Windstream 2006 Annual Report Download - page 115

Selling, general, administrative and other expenses increased $19.8 million, or 7 percent, in 2006 and increased slightly
in 2005. The acquisition of Valor accounted for a $21.8 million increase in selling, general, administrative and other
expenses in 2006. Selling, general, administrative and other expenses in 2006 were affected by the combination of a
decline in intercompany allocations received from Alltel leading up to the separation, offset by a gradual increase in
expenses associated with Windstream’s new corporate cost structure. Prior to the spin, under a shared services
arrangement, Alltel provided certain functions on the Company’s behalf, including but not limited to accounting,
marketing, customer billing, information technology, legal, human resources, and engineering services. The increase in
2005 was due primarily to higher insurance premiums related to employee medical and dental plans. Partially
offsetting the increase in employee benefit costs in 2005 was a decline in intercompany allocations received from
Alltel.
Depreciation and amortization expense decreased $24.2 million, or 5 percent, in 2006 and $33.8 million, or 7 percent,
in 2005. The acquisition of Valor accounted for a $56.4 million increase in depreciation and amortization expense in
2006. The decrease in depreciation and amortization expense primarily resulted from a reduction in depreciation rates
for the Company’s Florida, Georgia, and South Carolina operations, reflecting the results of studies of depreciable lives
completed during 2005, and for its Alabama, Arkansas, North Carolina, Pennsylvania and certain Texas operations,
reflecting the results of studies completed during 2006. The depreciable lives were lengthened to reflect the estimated
remaining useful lives of the wireline plant based on the Company’s expected future network utilization and capital
expenditure levels required to provide service to its customers. During 2007, the Company expects to review the
depreciation rates utilized in certain of its remaining wireline operations.
Royalty expense decreased $139.2 million, or 52 percent, and $1.4 million or 1 percent, in 2006 and 2005, respectively.
Prior to the separation, Windstream’s regulated subsidiaries incurred a royalty expense from Alltel for the use of the
Alltel brand name in marketing and distributing telecommunications products and services pursuant to a licensing
agreement with an Alltel affiliate. Following the spin off and merger with Valor, Windstream no longer incurs this
charge as it discontinued the use of the Alltel brand name following a brief transitional rebranding period.
Wireline segment income increased $277.1 million, or 42 percent in 2006, and decreased slightly in 2005, or $2.4
million. The acquisition of Valor accounted for a $75.4 million increase in wireline segment income in 2006. The
increase in segment income in 2006 primarily resulted from the termination of the licensing agreement with Alltel, the
favorable effects of reduced depreciation rates and the incremental expenses associated with work force reductions and
higher overtime and repair costs incurred in the first quarter of 2005, which were partially offset by the decline in
revenues and sales due to the loss of access lines, as discussed above. The decrease in segment income in 2005
primarily resulted from the decline in revenues and sales due to the loss of access lines, which was partially offset by
the favorable effects of reduced depreciation rates, as discussed above.
Set forth below is a summary of the restructuring and other charges related to the wireline operations that were not
included in the determination of segment income for the years ended December 31:
(Millions) 2006 2005 2004
Fees associated with spin-off from Alltel $ 7.9 $ 31.2 $ -
Signage and other rebranding costs 13.8 - -
Severance and employee benefit costs 10.5 4.5 11.2
Computer system separation and conversion costs 5.9 - -
Lease and contract termination costs - - (1.8)
Relocation costs - - 1.2
Other exit costs - - 0.7
Total restructuring and other charges $ 38.1 $ 35.7 $ 11.3
Regulatory Matters – Wireline Operations
The Company’s Incumbent Local Exchange Carriers (“ILECs”) are regulated by both federal and state agencies. The
Company’s interstate products and services and the related earnings are subject to federal regulation by the Federal
Communications Commission (“FCC”), and the Company’s intrastate and local services are subject to state regulation
by the respective state Public Service Commissions (“PSCs”). The FCC has primary jurisdiction over interstate
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