Windstream 2013 Annual Report Download - page 151

F-15
Interest Expense
Set forth below is a summary of interest expense for the years ended December 31:
(Millions) 2013 2012 2011
Senior secured credit facility, Tranche A $ 19.4 $ 13.9 $ 6.1
Senior secured credit facility, Tranche B 78.4 51.8 40.2
Senior secured credit facility, revolving line of credit 14.6 18.1 19.8
Senior unsecured notes 418.1 400.8 413.0
Notes issued by subsidiaries 48.0 91.8 20.9
Credit facility extension fees 6.2 — —
Impacts of interest rate swaps 48.0 56.4 64.8
Other interest expense 2.9 3.2 0.3
Less capitalized interest expense (7.9)(10.9)(6.8)
Total interest expense $ 627.7 $ 625.1 $ 558.3
Interest expense increased $2.6 million, or 0.4 percent, and $66.8 million, or 12.0 percent, for the years ended December 31,
2013 and 2012, respectively. The increase in 2013 was attributable to additional interest and amortization of debt issuance costs
associated with the Windstream Corp. 2023 Notes issued in January 2013, the revolving line of credit completed in August
2013, and the additional senior secured credit facility borrowings under Tranche B4 and Tranche B5 completed in January and
December 2013, respectively. These increases were partially offset by repayments of the 2013 Notes completed in August 2013
and the PAETEC 2017 Notes and PAETEC 2015 Notes completed in the first quarters of 2013 and 2012, respectively. The
increase in 2012 was primarily due to additional interest incurred on the various series of PAETEC notes assumed by
Windstream Corp. in connection with the PAETEC acquisition.
Windstream Corp. enters into interest rate swap agreements to mitigate the interest rate risk inherent in its variable rate senior
secured credit facility. Four of the swaps are off-market swaps; therefore, they contain an embedded financing element, which
the swap counterparties recover through an incremental charge in Windstream Corp.'s 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 Windstream Corp. would pay on
a hypothetical on-market interest rate swap and is recognized in interest expense. 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 facilities. These on-market swaps mature on June 17, 2016. See
Note 6 for additional details.
Income Taxes
Income tax expense increased $7.1 million, or 7.2 percent, in 2013, and decreased $1.2 million, or 1.2 percent, in 2012. The
increase in income tax expense in 2013 was primarily due to an increase in income before taxes. This increase was partially
offset by the effect of a discrete item recognized in the first quarter of 2013 of $17.8 million of previously unrecognized tax
benefits, including interest, as a result of the expiration of the statute of limitations and the effect of a discrete item in the fourth
of quarter of 2013 to recognize $7.4 million of tax benefit, net of reserves, related to research and development credits. The
decrease in income tax expense in 2012 was primarily due to a decrease in income before taxes. Our effective tax rate in 2013
was 30.9 percent, compared to 37.1 percent in 2012 and 37.0 percent in 2011. The decrease in the effective tax rate in 2013 is
primarily due to the discrete items discussed above. These discrete items did not have a significant impact on our 2013 annual
results from operations or financial position.
For 2014, our annualized effective income tax rate is expected to range between 38 percent and 39 percent, excluding one-time
discrete items. Changes in the relative profitability of our business, as well as recent and proposed changes to federal and state
tax laws may cause the rate to change from historical rates. See Note 12 to the consolidated financial statements for further
discussion of income tax expense and deferred taxes.