Unless the context indicates otherwise, the terms "Windstream," "we," "us" or "our" refer to Windstream Holdings, Inc. and its subsidiaries, including Windstream Services, LLC, and the term "Windstream Services" refers to Windstream Services, LLC and its subsidiaries.

The following sections provide an overview of our results of operations and highlight key trends and uncertainties in our business. Certain statements constitute forward-looking statements. See "Forward-Looking Statements" at the end of this discussion for additional factors relating to such statements, and see "Risk Factors" in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission ("SEC") on May 19, 2020, for a discussion of certain risk factors applicable to our business, financial condition and results of operations.

ORGANIZATIONAL STRUCTURE

Windstream Holdings, Inc. ("Windstream Holdings") is a publicly traded holding company incorporated in the state of Delaware on May 23, 2013, and the parent of Windstream Services, LLC ("Windstream Services"), a Delaware limited liability company organized on March 1, 2004. Following its delisting on March 6, 2019, Windstream Holdings common stock no longer trades on the Nasdaq Global Select Market ("NASDAQ") but trades on the Over-the-Counter ("OTC") Pink Sheets market maintained by the OTC Market Group, Inc. under the trading symbol "WINMQ". Windstream Holdings owns a 100 percent interest in Windstream Services. Windstream Services and its guarantor subsidiaries are the sole obligors of all outstanding debt obligations and, as a result, also file periodic reports with the Securities and Exchange Commission ("SEC"). Windstream Holdings is not a guarantor of nor subject to the restrictive covenants included in any of Windstream Services' debt agreements. The Windstream Holdings board of directors and officers oversee both companies.

There are no significant differences between the consolidated results of operations, financial condition, and cash flows of Windstream Holdings and those of Windstream Services other than for certain expenses directly incurred by Windstream Holdings principally consisting of audit, legal and board of director fees, NASDAQ listing fees, other shareholder-related costs, income taxes, common stock activity, and payables from Windstream Services to Windstream Holdings. For the three and six-month periods ended June 30, 2020, the amount of pre-tax expenses directly incurred by Windstream Holdings was approximately $0.5 million and $1.2 million compared to $0.5 million and $0.9 million for the same periods in 2019. On an after-tax basis, expenses incurred directly by Windstream Holdings was approximately $0.3 million and $0.9 million for the three and six-month periods ended June 30, 2020, compared to $0.4 million and $0.7 million for the same periods in 2019. Unless otherwise indicated, the following discussion of our business strategy, trends and results of operations pertain to both Windstream Holdings and Windstream Services.

OVERVIEW

We are a leading provider of advanced network communications and technology solutions for businesses across the U.S. We also offer broadband, entertainment and security solutions to consumers and small businesses primarily in rural areas in 18 states. Additionally, we supply core transport solutions on a local and long-haul fiber network spanning approximately 169,000 miles.

Our mission is to connect people and empower business in a world of infinite possibilities brought on by rapid technological change. Our vision is to provide innovative software and network solutions while consistently delivering a great customer experience.





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BANKRUPTCY AND RELATED DEVELOPMENTS

On February 15, 2019, Judge Jesse Furman of the United States District Court for the Southern District of New York issued an adverse ruling in litigation relating to a noteholder's allegations that our 2015 spin-off of certain assets into a publicly-traded real estate investment trust resulted in one or more defaults of certain covenants under one of Windstream Services' existing indentures. The findings resulted in a cross default under Windstream Services' senior secured credit agreement governing its secured term and revolving loan obligations and a cross-acceleration event of default under the indentures governing Windstream Services' other series of secured and unsecured notes. As a result, on February 25, 2019, Windstream Holdings and all of its subsidiaries, including Windstream Services (collectively the "Debtors"), filed voluntary petitions (the "Chapter 11 Cases") for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") in the U.S. Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The Chapter 11 Cases are being jointly administered under the caption In re Windstream Holdings, Inc., et al., No 19-22312 (RDD).Windstream has continued to operate its business as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

In connection with the Chapter 11 Cases, the Debtors analyzed the contractual arrangement with Uniti, and on July 25, 2019, the Debtors filed a complaint in the Chapter 11 Cases seeking, among other things, to recharacterize the Uniti arrangement from a lease to a financing. After engaging in a months-long mediation process with Uniti and its creditors regarding the litigation, on March 2, 2020, Windstream, along with certain of their creditors, announced an agreement in principle with Uniti to settle any and all claims and causes that were or could have been asserted against Uniti by Windstream. Among the terms of the settlement, Uniti agreed to fund up to $1.75 billion in capital improvements to the network, which will allow us to deliver 1-Gigabytes per second ("Gbps") to more than half of our Kinetic footprint. Uniti also agreed to pay Windstream $400 million payable in quarterly cash installments over five years, at an annual interest rate of 9.0 percent, which amount may be fully paid after one year, resulting in total cash payments ranging from $432 - $490 million. Uniti will also purchase certain unused and underutilized dark fiber assets from Windstream and Uniti will transfer to Windstream $244.5 million of proceeds from, and conditioned upon, the sale of Uniti's common stock to certain first lien creditors of Windstream Services. In conjunction with the announcement, Windstream filed a motion seeking approval from the Bankruptcy Court of the proposed settlement, and a hearing on the motion was held on May 7-8, 2020, at which time the Bankruptcy Court approved the settlement with Uniti. The approved settlement is subject to certain regulatory approvals and conditions precedent, including Uniti's receipt of satisfactory "true lease" and REIT opinions, which remain outstanding. In conjunction with the settlement with Uniti, Windstream also entered into a plan support agreement with Elliott Investment Management, L.P., ("Elliott") and certain consenting first lien creditors of Windstream Services outlining certain terms included in Windstream's plan of reorganization.

On April 1, 2020, the Debtors filed a Joint Chapter 11 Plan of Reorganization ("the Plan") with the Bankruptcy Court. On the same date, the Debtors filed a Disclosure Statement relating to the Plan. The Plan was approved by the Bankruptcy Court on June 25, 2020 and provides for the reduction of more than $4 billion of our existing debt. Pending receipt of regulatory approvals, we expect to emerge from bankruptcy as a private company later this summer.

For more information regarding the impact of the Chapter 11 Cases, settlement with Uniti and our plan of reorganization see Note 2 to the consolidated financial statements and "Financial Condition, Liquidity and Capital Resources" below.

CORONAVIRUS, COVID-19, CONSIDERATIONS AND IMPACTS TO OUR BUSINESS

During 2020 in response to the COVID-19 global pandemic, we implemented various actions across our organization to mitigate the spread and impact of the virus and to meet the needs of our customers. Certain impacts to our operations and actions by us in response to COVID-19 include the following



•      Took comprehensive action to keep our employees safe, including
       implementing a work-from-home strategy for employees whose jobs can be
       performed remotely, including call center support, sales and marketing,
       finance and other administrative functions. We also implemented processes
       and procedures to limit face-to-face interactions between our field
       technicians and customers and provided personal protection equipment to
       our technicians to allow them to continue to work safely while responding
       to an increase in demand for our broadband services.



•      Participated in the Federal Communications Commission ("FCC") Keep
       Americans Connected Pledge not to turn-off service or charge late fees due
       to a customer's inability to pay their bill due to circumstances related
       to COVID-19 functions.



•      Through constant communication with our vendors and suppliers and managing
       our existing inventory, we have avoided any significant disruptions to our
       supply chain.




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•      Our broadband network is well equipped to handle the expected incremental
       demand given our past efforts to modernize our network and provide
       high-speed IP/Ethernet services. We have experienced increased demand for
       data services within our Kinetic business segment driven by our enhanced
       speed capabilities combined with families working and managing essential
       functions from their homes to lessen the impact of COVID-19.

During the second quarter of 2020, we incurred $4.5 million of incremental costs related to COVID-19, primarily consisting of supplemental premium pay and benefits for our technicians and the cost of personal protection supplies, including gloves, masks and hand sanitizer. The ongoing impacts of COVID-19 on our business are uncertain due to many factors and could have a material adverse impact on our future results of operations, cash flows and financial position.

EXECUTIVE SUMMARY

To execute on our mission and achieve our vision, we have the following key priorities for 2020:



• Focus on growth.

We plan on exiting our restructuring in 2020 with a new capital structure, which will allow for continued strategic investments in our Kinetic business and increase speed capabilities to more of our Kinetic footprint.

• Maintain product and software leadership.

We will continue to maintain our leadership positions in telecommunications products and software. Our 2020 focus will be on continuing to expand our broadband speed capabilities, continuing to enhance our SD-WAN and UCaaS products, expanding our metro fiber and long-haul network services, and enhancing our customer-facing digital experience through our customer portals and interfaces.

• Deliver consistent excellence in the customer experience.

In 2019, we saw dramatic improvements in our net promoter scores, customer satisfaction surveys and industry awards. We will continue this momentum in 2020 by enhancing network visibility and design for our customers and expanding software tools and automation efforts to better and more efficiently serve our customers.

• Drive adoption of strategic products.

We have made significant progress transitioning from legacy products and services to our industry-leading SD-WAN and UCaaS products. We expect to achieve solid growth in our strategic revenues as we continue to aggressively work to convert existing customers from legacy to strategic products and services.

• Manage costs aggressively.

Our biggest single cash cost consists of interconnection payments we make to other telecommunications carriers to utilize their networks to deliver our products and services to customers. We continue to reduce those payments by approximately 10 percent annually, a trend expected to continue. In addition, we are focused on reducing expenses associated with network real estate and collocation facilities.

Our focused operational strategy for each business segment has the overall objective to slow the decline in adjusted OIBDA, which is defined as operating income (loss) before depreciation and amortization and goodwill impairment and adjusted to exclude the impacts of straight-line expense under the contractual arrangement with Uniti, share-based compensation, restructuring and other charges, and certain other costs.




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During the second quarter and first half of 2020, we achieved the following related to these initiatives:



•      We added 22,100 net broadband customers during the second quarter of 2020,
       surpassing last quarter as the single highest quarterly customer growth in
       more than a decade and marking the ninth consecutive quarter that we grew
       high-speed Internet customers. With over 40,000 net subscribers added in
       the first half of 2020, we now expect to add 60,000 net high-speed
       Internet customers for the full year of 2020. This growth in market share
       has been driven by our continued improvement in our broadband speed
       capability. As of June 30, 2020, 71 percent of our broadband customer base
       enjoy speeds of 25 Mbps or greater, up 1,000-basis points from the end of
       2018. We have nearly tripled the availability of 100 megabytes per second
       ("Mbps") speeds across our footprint and now 43 percent of our households
       can receive speeds of 100 Mbps or greater, up from 15 percent at the end
       of 2018, and 56 percent of our households have access to speeds of 25 Mbps
       or greater, up from 47 percent a year ago. Additionally, we have enabled
       1-Gigabyte per second ("Gbps") capability to over 100,000 commercial
       locations across our footprint. Increasing penetration of faster speeds
       across our customer base remains a key priority for us to continue to
       drive subscriber growth and higher average monthly revenue per customer.
       Currently, only 40 percent of our Kinetic households capable of receiving
       25 Mbps or greater speeds and only 13 percent of such households with
       access to 1 Gbps speeds are enjoying those speeds. Year-to-date
       contribution margin in our Kinetic segment was 57.2 percent.



•      In our Enterprise business, our emphasis on growing revenues from our
       strategic products continues to help offset the continued pressure on our
       core and legacy product offerings. We remain the nation's largest Software
       Defined Wide Area Network ("SD-WAN") service provider with over 3,200
       SD-WAN customers under contract representing over 29,000 endpoint
       locations. OfficeSuite© demand also remains strong as we now have
       approximately 5,500 Unified Communications as a Service ("UCaaS") seats
       installed, Our total annualized strategic product revenue reached $334
       million in the second quarter of 2020, representing 24 percent
       year-over-year growth and now represents 15 percent of our total
       Enterprise service revenues. Contribution margin in our Enterprise segment
       was 19.7 percent for the first half of 2020, up slightly from the same
       period a year ago.



•      Year-to-date contribution margin in our Wholesale segment was 72.4 percent
       and reflected our continued focus on expense management.



•      During the first six months of 2020, our total annualized interconnection,
       network facility and fiber expenses decreased by 14 percent on a
       year-over-year basis to an annualized amount of approximately $1.1 billion
       as of June 30, 2020. This annual interconnection expense amount still
       includes approximately $700 million of TDM-related expenses including
       network facility expense, which remain the focus for future cost
       reductions.

See "Consolidated Results of Operations" section below for a detailed discussion and analysis of our second quarter and year-to-date consolidated operating results.






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