Segment Information

12 Months Ended

Dec. 31, 2019

Segment Information:

Effective April 1, 2019, we reorganized our business operations into three segments: Kinetic, Enterprise and Wholesale. The Kinetic business unit primarily serves customers in markets in which we are the incumbent local exchange carrier (“ILEC”) and provides services over network facilities operated by us. The Enterprise and Wholesale business units primarily serve customers in markets in which we are a competitive local exchange carrier (“CLEC”) and provide services over network facilities primarily leased from other carriers. As a result of this reorganization, we improved the alignment of our customer base within our ILEC and CLEC markets. The significant changes to our previous segment structure included: (1) shifting certain business customers with operations in ILEC-only markets from the Enterprise segment to the Consumer & Small Business segment, which was renamed Kinetic; (2) shifting governmental and resale customers from Wholesale to Enterprise; (3) shifting wholesale customers and related services in ILEC markets from Wholesale to Kinetic; and (4) allocating certain corporate expenses, primarily property taxes, to the segments. Prior period segment information has been revised to reflect these changes for all periods presented.

On December 31, 2018, we completed the sale of substantially all of our consumer CLEC business. The consumer operations sold consisted solely of the former EarthLink consumer business that we acquired in February 2017. The sale of the consumer CLEC business did not represent a strategic shift in our operations nor have a major effect on our consolidated results of operations, financial position or cash flows, and therefore did not qualify for reporting as a discontinued operation. Accordingly, for periods prior to the sale, the sold CLEC business continues to be presented as a separate segment. The retained portion of the consumer CLEC business, primarily consisting of revenues generated from our master services agreement with Uniti have been assigned to the Enterprise segment.

For financial reporting purposes, our segments consist of:

•

Kinetic - We manage as one business our residential, business, and wholesale operations in those markets in which we are the ILEC due to the similarities with respect to service offerings, marketing strategies and customer service delivery. Residential customers can bundle voice, high-speed Internet and video services, to provide one convenient billing solution and receive bundle discounts. We offer a wide range of advanced Internet, voice, and web conferencing products to our business customers. These services are equipped to deliver high-speed Internet with competitive speeds, value added services to enhance business productivity and options to bundle services for a global business solution to meet our business customer needs.

Products and services offered to business customers include traditional local and long-distance voice services, high-speed Internet services, and value-added services such as security and online back-up, which are delivered primarily over network facilities operated by us. We offer consumer video services through relationships with DirecTV and Dish Network LLC, and we also own and operate cable television franchises in some of our service areas. We offer Kinetic, a premium broadband and video entertainment offering in several of our markets.

Our wholesale services are focused on providing network bandwidth to other telecommunications carriers and network operators. These services include special access services, which provide access and network transport services to end users including Ethernet access up to 2 Gbps, traditional TDM private line access and transport. Wholesale services also include fiber-to-the-tower connections to support the wireless backhaul market, and both Ethernet/dedicated Internet connections and broadband access services. The combination of these services allow Kinetic wholesale customers to provide voice and data services to their customers through the use of our network or in combination with their own networks.

•

Enterprise - Products and services offered to our business customers include integrated voice and data services, which deliver voice and broadband services over a single Internet connection, data transport services, multi-site networking services which provide a fast and private connection between business locations, SD-WAN, which optimizes application performance, UCaaS, a next generation voice solution, as well as a variety of other data services, including cloud computing and collocation and managed services as an alternative to traditional information technology infrastructure.

18. Segment Information, Continued:

•

Wholesale - Our wholesale operations are focused on providing network bandwidth to other telecommunications carriers, network operators, and content providers within CLEC markets. These services include network transport services to end users, Ethernet and Wave transport up to 100 Gbps, and dark fiber and colocation services. Wholesale services also include fiber-to-the-tower connections in CLEC markets to support the wireless backhaul market. In addition, we offer voice and data carrier services to other communications providers and to larger-scale purchasers of network capacity. The combination of these services allow wholesale customers to provide voice and data services to their customers through the use of our network or in combination with their own networks.


•	Consumer CLEC - Prior to its sale, products and services offered to customers by this business unit included traditional voice and long-distance services, nationwide Internet access services, both dial-up and high-speed, as well as value added services including online backup and various e-mail services.

We evaluate performance of the segments based on contribution margin or segment income, which is computed as segment revenues and sales less segment operating expenses. Segment revenues are based upon each customer’s classification to an individual segment and include all services provided to that customer. Segment revenues also include revenue from federal and state USF, CAF – Phase II support, funds received from federal access recovery mechanisms, revenues from providing switched access services, including usage-based revenues from long-distance companies and other carriers for access to our network to complete long-distance calls, reciprocal compensation received from wireless and other local connecting carriers for the use of network facilities, certain surcharges assessed to our customers, including billings for our required contributions to federal and state USF programs, and product sales to contractors. There are no differences between total segment revenues and sales and total consolidated revenues and sales.

Segment expenses include specific expenses incurred as a direct result of providing services and products to segment customers; selling, general and administrative expenses that are directly associated with specific segment customers or activities; and certain allocated expenses which include network expenses, facilities expenses and other expenses, such as vehicle and real estate-related expenses. Operating expenses associated with regulatory and other revenues have also been assigned to our segments. We do not assign depreciation and amortization expense, goodwill impairment, merger, integration and other costs, restructuring charges, straight-line expense under the contractual arrangement with Uniti, share-based compensation, business transformation expenses, costs related to network optimization projects, spend commitment penalties incurred under certain carrier discount plans, and reserves for funding denials from Universal Service Administrative Company (“USAC”) to our segments, because these expenses are centrally managed and are not monitored by or reported to the chief operating decision maker (“CODM”) by segment. Similarly, certain costs related to centrally-managed administrative functions, such as accounting and finance, information technology, network management, legal and human resources, are not assigned to our segments. Interest expense and net gain on early extinguishment of debt have also been excluded from segment operating results because we manage our financing activities on a total company basis and have not assigned any debt or lease obligations to the segments. Other expense, net, reorganization items, net, and income tax benefit are not monitored as a part of our segment operations and, therefore, these items also have been excluded from our segment operating results.

Capital expenditures for network enhancements and information technology-related projects benefiting Windstream as a whole and incremental capital expenditures incurred in 2018 and 2017 related to our acquisitions of EarthLink and Broadview are not assigned to the segments and are presented as corporate/shared capital expenditures. Asset information by segment is not monitored or reported to the CODM and therefore has not been presented. Substantially all of our customers are located in the United States, and we do not have any single customer that provides more than 10 percent of our total consolidated revenues and sales.

18. Segment Information, Continued:

The following table summarizes our segment results for the years ended December 31:



(Millions)	2019		2018		2017
Kinetic:
Revenues and sales	$	2,074.7	$	2,140.5	$	2,258.5
Costs and expenses	885.6		884.4		937.2
Segment income	1,189.1		1,256.1		1,321.3
Enterprise:
Revenues and sales	2,678.5		3,016.9		3,032.9
Costs and expenses	2,159.1		2,454.9		2,497.0
Segment income	519.4		562.0		535.9
Wholesale:
Revenues and sales	362.2		384.8		399.0
Costs and expenses	101.4		111.1		111.3
Segment income	260.8		273.7		287.7
CLEC Consumer:
Revenues and sales	—		170.9		162.5
Costs and expenses	—		78.4		81.8
Segment income	—		92.5		80.7
Total segment revenues and sales	5,115.4		5,713.1		5,852.9
Total segment costs and expenses	3,146.1		3,528.8		3,627.3
Total segment income	$	1,969.3	$	2,184.3	$	2,225.6

Capital expenditures by segment were as follows as of December 31:



(Millions)	2019		2018		2017
Kinetic	$	454.8	$	369.8	$	391.8
Enterprise	152.5		187.6		199.7
Wholesale	27.3		31.3		32.4
Corporate/shared (a)	243.9		231.5		284.7
Total	$	878.5	$	820.2	$	908.6

(a)

Represents capital expenditures not directly assigned to the segments and primarily consist of capital outlays for network enhancements and information technology-related projects benefiting Windstream as a whole. For 2018 and 2017, these amounts include incremental capital spend related to our 2017 acquisitions of EarthLink and Broadview of $37.6 million and $34.5 million, respectively. Corporate/shared capital expenditures for 2017 include $49.9 million related to Project Excel, an incremental capital program completed in mid-2017, which upgraded our broadband network.

18. Segment Information, Continued:

The following table reconciles segment income to consolidated net loss income for the years ended December 31:



(Millions)	2019			2018			2017
Total segment income	$	1,969.3		$	2,184.3		$	2,225.6
Depreciation and amortization	(1,068.2		)	(1,526.7		)	(1,470.0		)
Goodwill impairment	(2,712.3		)	—			(1,840.8		)
Merger, integration and other costs	(8.3		)	(31.9		)	(137.4		)
Restructuring charges	(28.5		)	(45.0		)	(43.0		)
Straight-line expense under contractual arrangement with Uniti	(675.2		)	—			—
Other unassigned operating expenses (a)	(354.3		)	(284.1		)	(325.0		)
Other expense, net	(7.8		)	(4.9		)	(2.3		)
Gain on sale of Consumer CLEC business	—			145.4			—
Net gain (loss) on early extinguishment of debt	—			190.3			(56.4		)
Reorganization items, net	(260.6		)	—			—
Interest expense	(331.9		)	(901.3		)	(875.4		)
Income tax benefit (expense)	320.0			(449.1		)	408.1
Net loss	$	(3,157.8	)	$	(723.0	)	$	(2,116.6	)

(a)

Included in this amount for 2019 were spend commitment penalties incurred under certain carrier discount plans of $102.5 million and a reserve of $19.7 million for a funding denial from Universal Service Administrative Company pursuant to funding for the years 2012 to 2017 related to a large customer participating in the Universal Service Rural Healthcare Telecommunications Program.