Windstream Holdings Inc. on Thursday (Aug. 8) reported adjusted second quarter earnings and sales were down broadly across all its businesses as the company seeks to renegotiate terms of a master lease agreement with former spinoff Uniti Corp during the company’s court-order Chapter 11 reorganization process.
In a second quarter conference call with Wall Street analysts, investors, shareholders and bankruptcy court watchers, Windstream President and CEO Tony Thomas said the Little Rock-based telecom is working to modify its contractual arrangement with Uniti as has been reported by Talk Business & Politics.
On July 26, Windstream, Uniti and other parties appeared in federal bankruptcy court in upstate New York concerning a request by U.S. Bank and other unsecured creditors and trustees in the Windstream Chapter 11 bankruptcy filing to end or significantly alter a master lease contract between the closely-tied Little Rock telecom concerns.
The hearing in federal court in White Plains, New York, was part of broader proceedings before Honorable U.S. District Judge Robert Drain involving Windstream’s Feb. 25 default in the Manhattan-based U.S. Bankruptcy Court for the Southern District of New York. Windstream and its affiliated operating subsidiary, Windstream Services LLC, also filed a 54-page complaint on July 25 in the federal bankruptcy court against Uniti and its various state-held real estate investment trust vehicles to resolve ongoing disputes related to a multiyear lease following Windstream’s spinoff of the Little Rock REIT in April 2015.
“To increase the likelihood of an optimal result, Windstream is pursuing both litigation against and negotiations with Uniti,” Thomas said in the call. “We are hopeful this process will lead to a mutually satisfactory agreement between Windstream, Uniti, and our other key stakeholders. Absent an acceptable negotiated resolution, Windstream is prepared to pursue its litigation claims to conclusion.”
In the original court decision that pushed Windstream into bankruptcy, U.S. District Judge Jesse Furman’s ruling first arose from challenges by Aurelius Capital Management and U.S. Bank that the spinoff of the Uniti was invalid under previous financial arrangements with Windstream. The court ruled on Feb. 15 that Aurelius was entitled to a $310.5 million judgment, plus interest.
Uniti and Windstream entered into talks earlier this summer on the master lease agreement after the latter filed voluntary petitions for reorganization in late February under federal Chapter 11 rules. The controversial lease agreement provides for annual rent of $659 million to Uniti paid in equal monthly installments in advance, with an annual base rent escalator of 0.5%, according to securities filings. U.S. Bank and other unsecured creditors have tried to change the terms of the lease agreement.
Uniti said in a July 19 court filing that it believes pleadings by bankruptcy trustees and the U.S. Bank-led group contain factual and legal flaws and inconsistencies.
“Under appropriate legal tests, Uniti is confident the master lease is a ‘true lease,’ and every serious analysis of it ever performed by specialists has reached that conclusion,” the company said. “Uniti is confident that a careful examination of the evidence (including many of the very documents cited by UMB, U.S. Bank, and the UCC) will confirm that the master lease is a true lease, as it was asserted to be by Windstream and its advisors when it was executed.”
Thomas said Thursday that Windstream wishes to recharacterize its relationship with Uniti from a “lease” to a “financing arrangement.”
“Our complaint asserts that the approximately $650 million Windstream pays Uniti each year was intended to finance the 2015 spinoff of the network assets that created Uniti and was not a ‘true lease,’ said the Windstream CEO. “While the outcome of any litigation is uncertain, we believe we have compelling and valuable claims against Uniti, and any ultimate outcome should reflect that value.”
Almost as an afterthought to the least negotiations, Windstream reported that adjusted earnings before Windstream’s $650 million annual cash payment to Uniti came in at $450.4 million, down 4.4% from $471.2 million in the same period a year ago. Adjusted revenues were also down year-over-year at $1.29 billion, a decline of 7.9% compared to $1.4 billion a year ago.
“Windstream has continued to operate without material business interruption after voluntarily filing for restructuring in February. We continue to expand broadband service across our largely rural footprint and grow our consumer broadband customer base,” said Thomas. “We also continue to see strong growth in strategic sales in our Enterprise business unit. We appreciate the continued strong support we have received from our employees, customers, vendors and financial stakeholders as we work through this process.”
Windstream’s broadband Kinetic internet service reported revenues of $509 million, down 4% from the same period a year ago. Kinetic, which added 1,900 new subscribers during the three-month period, reported income of $303 million compared to $315 million year-over-year.
Windstream’s Enterprise service revenues were $673 million, a 10% decrease from the same period a year ago, and segment contribution margin was $139 million compared to $147 million year-over-year. Wholesale service revenues eroded 9% from a year ago to only $88 million as segment income was $65 million compared to $70 million year-over-year.
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.