Windstream 2007 Annual Report Download - page 60

Windstream Corporation
Form 10-K, Part I
Item 1. Business
The Company requested that the Ohio PUC and the Kentucky PSC deny Verizon’s requested relief based in part on the
fact that the Company’s intrastate access rates are just and reasonable and on the current efforts to reform inter-carrier
compensation comprehensively at the federal level, as previously explained. The Company cannot predict the outcome
of the Verizon complaints in Ohio and Kentucky.
Universal Service
We recognize revenue from state universal service funds in a limited number of states in which we operate. In 2007,
Windstream recognized $127.0 million in state universal service revenue. 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. The purpose
of the Texas USF is to assist telecommunications providers in providing basic local telecommunications services at
reasonable rates to customers in high cost rural areas and to qualifying low-income and disabled customers. By order of
the Texas PUC, the Texas USF distributes support to eligible carriers serving areas identified as high cost, on a per-line
basis. Texas USF support payments are based on the number of actual lines in service and therefore are subject to
reductions when customers discontinue service or migrate to a competitive carrier. All customers of
telecommunications services in Texas contribute to the Texas USF through the payment of a monthly surcharge by
their customers.
The rules governing the Texas USF provide for a review of the Texas USF every three years. In September 2005, the
Texas Legislature adopted significant telecommunications reform legislation. Part of that legislation directed the Texas
PUC to initiate a study of the Texas USF and to make a report to the Texas Legislature. In addition, the 2005
legislation precludes the Texas PUC from undertaking any proceeding to reduce Texas USF support until after
September 1, 2007. The Texas PUC completed its review and issued its report to the 2007 Texas Legislature in
December 2006. The report recommended that the high cost program for small companies should be reviewed further
regarding such issues as reasonableness of basic local service rates as well as which lines should be eligible for
support. Windstream receives approximately $12.0 million annually from the Texas high cost program for small
companies. The report also concluded that the high cost program for large companies should be updated and that the
Texas PUC conduct a contested case or rulemaking under current law to consider, at a minimum, any appropriate
re-sizing and re-targeting of support. In the third quarter of 2007, the Texas PUC Staff filed a petition to review the
USF amounts received by the large company participants. Windstream and the other large company participants filed
testimony in November 2007, and additional testimony is scheduled throughout the first quarter of 2008. Hearings are
scheduled for April 2008, and a final decision by the Texas PUC is expected in June 2008. Windstream receives
approximately $92.0 million from the Texas high cost program for large companies. The Company cannot estimate at
this time the financial impact that would result from changes, if any, to the high cost programs.
During the third quarter 2007, the staff of a state Public Utilities Commission’s staff (“PUC Staff”) notified the
Company that the PUC Staff believed the Company had been over-compensated from its state universal service fund
dating back to 2000 in the amount of $6.1 million plus interest in the amount of $1.2 million (for a total $7.3 million).
On October 18, 2007, the PUC Staff issued a Notice of Violation and recommended that the Company be assessed a
fine in the amount of $5.2 million, in addition to the initial refund request, for failure to refund the requested amount.
Based on existing regulations that govern the universal service support amounts for acquired properties and the PUC
order approving the Valor acquisition of the Verizon (GTE) properties, the Company believes its universal service
receipts in question are in compliance with all applicable regulatory requirements, that it has not been over-
compensated and that no refund or penalty is owed. The Company is vigorously defending its position to eliminate or
reduce the assessment but at this time cannot predict the outcome of the proceeding. The case has been referred to the
State Office of Administrative Hearings for a hearing, which is scheduled with the hearing officer for August 12, 2008.
A liability of $7.3 million was established during the third quarter of 2007 through a reduction of service revenues to
reserve for this matter.
Other Regulations
Under applicable state regulations, some of our subsidiaries are required to obtain the applicable state commission
approval for, or are subject to limitations on, any issuance of stock, incurrence of long-term debt, payment of
dividends, acquisition or sale of material utility asset or any change in control of these subsidiaries or their parent
companies. None of these limitations have had any material impact on the Company.
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