice and video services to consumers primarily in rural markets. We have operations in 48 states and the District of Columbia, a local and long-haul fiber network spanning approximately 118,000 miles, a robust business sales division and 27 data centers offering managed services and cloud computing.

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

Basis of Presentation – The accompanying unaudited consolidated financial statements have been prepared based upon SEC rules that permit reduced disclosure for interim periods. Certain information and footnote disclosures have been condensed or omitted in accordance with those rules and regulations. The accompanying consolidated balance sheet as of December 31, 2013 , was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. In our opinion, these financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year. For a more complete discussion of significant accounting policies and certain other information, this report should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2013 , which was filed with the SEC on February 27, 2014 .

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

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

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

12

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


1. Preparation of Interim Financial Statements, Continued:

Recently Issued Authoritative Guidance

Discontinued Operations – In April 2014, the Financial Accounting Standards Board issued revised guidance to reduce diversity in practice for reporting discontinued operations. Under the previous guidance, any component of an entity that was a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group was eligible for discontinued operations presentation. The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity) and that have a major effect on a reporting entity’s operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. The updated guidance is effective for the fiscal years, and interim periods within those years, beginning after December 15, 2014. The adoption of this guidance is not expected to have a material effect on our consolidated results of operations, financial position or liquidity.

2. Goodwill and Other Intangible Assets:

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

During the fourth quarter of 2013, in connection with the disposal of our software business and changes in certain management responsibilities, we reassessed our reporting unit structure as of November 30, 2013 and performed a quantitative analysis as of that date. We estimated the fair value of our reporting units using an income approach supplemented with a market approach. The income approach is based on the present value of projected cash flows and a terminal value, which represents the expected normalized cash flows of the reporting unit beyond the cash flows from the discrete projection period of five years. We discounted the estimated cash flows for each of the reporting units using a rate that represents a market participant's weighted average cost of capital commensurate with the reporting unit's underlying business operations. Results of the income approach were corroborated with estimated fair values derived from a market approach, which primarily included the use of comparable multiples of publicly traded companies operating in businesses similar to ours. We also reconciled the estimated fair value of our reporting units to our total market capitalization. Goodwill was assigned to the reporting units using a relative fair value allocation approach.
 
As of January 1, 2014, we have three reporting units, excluding corporate-level activities. After considering changes to assumptions used in our most recent quantitative testing completed as of November 30, 2013, including general economic conditions, capital markets, telecommunications industry competition and trends, changes in common stock prices, our results of operations, and the magnitude of the excess of the fair value over the carrying value of each of our reporting units as determined in our most recent quantitative testing, we concluded that is more likely than not that the fair value of our reporting units is not less than their respective carrying values and, therefore, we did not perform a quantitative analysis.

Other intangible assets arising from business combinations are initially recorded at estimated fair value and amortized over the estimated useful lives.

13



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


2. Goodwill and Other Intangible Assets, Continued:

Intangible assets were as follows at:
   
 
March 31, 2014
 
December 31, 2013
(Millions)
 
Gross
Cost
 
Accumulated
Amortization
 
Net Carrying
Value
 
Gross
Cost
 
Accumulated
Amortization
 
Net Carrying
Value
Franchise rights
 
$
1,285.1

 
$
(211.1
)
 
$
1,074.0

 
$
1,285.1

 
$
(200.4
)
 
$
1,084.7

Customer lists
 
1,914.0

 
(1,046.3
)
 
867.7

 
1,914.0

 
(991.9
)
 
922.1

Cable franchise rights
 
39.8

 
(27.3
)
 
12.5

 
39.8

 
(27.0
)
 
12.8

Other
 
37.9

 
(37.6
)
 
0.3

 
37.9

 
(37.4
)
 
0.5

Balance
 
$
3,276.8

 
$
(1,322.3
)
 
$
1,954.5

 
$
3,276.8

 
$
(1,256.7
)
 
$
2,020.1

 
Intangible asset amortization methodology and useful lives were as follows as of March 31, 2014 :
Intangible Assets
  
Amortization Methodology
  
Estimated Useful Life
Franchise rights
  
straight-line
  
30 years
Customer lists
  
sum of years digits
  
9 - 15 years
Cable franchise rights
  
straight-line
  
15 years
Other
  
straight-line
  
1 - 3 years

Amortization expense for intangible assets subject to amortization was $65.6 million for the three months ended March 31, 2014 , as compared to $74.4 million for the same period in 2013 . Amortization expense for intangible assets subject to amortization was estimated to be as follows for each of the twelve month periods ended March 31:
Year
(Millions)
2015
$
246.3

2016
213.5

2017
178.0

2018
150.4

2019
123.5

Thereafter
1,042.8

Total
$
1,954.5



14



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


3. Long-term Debt and Capital Lease Obligations:

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

Long-term debt was as follows at:
(Millions)
 
March 31,
2014

 
December 31,
2013

Issued by Windstream Corp.:
 
 
 
 
Senior secured credit facility, Tranche A3 – variable rates, due December 30, 2016
 
$
376.6

 
$
387.3

Senior secured credit facility, Tranche A4 – variable rates, due August 8, 2017
 
273.7

 
277.5

Senior secured credit facility, Tranche B4 – variable rates, due January 23, 2020
 
1,328.2

 
1,331.6

Senior secured credit facility, Tranche B5 – variable rates, due August 8, 2019
 
588.5

 
590.0

Senior secured credit facility, Revolving line of credit – variable rates, due
    December 17, 2015
 
610.0

 
590.0

Debentures and notes, without collateral:
 
 
 
 
2017 Notes – 7.875%, due November 1, 2017
 
1,100.0

 
1,100.0

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

 
400.0

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

 
700.0

2021 Notes – 7.750%, due October 1, 2021
 
950.0

 
950.0

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

 
500.0

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

 
600.0

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

 
700.0

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

 
100.0

Cinergy Communications Company – 6.58%, due January 1, 2022
 
2.0

 
2.0

Debentures and notes, without collateral:
 
 
 
 
PAETEC 2018 Notes – 9.875%, due December 1, 2018
 
450.0

 
450.0

Premium on long-term debt, net
 
27.3

 
28.8

 
 
8,706.3

 
8,707.2

Less current maturities
 
(88.7
)
 
(85.0
)
Total long-term debt
 
$
8,617.6

 
$
8,622.2


Senior Secured Credit Facility

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

Revolving Line of Credit - During the first three months of 2014 , Windstream Corp. borrowed an additional $325.0 million under the revolving line of credit in its senior secured credit facility and repaid $305.0 million of these borrowings through March 31, 2014 . Letters of credit are deducted in determining the total amount available for borrowing under the revolving line of credit. Accordingly, the total amount outstanding under the letters of credit and the indebtedness incurred under the revolving line of credit may not exceed $1,250.0 million . Considering letters of credit of $16.8 million , the amount available for borrowing under the revolving line of credit was $623.2 million at March 31, 2014 .


15



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


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

During the first quarter of 2014, the variable interest rate on the revolving line of credit ranged from 2.41 percent to 4.50 percent , and the weighted average rate on amounts outstanding during the period was 2.53 percent . Comparatively, the variable interest rate during the first three months of 2013 and the weighted average rate on amounts outstanding during the period were both 4.50 percent . The revolving line of credit will expire on December 17, 2015.

Debentures and Notes, Without Collateral

2023 Notes - On January 23, 2013, Windstream Corp. completed the private placement of $700.0 million in aggregate principal amount of 6.375 percent senior unsecured notes due August 1, 2023 , at an issue price at par to yield 6.375 percent ("the 2023 Notes"). Proceeds from the private placement were used to pay the consideration for the tender offer and consent solicitation to purchase for cash any and all of the outstanding $650.0 million 8.875 percent notes, due June 30, 2017 ("PAETEC 2017 Notes"), which were acquired in connection with our acquisition of PAETEC Holding Corp ("PAETEC") in 2011, together with related fees and expenses. Interest on the 2023 Notes is paid semi-annually. Debt issuance costs associated with the new borrowings were $13.9 million , which were recorded in other assets on the balance sheet and are amortized into interest expense over the life of the borrowings.

Debt Compliance

The terms of Windstream Corp.'s credit facility and indentures include customary covenants that, among other things, require maintenance of certain financial ratios and restrict Windstream Corp.'s ability to incur additional indebtedness. These financial ratios include a maximum leverage ratio of 4.5 to 1.0 and a minimum interest coverage ratio of 2.75 to 1.0 . In addition, the covenants include restrictions on dividend and certain other types of payments. The terms of the indentures assumed in connection with the acquisition of PAETEC include restrictions on the ability of the subsidiary to incur additional indebtedness, including a maximum leverage ratio, with the most restrictive being 4.75 to 1.0 . As of March 31, 2014 , Windstream Corp. was in compliance with all of these covenants.

In addition, certain of Windstream Corp.'s debt agreements contain various covenants and restrictions specific to the subsidiary that is the legal counterparty to the agreement. Under Windstream Corp.'s long-term debt agreements, acceleration of principal payments would occur upon payment default, violation of debt covenants not cured within 30 days, a change in control including a person or group obtaining 50 percent or more of Windstream Corp.'s outstanding voting stock, or breach of certain other conditions set forth in the borrowing agreements. Windstream Corp. and its subsidiaries were in compliance with these covenants as of March 31, 2014 .

Maturities for long-term debt outstanding as of March 31, 2014 , excluding $27.3 million of unamortized net premium, were as follows for each of the twelve month periods ended March 31 :
Year
(Millions)
2015
$
88.7

2016
702.5

2017
339.9

2018
1,307.0

2019
869.5

Thereafter
5,371.4

Total
$
8,679.0


Loss on Early Extinguishment of Debt

During the three month period ended March 31, 2013 , Windstream Corp. retired all $650.0 million of the outstanding PAETEC 2017 Notes. As noted above, the PAETEC 2017 Notes were repurchased using proceeds from the issuance of the 2023 Notes. Windstream Corp. also amended its senior secured credit facility including issuance of Tranche B4, the proceeds of which were used to repay Tranche A2, Tranche B and Tranche B2 during the first quarter of 2013. The retirements and a portion of the credit facility amendment were accounted for under the extinguishment method of accounting, and as a result, Windstream Corp. recognized losses on extinguishment of debt of $13.8 million during the three months ended March 31, 2013 .

16



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


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

The loss on early extinguishment of debt was as follows for the three months ended March 31 , 2013:
(Millions)
 
 
 
 
 
 
 
Senior secured credit facility:
 
 
 
 
 
 
 
Unamortized debt issuance costs on original issuance
 
 
 
 
 
 
$
(2.5
)
Loss on early extinguishment for senior secured credit facility
 
 
 
 
 
(2.5
)
PAETEC 2017 Notes:
 
 
 
 
 
 

Premium on early redemption
 
 
 
 
 
 
(51.5
)
Third-party fees for early redemption
 
 
 
 
 
 
(1.0
)
Unamortized premium on original issuance
 
 
 
 
 
 
41.2

Loss on early extinguishment for PAETEC 2017 Notes
 
 
 
 
 
 
(11.3
)
Total loss on early extinguishment of debt
 
 
 
 
 
 
$
(13.8
)

Capital Lease Obligations

We lease facilities and equipment for use in our operations. These facilities and equipment are included in outside communications plant in property, plant and equipment in the accompanying consolidated balance sheets. Lease agreements that include a bargain purchase option, transfer of ownership, contractual lease term equal to or greater than 75 percent of the remaining estimated economic life of the leased facilities or equipment or minimum lease payments equal to or greater than 90 percent of the fair value of the leased facilities or equipment are accounted for as capital leases in accordance with authoritative guidance for capital leases. These capital lease obligations are included in the accompanying consolidated balance sheets within other liabilities and other current liabilities. During the three month periods ended March 31 , 2014 and 2013 , we acquired equipment under capital leases of $0.9 million and $7.0 million , respectively.

Future minimum lease payments under capital lease obligations were as follows for each of the twelve month periods ended March 31 :
Year
 
 
 
(Millions)
2015
 
 
 
$
32.6

2016
 
 
 
26.3

2017
 
 
 
13.1

2018
 
 
 
2.3

2019
 
 
 
1.0

Thereafter
 
 
 
1.8

Total future payments
 
 
 
77.1

Less: Amounts representing interest
 
 
 
5.8

Present value of minimum lease payments
 
 
 
$
71.3


Interest Expense

Interest expense was as follows for the three months ended March 31 :
(Millions)
 
 
 
 
 
 
2014

 
2013

Interest expense related to long-term debt
 
 
 
 
 
 
$
134.5

 
$
154.1

Impact of interest rate swaps
 
 
 
 
 
 
7.4

 
15.9

Interest on capital leases and other
 
 
 
 
 
 
1.1

 
0.7

Less capitalized interest expense
 
 
 
 
 
 
(1.1
)
 
(1.8
)
Total interest expense
 
 
 
 
 
 
$
141.9

 
$
168.9



17



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


4. Derivatives:

Windstream Corp. enters into interest rate swap agreements to mitigate the interest rate risk inherent in its variable rate senior secured credit facility. Derivative instruments are accounted for in accordance with authoritative guidance for recognition, measurement and disclosures about derivative instruments and hedging activities, including when a derivative or other financial instrument can be designated as a hedge. This guidance requires recognition of all derivative instruments at fair value, and accounting for the changes in fair value depends on whether the derivative has been designated as, qualifies as and is effective as a hedge. Changes in fair value of the effective portions of cash flow hedges are recorded as a component of other comprehensive loss in the current period. Any ineffective portion of the hedges is recognized in earnings in the current period.

In 2006, Windstream Corp. entered into four pay fixed, receive variable interest rate swap agreements to serve as cash flow hedges of the interest rate risk inherent in its senior secured credit facility. Windstream Corp. renegotiated the four interest rate swap agreements on December 3, 2010, and again on August 21, 2012, each time lowering the fixed interest rate paid and extending the maturity. As a result of the August 21, 2012 transaction, Windstream Corp. reduced its fixed interest rate paid from 4.553 percent to 3.391 percent effective October 17, 2012. The fixed interest rate paid includes a component which serves to settle the liability existing on Windstream Corp. swaps at the time of the transaction. The variable rate received resets on the seventeenth day of each month to the one-month London Interbank Offered Rate ("LIBOR"). The swaps had a notional value of $900.0 million as of March 31, 2014 , where it will remain until maturity on October 17, 2019.

On May 31, 2013, Windstream Corp. entered into six new pay fixed, receive variable interest rate swap agreements, designated as cash flow hedges of the previously unhedged interest rate risk inherent in its senior secured credit facility. These swaps have a fixed notional value of $750.0 million and mature on June 17, 2016. The fixed rate paid ranges from 1.026 to 1.040 percent plus a fixed spread of 2.750 percent . The variable rate received resets on the seventeenth day of each month to the one-month LIBOR subject to a minimum rate of 0.750 percent.

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

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

Set forth below is information related to the interest rate swap agreements:
(Millions, except for percentages)
 
March 31,
2014

 
December 31,
2013

Designated portion, measured at fair value:
 
 
 
 
Other current liabilities
 
$
30.8

 
$
30.0

Other non-current liabilities
 
$
43.3

 
$
41.8

Accumulated other comprehensive income
 
$
21.3

 
$
28.2

De-designated portion, unamortized value:
 
 
 
 
Accumulated other comprehensive loss
 
$
(20.5
)
 
$
(24.7
)
Weighted average fixed rate paid
 
3.57
%
 
3.57
%
Variable rate received
 
0.16
%
 
0.16
%

Derivatives are assessed for effectiveness each quarter and any ineffectiveness is recognized in other income, net in our consolidated statements of income. There was no ineffectiveness recognized on Windstream Corp.'s cash flow hedges during the first quarter of 2014. Comparatively, we recognized an increase to earnings of $1.2 million related to ineffectiveness of the cash flow hedges for the three month period ended March 31, 2013 .

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

18



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS  
____


4. Derivatives, Continued:

All or a portion of the change in fair value of Windstream Corp.'s interest rate swap agreements recorded in accumulated other comprehensive income may be recognized in earnings in certain situations. If Windstream Corp. extinguishes all of its variable rate debt, or a portion of its variable rate debt such that the variable rate interest received on the swaps exceeds the variable rate interest paid on its debt, all or a portion of the change in fair value of the swaps would be recognized in earnings. In addition, the change in fair value of the swaps may be recognized in earnings if Windstream Corp. determines it is no longer probable that it will have future variable rate cash flows to hedge against or if a swap agreement is terminated prior to maturity. Windstream Corp. has assessed the counterparty risk and determined that no substantial risk of default exists as of March 31, 2014 . Each counterparty is a bank with a current credit rating at or above A .

Windstream Corp. expects to recognize losses of $9.3 million , net of taxes, in interest expense in the next twelve months related to the unamortized value of the de-designated portion of interest rate swap agreements at March 31, 2014 . Payments on the original four swaps are presented in the financing activities section of the accompanying consolidated statements of cash flows due to the embedded financing element discussed above.

Changes in the value of these derivative instruments were as follows for the three month periods ended March 31 :
(Millions)
 
2014

 
2013

Changes in fair value of effective portion, net of tax (a)
 
$
(4.3
)
 
$
(0.3
)
Amortization of unrealized losses on de-designated interest rate swaps, net of tax (a)
 
$
2.6

 
$
8.2


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

The agreements with each of the derivative counterparties contain cross-default provisions, whereby if Windstream Corp. were to default on certain indebtedness, it could also be declared in default on its derivative obligations and may be required to net settle any outstanding derivative liability positions with its counterparties. In addition, certain of the agreements with the counterparties contain provisions where if a specified event or condition, such as a merger, occurs that materially changes Windstream Corp.'s creditworthiness in an adverse manner, Windstream Corp. may be required to fully collateralize its derivative obligations. At March 31, 2014 , Windstream Corp. had not posted any collateral related to its interest rate swap agreements.

Balance Sheet Offsetting

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

As of March 31, 2014 and December 31, 2013 , all swap agreements with counterparties were in a liability position and, accordingly, there were no assets to be recognized in the accompanying consolidated balance sheets. The following table presents the liabilities subject to an enforceable master netting arrangement as of March 31, 2014 and December 31, 2013.

Information pertaining to derivative liabilities was as follows:
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated
Balance Sheets
 
 
(Millions)
Gross Amount of Recognized Liabilities
 
Net Amount of Liabilities presented in the Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
March 31, 2014:
 
 
 
 
 
 
 
 
 
Derivatives
$
74.1