Windstream Holdings Inc. on Wednesday (May 15) reported that losses had widened to $2.3 billion in the first quarter as the Arkansas telecom wades its way through federal court-supervised bankruptcy proceedings that have cast a cloud over the company’s operations.
In highlighting the company’s Chapter 11 filing on Feb. 25 during a conference call Wednesday, Windstream CEO Tony Thomas said federal bankruptcy court officials had given the company “unfettered access” to the remaining $600 million in debtor-in-possession (DIP) financing to allow Windstream to continue operating “business as usual” and to meet its financial obligations, including a $24 million bonus retention for top executives and key employees.
Windstream officials also set the table for a possible fight with former spin-off Uniti Corp. over the value of a master lease agreement. Windstream is Uniti’s largest customer and is obligated for more than 60% of the company’s revenues due to a landlord-tenant, lease-back agreement going back nearly four years.
“Discussions continue with the various parties involved in the restructuring process; however, it is too early to provide an expected timeframe for emergence,” said Thomas. “We appreciate the strong support we have received from our employees, customers, vendors and financial stakeholders as we work through the process.”
Windstream first announced earlier this year that its holding company and subsidiary, Windstream Services LLC, had filed voluntary petitions for reorganization under Chapter 11 in the federal bankruptcy court in New York City. That default was precipitated by a Feb. 15 court ruling by U.S. District Judge Jesse Furman for the Southern District of New York that Windstream violated bond agreements after splitting off Uniti in April 2015 as Arkansas’ first publicly held real estate investment trust, or REIT. That company was formerly known by the bulky name of Communications Sales & Leasing, but changed its name to Uniti more than two years ago.
Furman’s ruling arose from challenges by Aurelius Capital Management and U.S. Bank National Association that the 2015 deal was invalid under the terms of a debt exchange offer and consent solicitations in respect to senior notes issued by Windstream Services LLC to finance the spinoff of Uniti. The court further ruled that Aurelius was entitled to a $310.5 million judgment, plus interest from and after July 23, 2018.
In conjunction with the Chapter 11 filing, Citigroup Global Markets Inc. in late February offered Windstream a $1 billion financing package as part of the court’s “first day” approvals. At the time, the federal bankruptcy court on Wall Street gave Windstream access to $400 million of the funding to continue day-to-day operations.
During the conference call with Wall Street analysts and investors, Thomas said the federal court approved the investment grade financing package in mid-April during a series of so-called “second-day” motions. Surprisingly, Thomas said that the fair value of the assets the company is renting from Uniti is $7.5 billion, which the Windstream CEO called “significantly above market.”
Thomas said Windstream has utilized fiber to replace copper in select portions of its rural broadband markets, noting that many of those investments have boosted Uniti’s earnings and revenue under the terms of the master lease. However, he said the remaining tenant capital improvements are expected to have little or no value at renewal of the lease in 2030.
Given those factors, Thomas said Windstream estimates that the lease payment could be reduced by 80% or more if the lease were to be renewed in 2030, because of the significant decline in the value of landline assets. He said diversity of such new technologies, such as 5G fixed wireless, is integral in evaluating the current lease.
“In the context of its Chapter 11 cases, Windstream is evaluating all options regarding the Uniti lease, including renegotiation, recharacterization, unwinding the lease, as well as an outright rejection of the lease,” said Thomas. “More details will emerge as the Chapter 11 process evolves.”
U.S. TRUSTEE PROTESTS EXECUTIVE BONUS PAYOUT
Although Windstream officials did not address another controversial part of the federal bankruptcy proceedings, U.S. District Judge Robert Drain did approve the company’s request for $18.9 million in bonuses to retain Thomas and four other “key” executives to steer the company through its Chapter 11 reorganization in 2019.
That hearing was held on Monday in New York City, and was protested by the federal trustee from the U.S. Department of Justice, who said the company’s performance targets were set too low. In addition to the executive bonus plan, Drain also approved a smaller $5 million retention plan to be paid to an unknown number of “non-insider” employees instrumental to the rural telecom’s success and day-to-day operations.
Turning to the company’s disappointing and delayed first quarter results, Windstream reported a net loss of $2.3 billion, or a whopping $54.26 per share, compared to a net loss of $121 million, $3.25 per share, a year ago. Revenues for the three-month period ended March 31 fell 9% to $1.32 billion, compared to $1.45 billion a year ago.
Those results included a $2.3 billion non-cash goodwill impairment charge in the first quarter primarily due to a new lease accounting standard and the filing of the Chapter 11 reorganization case.
The remaining Wall Street analysts that still cover Windstream, which was delisted from the Nasdaq stock exchange after the bankruptcy filing and now trades over-the-counter as a penny stock, forecasted the rural broadband provider to report a first quarter loss of $2.71 per share on revenue of $1.32 billion, according to Thomson Reuters.
“Windstream began the year with another solid quarter, demonstrating the company’s continued momentum in the marketplaces we serve,” said Thomas, highlighting 11,400 new subscribers for the company’s high-speed Kinetic fiber internet service. “We stand alone among major U.S. telecom service providers with 14 consecutive months of consumer broadband subscriber growth through April, as well as our strongest quarterly broadband growth since 2011.”
Companywide, Windstream’s Consumer & Small Business service revenues were $454 million, down 4% from the same period a year ago. Segment income was $272 million compared to $282 million year-over-year.
Enterprise service revenues were $680 million, a 7% decrease from the same period a year ago, and segment income was $153 million compared to $146 million year-over-year. Wholesale service revenues were $169 million, down 8% from a year ago, while segment income was $114 million compared to $128 million in 2018.
Going forward in 2019, Windstream forecasts operating income of $1.76 billion in 2019, a decline of 4% year-over-year. In 2018, Windstream generated $1.97 billion in so-called adjusted OIBDAR, or operating income before depreciation and amortization, a decline of 2% year-over-year but an improvement from a 5.5% decline in 2017.
At the end of 2018, Windstream had 11,945 employees, including about 1,500 in Little Rock and 1,340 union employees under collective bargaining agreements. The Little Rock-based telecom offers bundled broadband services to consumers and businesses across the company’s 150,000 fiber network miles primarily in rural areas in 18 U.S. states.
Although Windstream’s shares no longer trade on Wall Street, Uniti’s stock fell 4.5%, or 50 cents at $10.32 in early trading on Wednesday on the Nasdaq Stock. Uniti, which reported a first quarter profit of a penny per share last week, did not publicly respond to Windstream’s comments concerning the companies’ master lease pact.