Windstream 2014 Annual Report Download - page 131

F-15
Interest Expense
Set forth below is a summary of interest expense for the years ended December 31:
(Millions) 2014 2013 2012
Senior secured credit facility, Tranche A $ 17.2 $ 19.4 $ 13.9
Senior secured credit facility, Tranche B 71.2 78.4 51.8
Senior secured credit facility, revolving line of credit 22.2 14.6 18.1
Senior unsecured notes 384.4 418.1 400.8
Credit facility extension fees — 6.2 —
Notes issued by subsidiaries 44.9 48.0 91.8
Impacts of interest rate swaps 29.0 48.0 56.4
Interest on capital and other lease obligations 6.6 2.9 3.2
Less capitalized interest expense (3.7)(7.9)(10.9)
Total interest expense $ 571.8 $ 627.7 $ 625.1
Interest expense decreased $55.9 million, or 8.9 percent in 2014, and increased $2.6 million, or 0.4 percent in 2013. The decrease
in 2014 was primarily due to the payoffs of $800.0 million of 8.125 percent notes due August 1, 2013 and $500.0 million of 7.0
percent notes due March 15, 2019 which were both completed in the third quarter of 2013, the payoff of the PAETEC 2017 Notes
completed in January 2013, and the absence of credit facility extension fees related to refinancing activities completed in the first
quarter of 2013. These decreases were partially offset by additional borrowings under the revolving line of credit and Tranche B5
of the senior credit facility. 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.
Windstream Corp. has entered into ten 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. The remaining six pay fixed, receive variable
interest rate swap agreements, are designated as cash flow hedges of the previously unhedged interest rate risk inherent in
Windstream Corp.’s senior secured credit facility and mature on June 17, 2016. See Note 5 for additional details.
Income Taxes
Income tax expense decreased $130.4 million, or 123.8 percent, in 2014, and increased $7.1 million, or 7.2 percent, in 2013. The
decrease in income tax expense in 2014 was primarily due to a decrease in income before taxes. 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. These discrete items were solely related to 2013 and
had no impact to our 2014 income tax expense. Our effective tax rate in 2014 was 38.9 percent, compared to 30.9 percent in 2013
and 37.1 percent in 2012. The effective tax rate in 2013 was significantly lowered by the effect of the discrete items discussed
above.
For 2015, our annualized effective income tax rate is expected to range between 38 percent and 39 percent, excluding one-time
discrete items. Changes in our 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 11 to the consolidated financial statements for further
discussion of income tax expense and deferred taxes.