Windstream 2011 Annual Report Download - page 133

F-25
advisors. Historical returns of the plan were 9.79 percent since 1975, including periods in which it was sponsored by Alltel.
Projected returns on qualified pension plan assets were based on broad equity and bond indices and include a targeted asset
allocation of 55.0 percent to equities, 35.0 percent to fixed income assets and 10.0 percent to alternative investments, with an
aggregate expected long-term rate of return of approximately 8.0 percent. Lowering the expected long-term rate of return on the
qualified pension plan assets by 50 basis points (from 8.0 percent to 7.5 percent) would result in a decrease in our projected
pension income of approximately $4.6 million in 2012.
The discount rate selected is based on a hypothetical yield curve and associated spot rate curve adjusted to reflect the expected
cash outflows for pension benefit payments. The yield curve incorporates actual high-quality corporate bonds across the full
maturity spectrum and is developed from yields on Aa-graded, non-callable/putable bonds. The discount rate determined on this
basis was 4.64 percent at December 31, 2011. Lowering the discount rate by 25 basis points (from 4.64 percent to 4.39 percent)
would result in an increase in our projected pension income of approximately $0.9 million and an increase in our pension
obligation of $39.2 million in 2012. We recognize changes in the fair value of plan assets and actuarial gains and losses due to
actual experience differing from the various actuarial assumptions, including changes in our pension obligation, as pension
expense or income in the fourth quarter each year.
Effective during the fourth quarter, we changed our method of recognizing actuarial gains and losses for pension benefits to
recognize actuarial gains and losses in our operating results in the year in which the gains and losses occur. Historically, we
have recognized actuarial gains and losses as a component of accumulated other comprehensive income in our consolidated
balance sheets on an annual basis and amortized unrecognized gains or losses that exceed 17.5 percent of the greater of the
projected benefit obligation or market-related value of plan assets on a straight-line basis over five years. Unrecognized
actuarial gains and losses below the 17.5 percent corridor were amortized into operating results over the average future service
life of active employees in these plans. These gains and losses are measured annually as of December 31st and accordingly will
be recorded during the fourth quarter. This change will improve transparency in our financial results by more quickly
recognizing the effects of economic and interest rate trends on plan investments and assumptions. We have applied these
changes retrospectively, adjusting all prior periods presented (see Note 2).
The Pension Protection Act of 2006 (“PPA”) was signed into law on August 17, 2006. In general, PPA changed the rules
governing the minimum contribution requirements for funding a qualified pension plan on an annual basis without paying
excise tax penalties. Among other requirements, PPA changed the assumptions used to calculate the minimum lump-sum benefit
payments, and applied benefit restrictions to plans below certain funding levels. PPA made permanent certain provisions of the
Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) that were scheduled to expire in 2010. EGTRRA
increased the maximum amount of benefits that a qualified defined benefit pension plan could pay and increased the maximum
compensation amount allowed for determining benefits for qualified pension plans. We are complying with PPA provisions. As
a result of the $135.8 million contribution in 2011, the qualified pension was at least 80.0 percent funded for the 2011 plan year,
resulting in no benefit restrictions. The assumptions selected as of December 31, 2011, for financial reporting purposes, for the
qualified pension plan reflected the PPA impact. Future contributions to the plan are dependent on various factors, including
future investment performance, changes in future discount rates and changes in the demographics of the population
participating in the qualified pension plan.
See Notes 2 and 8 for additional information on our pension plans.
Useful Lives of Assets
The calculation of depreciation and amortization expense is based on the estimated economic useful lives of the underlying
property, plant and equipment and finite-lived intangible assets. Our regulated operations use a group composite depreciation
method. Under this method, when plant is retired, the original cost, net of salvage value, is charged against accumulated
depreciation and no immediate gain or loss is recognized on the disposition of the plant. With the assistance of outside
expertise, we completed an analysis of the depreciable lives of assets held for certain subsidiaries in 2012. Accordingly, we will
implement new depreciation rates beginning in the first quarter of 2012, for those subsidiaries. We expect the change to result in
an increase in depreciation expense of $67.0 million in 2012.
Goodwill and Other Indefinite-lived Intangibles
In accordance with authoritative guidance on goodwill and intangibles other than goodwill, we test our goodwill for impairment
at least annually, or whenever indicators of impairment arise. This guidance requires write-downs of goodwill only in periods in
which the recorded amount of goodwill exceeds the fair value. We assess the impairment of our goodwill by evaluating the
carrying value of our shareholders’ equity against the current fair market value of our outstanding equity, where the fair market
value of our equity is equal to our current market capitalization plus a control premium estimated to be 20.0 percent through the
review of recent market observable transactions involving wireline telecommunication companies. If the fair value is less than