Windstream 2007 Annual Report Download - page 104

Loss on Extinguishment of Debt
Pursuant to the early settlement of portions of its subsidiary debt at the time of the spin off, the Company incurred
prepayment penalties of $7.9 million in 2006.
Intercompany Interest Income
Prior to the spin off from Alltel, the Company participated in a centralized cash management program with its parent
company. Under this program, the Company earned interest on amounts remitted to Alltel at a rate based on current
market rates for short-term investments and paid interest on amounts received from Alltel at a rate based on Alltel’s
weighted-average borrowing rate. Intercompany interest income increased $8.6 million in 2006, primarily due to an
increase in the amount of funds remitted to Alltel under the cash management program, combined with an increase in
the advance interest rate. The Company ceased its participation in the cash management program following the spin off
from Alltel.
Interest Expense
Set forth below is a summary of interest expense for the years ended December 31:
(Millions) 2007 2006 2005
Senior secured credit facility, Tranche A $ 34.9 $ 16.0 $ -
Senior secured credit facility, Tranche B 112.0 64.5 -
Senior secured credit facility, revolving line of credit 7.0 1.2 -
Senior unsecured notes 249.3 100.0 -
Notes issued by subsidiaries 40.4 29.1 20.3
Other interest expense 0.2 0.4 1.4
Impacts of interest rate swaps 4.3 1.1 -
Less capitalized interest expense (3.7) (2.7) (2.6)
Total interest expense $ 444.4 $ 209.6 $ 19.1
Interest expense increased $234.8 million, or 112 percent, in 2007 and $190.5 million, or 997 percent, in 2006. As
previously discussed, in conjunction with the spin off from Alltel and merger with Valor on July 17, 2006, the
Company borrowed approximately $4.9 billion of long-term debt under a credit facility and through the issuance of
senior notes, and assumed $400.0 million in principal value of additional senior notes from Valor. Interest expense
incurred on these new borrowings was the primary driver of increases in interest expense in both 2007 and 2006.
Additionally, the Company incurred $5.3 million in non-cash interest expense in the first quarter of 2007 on Tranche B
of its senior secured credit facilities due to the write-off of previously capitalized debt issue costs. These debt issue
costs were associated with $500.0 million of the Tranche B loan that was paid down pursuant to a refinancing
transaction during the first quarter of 2007 (See Note 5). The weighted-average interest rate paid on the long-term debt
in 2007 was 7.7 percent and for periods following the spin off and merger in 2006 was 7.8 percent.
Income Taxes
Income tax expense decreased $24.3 million, or 9 percent in 2007, and increased $8.4 million, or 3 percent, in 2006.
The decrease in income tax expense in 2007 is primarily due to adjustments to deferred income taxes for the impact of
an internal reorganization of our legal entity structure and a reduction in the Kentucky state income tax rate. The
increase in income tax expense in 2006 is primarily due to the increase in income before income taxes, partially offset
by a settlement received from the Internal Revenue Service (“IRS”) during 2006 related to taxes paid during 1997
through 2003. The Company’s effective tax rate in 2007 was 21.6 percent, compared to 38.3 percent in 2006 and
41.3 percent in 2005. The significant decrease in the 2007 effective tax rate was primarily due to the nontaxable gain
recognized pursuant to the split off of the publishing business, and the impact of the internal reorganization of our legal
entity structure. For 2008, the Company’s effective income tax rate is expected to range between 37.5 and 38.5 percent.
Changes in the relative profitability of our operations, as well as recent and proposed changes to federal and state tax
laws may cause the rate to vary from this expectation. See Note 12, “Income Taxes”, for further discussion of income
tax expense and deferred taxes.
Extraordinary Item
As previously discussed, during the third quarter of 2006, Windstream discontinued the application of SFAS No. 71.
Pursuant to the guidance in SFAS No. 101, “Discontinuation of the Application of FASB Statement No. 71,” the
impact of discontinuing the application of SFAS No. 71 was recognized as an extraordinary gain, net of taxes. See
Note 2 for further discussion of the components of this gain.
Cumulative Effect of Accounting Change
During the fourth quarter of 2005, the Company adopted FASB Interpretation No. 47, “Accounting for Conditional
Asset Retirement Obligations” (“FIN 47”), which is an interpretation of SFAS No. 143, “Accounting for Asset
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