Windstream 2008 Annual Report Download - page 108

Other income, net decreased $9.0 million, or 81 percent, in 2008 and increased $2.4 million, or 28 percent, in 2007.
The decline in 2008 was primarily due to a decrease in interest income earned on cash and cash equivalents in 2008
resulting from the reduction in cash on hand following the funding of the acquisition of CTC on August 31, 2007, and
repurchases of Company stock in accordance with the Company’s announced stock repurchase program discussed
below. This decline was partially offset by the recognition in 2008 of a $7.7 million gain from the sale of the
Company’s investments in non-consolidated cellular partnerships acquired through the merger with Valor in 2006.
Additionally, the change in other income, net in 2008 and 2007 was a result of the change in fair value of the
undesignated portion of an interest rate swap agreement, as discussed further in Note 2. Pursuant to the guidance in
SFAS No. 133, “Accounting for Derivative Financial Instruments and Hedging Activities”, as amended, changes in the
market value of the undesignated portion of this interest rate swap are included in net income. The market value
calculation of this interest rate swap is based on estimates of forward variable interest rates, and changes in estimated
forward rates could result in significant non-cash increases or decreases in other income, net in future periods.
The increase in other income, net in 2007 was due in part to an increase in interest income earned on short-term
investments. Prior to the spin off in the third quarter of 2006, excess cash was invested with Alltel pursuant to an
intercompany cash management agreement through which interest was earned on invested funds at rates averaging 5.0
percent. This interest income was included in intercompany interest income from Alltel in the accompanying
consolidated statement of income in 2006.
Gain on Sale of Publishing Business
On November 30, 2007 Windstream completed the split off of its directory publishing business in a tax-free transaction
with entities affiliated with WCAS. As a result of completing this transaction, Windstream recorded a gain of $451.3
million in the fourth quarter of 2007 (see Note 3).
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. The Company earned $31.9 million in intercompany interest income in 2006, and
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:
Interest expense
(Millions) 2008 2007 2006
Senior secured credit facility, Tranche A $ 14.6 $ 34.9 $ 16.0
Senior secured credit facility, Tranche B, net of interest rate swaps 99.8 116.3 65.6
Senior secured credit facility, revolving line of credit 8.9 7.0 1.2
Senior unsecured notes 255.1 249.3 100.0
Notes issued by subsidiaries 39.8 40.4 29.1
Other interest expense 0.1 0.2 0.4
Less capitalized interest expense (1.9) (3.7) (2.7)
Total interest expense $ 416.4 $ 444.4 $ 209.6
Interest expense decreased $28.0 million, or 6 percent, in 2008 and increased $234.8 million, or 112 percent, in 2007.
The decrease in 2008 was primarily due to the November 2007 retirement of $210.5 million of Tranche A senior
secured debt under its credit facility in a debt-for-debt exchange related to the sale of its publishing business, as well as
the decline in the LIBOR (London-Interbank Offered Rate) rate impacting the Tranche A notes. In addition, 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 issuance costs. These debt issue costs were
associated with $500.0 million of the Tranche B loan that was paid down pursuant to the refinancing transaction during
the first quarter of 2007 (see Note 5). 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
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