Windstream 2006 Annual Report Download - page 103

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Basis of Presentation
On July 17, 2006, Windstream Corporation (“Windstream” or the “Company”) completed the spin-off from Alltel
Corporation (“Alltel”) and the subsequent merger with Valor Communications Group Inc. (“Valor”), as further
discussed below under “Acquisition.” For periods prior to the spin-off from Alltel, the Company’s consolidated
financial statements were derived from the accounting records of Alltel, principally representing Alltel’s historical
wireline and communications support segments. The Company has used the historical results of operations, and
historical basis of assets and liabilities of the subsidiaries it owns and the wireline business it operates after completion
of the spin-off, to prepare the consolidated financial statements for periods prior to the spin-off. For the periods through
July 17, 2006, certain services such as information technology, accounting, legal, tax, marketing, engineering, and risk
and treasury management were provided to the Company by Alltel. These expenses have been allocated based on
actual direct costs incurred. Where specific identification of expenses was not practicable, the cost of such services was
allocated based on the most relevant allocation method to the service provided: either net sales of the Company as a
percentage of net sales of Alltel, total assets of the Company as a percentage of total assets of Alltel, or headcount of
the Company as a percentage of headcount of Alltel. Management of both the Company and Alltel considered these
allocations to be a reasonable reflection of the utilization of services provided.
The Company is organized based on the products and services that it offers. Under this organizational structure, its
operations consist of its wireline and product distribution segments and other operations. The Company’s wireline
segment consists of its retail and wholesale telecommunications services, including local, long distance, network
access, video services, broadband and data services. The product distribution segment consists of warehouse and
logistics operations, and it procures and sells telecommunications infrastructure and equipment to both affiliated and
non-affiliated businesses. The Company’s other operations include the Company’s directory publishing and
telecommunications information services operations. After the merger with Valor, telecommunications information
services are no longer offered as Valor was the sole remaining external customer. As discussed in detail below, the
Company has announced that it will split off the directory publishing business in 2007.
The management of the Company believes that the assumptions underlying its consolidated financial statements are
reasonable. However, the Company’s consolidated financial statements included herein may not necessarily reflect its
results of operations, financial position and cash flows in the future, or what its results of operations, financial position
and cash flows would have been had it been a separate, stand-alone company during the periods prior to the spin-off
from Alltel.The following discussion should be read in conjunction with the consolidated financial statements and the
related notes as of December 31, 2006.
Executive Summary of 2006 Results
Windstream is a customer-focused telecommunications company that provides local telephone, long distance, network
access, video services, broadband and high-speed data services to over 3.2 million residential and business customers
primarily located in rural areas in 16 states. Among the highlights in 2006:
• On July 17, 2006, the Company completed the spin-off from Alltel and the subsequent merger with Valor. This
acquisition is significant to the Company because it expanded its retail presence into new markets by adding
approximately 500,000 access lines in four states. The resulting company represents the largest
telecommunications carrier in the United States focusing primarily on rural markets, and should have greater
financial flexibility to develop and deploy products, expand the capacity of its network, respond to competitive
pressures and improve the cost structure of its operations due to the resulting increased size and economies of
scale.
• In the twelve month period ended December 31, 2006, the Company added approximately 258,000 broadband
customers, including 67,000 acquired with Valor. This increased our broadband customer base to over 656,000, or
20 percent of total access lines. The growth in broadband customers continues to more than offset the loss of local
access lines.
• Revenues and sales increased $109.8 million as compared with 2005, due primarily to the acquisition of Valor.
Excluding the acquisition, revenues and sales decreased $112.5 million, primarily due to the increase in
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