Windstream 2013 Annual Report Download - page 163

F-27
At December 31, 2013, our unamortized finite-lived intangible assets totaled $2,020.1 million and primarily consisted of
franchise rights of $1,084.7 million and customer lists of $922.1 million. The customer lists are amortized using the sum-of-the-
years digits method over estimated useful lives ranging from 9 to 15 years. The franchise rights are amortized on a straight-line
basis over their estimated useful lives of 30 years. A reduction in the average useful lives of the franchise rights and customer
lists of one year would have increased the amount of amortization expense recorded in 2013 by approximately $12.0 million.
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. This guidance requires write-
downs of goodwill only in periods in which the recorded amount of goodwill exceeds the fair value. As of January 1, 2013, we
determined that we had one reporting unit to test for impairment, which included all of our operations. We assessed impairment
of our goodwill based upon step one of the authoritative guidance by evaluating the carrying value of our shareholders’ equity
against the current fair market value of our outstanding equity, which was estimated to be equal to our current market
capitalization plus a control premium of 20.0 percent. This premium was estimated through a review of recent market
observable transactions involving telecommunications companies. As of January 1, 2013, the fair market value of our equity,
both including and excluding the control premium, exceed its carrying value, and accordingly, goodwill was considered not
impaired. Reducing our January 1, 2013 market capitalization by 76.0 percent would not have resulted in an impairment of the
carrying value of goodwill.
As discussed in Note 2 to the consolidated financial statements, 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
and determined that, as of the date of reassessment of November 30, 2013, we had five reporting units, including the software
business sold on December 5, 2013. Following the disposition of the software business, for purposes of performing our annual
goodwill impairment test beginning January 1, 2014, we will have four reporting units, including a corporate reporting unit.
Immediately prior to this change in our reporting unit structure and assignment of goodwill to the reporting units, we
determined that no impairment of goodwill existed as of November 30, 2013. Goodwill has been assigned to the non-corporate
reporting units using a relative fair value allocation approach. 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. 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. Changes in the key
assumptions used in the impairment analysis due to changes in market conditions could adversely affect the calculated fair
value of goodwill, materially affecting the carrying value and our future consolidated operating results.
See Notes 2 and 4 to the consolidated financial statements for additional information regarding goodwill.
Pension Benefits
We maintain a non-contributory qualified defined benefit pension plan as well as supplemental executive retirement plans that
provide unfunded, non-qualified supplemental retirement benefits to a select group of management employees. The annual
costs of providing pension benefits are based on certain key actuarial assumptions, including the expected return on plan assets
and discount rate. 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, unless an earlier measurement date is required. Our projected net pension income for 2014, which
is estimated to be approximately $0.9 million, was calculated based upon a number of actuarial assumptions, including an
expected long-term rate of return on qualified pension plan assets of 7.0 percent and a discount rate of 5.01 percent. If returns
vary from the expected rate of return or there is a change in the discount rate, the estimated net pension income could vary. In
developing the expected long-term rate of return assumption, we considered the plan's historical rate of return, as well as input
from our investment advisors. Projected returns on qualified pension plan assets were based on broad equity and bond indices
and include a targeted asset allocation of 24.0 percent to equities, 59.0 percent to fixed income assets and 17.0 percent to
alternative investments, with an aggregate expected long-term rate of return of approximately 7.0 percent. Lowering the
expected long-term rate of return on the qualified pension plan assets by 50 basis points (from 7.0 percent to 6.5 percent) would
result in a decrease in our projected pension income of approximately $4.8 million in 2014.