Windstream 2010 Annual Report Download - page 110

(a) Increases in contractor sales in 2010 is due to modest increases experienced during the second half of 2010
associated with increased infrastructure activity. Decreases in contractor sales in 2009 is primarily due to lower
demand for these products, which we believe was attributable to the postponement of purchasing decisions by
some contractors as a result of continued weakness in the overall economic environment.
(b) Decreases in business product sales for both periods are primarily due to lower demand for these products, which
we believe was attributable to the postponement of purchasing decisions by some businesses as a result of
continued weakness in the overall economic environment. We experienced modest increases across all product
sales during the second half of 2010.
Cost of Services
Cost of services primarily consist of network operations costs, including salaries and wages, employee benefits,
materials, contract services and information technology costs to support the network. Cost of services also include
interconnection expense (costs incurred by the Company to access the public switched network and to transport traffic
to the Internet), bad debt expense and business taxes. Interconnection expenses in certain markets where the Company
operates as a CLEC include charges from the incumbent local exchange provider to lease network components required
for service delivery. As a result, we expect interconnection expenses in these operations to be higher as a percentage of
revenues than these same costs incurred in Windstream’s other markets. The following table reflects the primary
drivers of year-over-year changes in cost of services:
Twelve Months Ended
December 31, 2010
Twelve Months Ended
December 31, 2009
(Millions)
Increase
(Decrease) %
Increase
(Decrease) %
Due to acquired businesses $ 384.4 $ 8.3
Due to changes in federal USF expenses (a) 6.2 (7.1)
Due to decreases in network operations and other (b) (0.3) (39.7)
Due to decreases in business taxes (c) (7.7) (5.9)
Due to changes in storm-related expenses (d) (6.0) 6.0
Due to changes in pension expense (e) (27.3) 74.0
Due to decreases in interconnection expense (f) (34.0) (31.8)
Total increases in cost of services $ 315.3 31% $ 3.8 0%
(a) Increases in federal USF contributions are primarily due to an increase in the USF contribution factors from 12.3
percent to 12.9 percent for the years ended December 31, 2009 and 2010, respectively. This increase resulted in a
proportionate increase in federal USF revenues. Decreases in 2009 were primarily due to the eliminations of
contributions required for high-speed Internet services effective with the conversion to price-cap regulation on
July 1, 2008, as previously discussed.
(b) Decreases in network operations and other expenses in 2010 are primarily attributable to cost saving measures,
partially offset by increases in network support costs and charges incurred to provide third party services to
customers. Decreases in network operations and other expenses during 2009 were due to the workforce reductions
announced in the third quarter 2009, and reductions in fuel costs.
(c) Decreases in business taxes for both periods were primarily attributable to lower property tax assessments.
(d) Changes in storm-related expenses were associated with the Company’s efforts to repair network facilities
damaged by severe ice storms primarily in our Kentucky service areas during the first quarter of 2009.
(e) Decreases in pension expense in 2010 are attributable to lower pension amortization as a result of the $152.0
million, or 23.2 percent, return generated on pension plan assets during 2009. Increases in pension expense in
2009 are attributable to the amortization of losses sustained on pension plan assets during the 2008 plan year.
(f) Decreases in interconnection expenses for both periods are due to the favorable impact of network efficiency
projects, the impact of voice line losses and rate reductions. Partially offsetting these decreases were increases
associated with purchases of higher capacity circuits to service the growth in data customers.
F-10