Windstream 2008 Annual Report Download - page 105

2007, the PUC Staff issued a Notice of Violation and recommended that the Company be assessed a penalty in the
amount of $5.2 million (which was later revised to $8.2 million) in addition to the initial refund request for failure to
refund the requested amount. The case was docketed and a hearing was conducted in September 2008. The Company’s
position was that its universal service receipts in question were in compliance with all applicable regulatory
requirements, that it was not over-compensated and that there should be no refund or penalty. On December 11, 2008,
the Administrative Law Judge (“ALJ”) recommended that the Company reimburse $8.0 million (including interest) to
the fund to account for the alleged overpayments, but that no administrative penalties should be imposed. The
recommendation of the ALJ was approved by the commission on January 29, 2009. A liability of $8.0 million is
included in other current liabilities of the accompanying consolidated balance sheet related to this issue, which we
expect to pay in the first quarter of 2009 (see Note 13).
Texas USF Large Company High Cost Program Settlement
The rules governing the Texas universal service fund provide for a review of the fund every three years. In the third
quarter of 2007, the Texas PUC filed a petition to review the USF amounts received by the large company participants.
In March 2008, Windstream, along with all the other parties in this proceeding, including three other ILECs receiving
support from the large company fund, reached agreement on a framework that will determine the amount of support
each company receives from the fund effective January 1, 2009. As a result of this agreement, the annual amount of
support received from the fund by the Company will decline by approximately $5.0 million. However, the Company
expects to recover at least that amount from its end user customers through modest rate increases allowed as part of the
agreement, which will be phased in over three years beginning January 1, 2009. The Texas PUC approved the
settlement on April 25, 2008.
The Texas USF small company high cost fund will likely be under review beginning in 2009. Windstream receives
approximately $13.0 million annually from the Texas high cost program for small companies. The Company does not
expect to incur any significant reductions in the amount of support from this fund.
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) 2008 2007 2006
Revenues and sales:
Product sales $ 315.3 $ 339.9 $ 334.9
Total revenues and sales 315.3 339.9 334.9
Costs and expenses:
Cost of products sold 297.1 318.8 312.8
Selling, general, administrative and other 19.1 21.6 15.9
Depreciation and amortization 0.4 0.8 1.4
Restructuring charges 0.2 0.1 0.1
Total costs and expenses 316.8 341.3 330.2
Segment (loss) income $ (1.5) $ (1.4) $ 4.7
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 decreased $24.6 million, or 7
percent, and increased $5.0 million, or 1 percent, in 2008 and 2007, respectively. For the year ended December 31,
2008, affiliated sales were $202.6 million, or 64.3 percent of total sales, while affiliated sales were $221.9 million, or
65.3 percent, of total sales in 2007 and $193.9 million, or 57.9 percent, of total sales in 2006. The decrease in 2008 was
primarily due to a decrease in capital expenditures in the Company’s wireline operations during the twelve months
ended December 31, 2008, as compared to the same period in 2007. The increases in 2007 were primarily due to sales
to the newly acquired Valor and CTC markets. Sales to external customers decreased $5.3 million and $23.0 million in
2008 and 2007, respectively. The decrease in 2008 and 2007 reflects decreases in sales to small telecommunications
providers and contractors.
Cost of products sold decreased $21.7 million, or 7 percent, and increased $6.0 million, or 2 percent, in 2008 and 2007,
respectively. The changes in both periods were consistent with the change in revenues and sales discussed above.
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