Windstream 2010 Annual Report Download - page 116

On December 5, 2007 and February 22, 2008, Verizon filed complaints with the Kentucky PSC and the Georgia PSC
very similar to the complaint filed in Ohio. In these cases, Verizon also alleges that the Company’s intrastate access
rates are excessive and should be reduced to the level currently charged by AT&T (formerly BellSouth). On
November 5, 2010, the Kentucky PSC closed Verizon’s complaint and opened a generic investigation into the
reasonableness of the intrastate switched access rates of all local exchange carriers. The Company cannot estimate at
this time the financial impact, if any, that may result from changes to the inter-carrier compensation mechanism in
Kentucky. On June 4, 2010, Georgia enacted a new law that requires incumbent LECs to reduce intrastate switched
access rates to interstate levels over a five-year period. To compensate for switched access revenue reductions, the law
permits ILECs to increase local rates and established a new state universal service fund. The new law will not have a
material impact on the Company’s operations.
On March 19, 2009, AT&T filed a complaint with the Pennsylvania PUC alleging that the Company’s intrastate access
rates are not just and reasonable and should be reduced to the Company’s interstate access rate levels. Parties to this
proceeding have presented their case and are awaiting a final decision by the Pennsylvania PUC. The Pennsylvania
PUC is not required to take action by a specific date. At this time, the Company cannot estimate the financial impact of
this decision due to the various options the PUC could consider if it ruled in the Complainant’s favor.
On November 23, 2009, Sprint requested that the North Carolina Utilities Commission (“NCUC”) reduce the
Company’s access rates to a cost-basis or, in the alternative, to the Company’s interstate access rate levels. The NCUC
ordered that affected carriers to develop an inter-carrier compensation reform plan by January 2011. The proposed plan
recommends reducing intrastate switched access rates to interstate levels over a three-year period coupled with modest
local rate increased and the establishment of a state universal service fund. The proposed plan, if adopted by the
NCUC, will not have a material impact on the Company’s operations.
The following discussion and analysis details results for Windstream’s consolidated operating income and all other
consolidated results presented below operating income.
Operating income increased $73.4 million, or 7.7 percent, in 2010 and declined $175.5 million, or 15.5 percent, in
2009. The increase in 2010 was primarily due to operating income generated from acquired businesses of $25.3 million
and expense management initiatives. These increases were partially offset by the unfavorable impact of an increase in
merger and integration expense of $55.0 million. The declines in 2009 were primarily due to the unfavorable impact of
pension and amortization expense. In addition, operating income during both years was unfavorably impacted by the
revenue impact associated with continued access line losses.
Other Income (Expense), Net
Set forth below is a summary of other income (expense), net for the years ended December 31:
(Millions) 2010 2009 2008
Interest income on cash and short-term investments $ 1.2 $ 1.4 $ 2.7
Sale of investments 0.5 - 7.7
Mark-to-market of undesignated swap (0.3) 3.0 (5.8)
Interest expense on undesignated swap (4.5) (4.7) (2.3)
Other expense, net (0.4) (0.8) (0.2)
Other income (expense), net $ (3.5) $ (1.1) $ 2.1
Other income (expense), net decreased $2.4 million in 2010 and decreased $3.2 million in 2009. The decline in 2010
was primarily due to changes in the non-cash, mark-to-market adjustment of the undesignated portion of the interest
rate swaps incurred prior to the “blend and extend” swap transaction entered into on December 10, 2010. See Financial
Condition, Liquidity and Capital Resources for further discussion of the “blend and extend” swap transaction. The
decline in 2009 was primarily due to the recognition of a $7.7 million gain from the sale of Company investments in
2008 and $2.4 million additional interest expense on undesignated swaps, partially offset by the change in fair value of
the undesignated portion of an interest rate swap agreement as discussed further in Note 2. Pursuant to the authoritative
guidance on accounting for derivative financial instruments and hedging activities, as amended, changes in the market
value of the undesignated portion of this interest rate swap are included in net income. The market value calculation of
this interest rate swap is based on estimates of forward variable interest rates, and changes in estimated forward rates
could result in significant non-cash increases or decreases in other income (expense), net in future periods.
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