Windstream 2007 Annual Report Download - page 100

Regulatory Matters – Wireline Operations
The Company’s incumbent local exchange carrier subsidiaries (the “ILECs”) are regulated by both federal and state
agencies. Interstate products and services and related earnings are subject to federal regulation by the Federal
Communications Commission (“FCC”), and intrastate products and services and related earnings are subject to
regulation by state Public Service Commissions (“PSCs”). The FCC has principal jurisdiction over interstate switched
and special rates and high speed Internet service offerings, and it regulates the rates that ILECs may charge for the use
of their local networks in originating or terminating interstate and international transmissions. State PSCs have
principal jurisdiction over matters including local service rates, intrastate access rates, quality of service, the
disposition of public utility property and the issuance of securities or debt by the ILECs.
Federal Regulation
The Nebraska and New Mexico operations, and portions of the Kentucky, Oklahoma and Texas operations, are subject
to price-cap regulation by the FCC that allows a greater degree of retail pricing flexibility than is afforded to the
Company’s rate-of-return regulated operations. The remainder of the Company’s ILEC operations are subject to
rate-of-return regulation by the FCC. On August 7, 2007, Windstream filed a petition with the FCC to convert the
majority of its remaining interstate rate-of-return regulated operations to price-cap regulation, although currently no
rules are in effect governing this conversion. Price cap regulation better aligns the Company’s continued efforts to
improve its cost structure because rates for interstate wholesale services are not required to be periodically adjusted
based on the Company’s cost structure. Many of the Company’s larger customers purchasing the services that are the
subject of this petition filed comments with the FCC in favor of the petition. No parties filed in opposition. The FCC is
currently considering the petition, and the Company expects the petition to be approved prior to July 1, 2008.
State Regulation
The Company has elected alternative regulation for local and intrastate services provided by its ILEC subsidiaries in all
states except New York. The Company continues to evaluate alternative regulation options in New York where the
local and intrastate services provided by its ILEC subsidiaries remain subject to rate-of-return regulation.
The Company receives state universal service support in a limited number of states in which it operates. In 2007,
Windstream received $127.0 million in state USF support. In 2008, the Company expects to receive approximately
$135.0 million in state USF support. These payments are intended to provide additional support, beyond the federal
universal service receipts, for the high cost of operating in rural markets. For the year ended December 31, 2007,
Windstream received approximately $104.0 million from the Texas USF. In 2008, the Company expects to receive
approximately $100.0 million in Texas USF support.
Because some of the regulatory matters discussed above are under agency or judicial review, resolution of these
matters continues to be uncertain, and the Company cannot predict at this time the specific effects, if any, that
regulatory decisions and rulemakings and future competition will ultimately have on its ILEC operations. For a
detailed discussion of our federal and state regulation, see Item 1, “Regulation”, of this annual report on Form 10-K.
Product Distribution
(Millions) 2007 2006 2005
Revenues and sales:
Product sales $ 339.9 $ 334.9 $ 307.9
Total revenues and sales 339.9 334.9 307.9
Costs and expenses:
Cost of products sold 318.8 312.8 289.2
Selling, general, administrative and other 21.6 15.9 12.4
Depreciation and amortization 0.8 1.4 1.9
Restructuring charges 0.1 0.1 -
Total costs and expenses 341.3 330.2 303.5
Segment income (loss) $ (1.4) $ 4.7 $ 4.4
Revenues and sales from Windstream’s product distribution segment are primarily derived from sales of equipment to
affiliated and non-affiliated communications companies. Such revenues and sales increased $5.0 million, or 1 percent,
and $27.0 million, or 9 percent, in 2007 and 2006, respectively. Sales of telecommunications equipment and data
products to the Company’s affiliated entities increased in both periods. For the year ended December 31, 2007,
affiliated sales were $221.9 million, or 65.3 percent of total sales, while affiliated sales were $193.9 million, or
57.9 percent, of total sales in 2006. The increases in 2007 and 2006 were primarily due to sales to the newly acquired
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