Windstream 2014 Annual Report Download - page 118

F-2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context indicates otherwise, the terms “Windstream,” “we,” “us” or “our” refer to Windstream Holdings, Inc. and its
subsidiaries, including Windstream Corporation, and the term “Windstream Corp.” refers to Windstream Corporation and its
subsidiaries.
The following sections provide an overview of our results of operations and highlight key trends and uncertainties in our business.
Certain statements constitute forward-looking statements. See “Forward-Looking Statements” at the end of this discussion for
additional factors relating to such statements, and see “Risk Factors” in Item 1A of Part I of this annual report for a discussion of
certain risk factors applicable to our business, financial condition and results of operations.
ORGANIZATIONAL STRUCTURE
Windstream Holdings, Inc. (“Windstream Holdings”) is a publicly traded holding company and the parent of Windstream
Corporation (“Windstream Corp.”). Windstream Holdings common stock trades on the Nasdaq Global Select Market under the
ticker symbol “WIN”. All shares of Windstream Corp. common stock are held by Windstream Holdings and do not trade on any
stock market. Windstream Corp. and its guarantor subsidiaries are the sole obligors of all outstanding debt obligations and, as a
result, also file periodic reports with the SEC. Windstream Holdings is not a guarantor of nor subject to the restrictive covenants
included in any of Windstream Corp.’s debt agreements.
There are no significant differences between the consolidated results of operations, financial condition, and cash flows of
Windstream Holdings and those of Windstream Corp. other than for certain expenses directly incurred by Windstream Holdings
principally consisting of audit, legal and board of director fees, Nasdaq listing fees, other shareholder-related costs, income taxes,
common stock activity, and payables from Windstream Corp. to Windstream Holdings. For the years ended December 31, 2014
and 2013, the amount of expenses directly incurred by Windstream Holdings were approximately $2.3 million and $0.5 million,
respectively, on a pretax basis, or $1.4 million and $0.3 million on an after-tax basis. Unless otherwise indicated, the following
discussion of our business strategy, trends and results of operations pertain to both Windstream Holdings and Windstream Corp.
PROPOSED SPIN-OFF OF CERTAIN NETWORK AND REAL ESTATE ASSETS
On July 29, 2014, we announced plans to spin off certain telecommunications network assets, including our fiber and copper
networks and other real estate, into Communications Sales & Leasing, Inc. (“CS&L”), an independent, publicly traded real estate
investment trust (“REIT”). The REIT will lease use of the assets to us through an exclusive long-term triple-net lease with an
initial term of 15 years at an initial estimated rent payment of $650.0 million per year. The lease is expected to include up to four
5 year renewal options and provide for annual rent escalations of 0.5 percent after the third year of the initial lease term. We will
continue to operate and maintain the assets in order to deliver advanced communications and technology services to consumers
and businesses. We will also continue to have sole responsibility for meeting our existing regulatory obligations following the
creation of the REIT. The REIT will focus on expanding and diversifying its assets and tenants through future acquisitions. We
will also contribute substantially all of our consumer competitive local exchange carrier business to the REIT, which will continue
to operate this business. Revenues from this business were approximately $35.7 million for the year ended December 31, 2014.
The tax-free spin-off should enable Windstream to realize significant financial flexibility by lowering long-term debt by
approximately $3.4 billion and potentially allow us to accelerate broadband investments, transition faster to an IP network or
pursue additional growth opportunities to better serve customers.
As part of this proposed transaction, shareholders will retain their existing Windstream Holdings shares. The spin-off will be
completed through a pro rata distribution of no less than 80.1 percent of the outstanding shares of the REIT to existing Windstream
Holdings shareholders. After giving effect to the interest in the REIT retained by Windstream, each Windstream Holdings
shareholder is expected to receive one share of the REIT for every five shares of Windstream Holdings common stock held as of
the record date in the form of a tax-free dividend. At the time of the spin-off, Windstream will retain a passive ownership interest
in up to 19.9 percent of the common stock of the REIT. Windstream intends to use all of its shares of the REIT opportunistically
during a twelve month period following the spin-off, subject to market conditions, to retire additional long-term debt.
On January 21, 2015, we announced that we have received all regulatory approvals from state public service commissions required
to consummate the transaction. In anticipation of the spin-off, we intend to reorganize certain of our subsidiaries, including
Windstream Corp., into limited liability companies and take certain other steps to facilitate the proposed transaction. At a special
meeting held on February 20, 2015, Windstream shareholders approved proposals to eliminate the requirement to conduct a
shareholder vote to effect the reorganization of Windstream Corp. to a limited liability company and to effect a reclassification
(reverse stock split) of Windstream Holdings common stock, whereby (i) each outstanding six (6) shares of common stock would