Windstream 2015 Annual Report Download - page 134

F-4
In connection with the distribution, CS&L borrowed approximately $2.14 billion through a new senior credit agreement. CS&L
also issued debt securities in the private placement market to fund the cash payment and to issue its debt securities to Windstream,
consisting of $1,110.0 million aggregate principal amount of 8.25 percent senior notes due April 15, 2023 and $400.0 million
aggregate principal amount of 6.0 percent senior secured notes due October 15, 2023. The CS&L unsecured notes and the
borrowings under CS&L’s new senior credit agreement were issued at a discount, and accordingly, at the date of distribution,
CS&L issued to Windstream approximately $2.5 billion of its debt securities consisting of $970.2 million in term loans, $400.0
million in secured and $1,077.3 million in unsecured notes (the “CS&L Securities”).
On April 24, 2015, following the completion of the spin-off transaction, Windstream transferred the CS&L Securities and cash to
two investment banks, in exchange for the transfer by the investment banks to Windstream of certain debt securities of Windstream
Services consisting of $1.7 billion aggregate principal amount of borrowings outstanding under Tranche A3, A4 and B4 of
Windstream Services’ senior credit facility and $752.2 million aggregate principal amount of borrowings outstanding under the
revolving line of credit in Windstream Services’ senior credit facility held by the investment banks.
On April 24, 2015, Windstream Services called for redemption all of its $400.0 million aggregate principal amount of 8.125 percent
senior unsecured notes due September 1, 2018, at a redemption price payable in cash equal to $1,040.63 per $1,000 principal
amount of the notes, plus accrued and unpaid interest up to the redemption date. Also on April 24, 2015, PAETEC Holding, LLC,
(“PAETEC”) a direct, wholly-owned subsidiary of Windstream Services, called for redemption all $450.0 million of its outstanding
aggregate principal amount of 9.875 percent notes due 2018, at a redemption price payable in cash equal to $1,049.38 per $1,000
principal amount of the notes, plus accrued and unpaid interest up to the redemption date. On May 27, 2015, we completed the
redemption of these two debt obligations, using a portion of the $1.035 billion cash payment received from CS&L to fund the
redemption price.
As of the spin-off date, excluding restricted shares issued to Windstream employees and directors, Windstream retained a passive
ownership interest in approximately 19.6 percent of the common stock of CS&L. Windstream intends to use all of its shares of
CS&L to retire additional Windstream Services debt within 18 to 24 months from the date of the spin-off, subject to market
conditions.
See Note 3 for additional information regarding the spin-off.
MASTER LEASE AGREEMENT
On April 24, 2015, Windstream Holdings entered into a long-term triple-net master lease with CS&L to lease back the
telecommunications network assets. Under the terms of the master lease, Windstream Holdings has the exclusive right to use the
telecommunications network assets for an initial term of 15 years with up to four, five-year renewal options and Windstream
Holdings is required to pay all property taxes, insurance, and repair or maintenance costs associated with the leased property. The
master lease provides for an annual rent of $650.0 million paid in equal monthly installments in advance and is fixed for the first
three years. Thereafter, rent will increase on an annual basis at a base rent escalator of 0.5 percent. During December 2015, we
requested and CS&L agreed to fund $43.1 million of capital expenditures. As a result, the annual lease payment increased at a
rate of 8.125 percent of the funds received from CS&L, or from $650.0 million to $653.5 million. Future lease payments due under
the agreement reset to fair market rental rates upon Windstream Holdings’ execution of the renewal options. Due to various forms
of continuing involvement, including Windstream Services retaining bare legal title (but not beneficial ownership) to the various
easements, permits and pole attachments related to the telecommunications network assets, we have accounted for the transaction
as a failed spin-leaseback for financial reporting purposes. As a result, the net book value of the network assets transferred to
CS&L continue to be reported in our consolidated balance sheet and all depreciable assets will be fully depreciated over the initial
lease term of 15 years. At inception of the master lease, we recorded a long-term lease obligation of approximately $5.1 billion
equal to the sum of the minimum future annual lease payments over the 15-year lease term discounted to the present value based
on Windstream Services’ incremental borrowing rate. Funding received from CS&L in December 2015 for capital expenditures
was recorded as an increase to the long-term lease obligation. As annual lease payments are made, a portion of the payment will
decrease the long-term lease obligation with the balance of the payment charged to interest expense using the effective interest
method.
See Note 5 for additional information regarding the master lease agreement.