Windstream 2010 Annual Report Download - page 77

Windstream Corporation
Form 10-K, Part I
Item 1A. Risk Factors
Windstream is dependent upon other ILECs for facilities and service in operating territories in which it is not the
incumbent.
Since the acquisitions of NuVox and the CLEC operations of Q-Comm, Windstream has acquired significant operating
presences in territories where it depends upon the ILEC to install and maintain the facilities used to serve its customers
(“CLEC territories”). These facilities include certain digital transmission lines, unbundled network elements (“UNEs”)
and other network components. The prices for these network components are negotiated with the ILEC or purchased
pursuant to the ILEC’s special access tariff terms and conditions. The terms, conditions and prices included in these
tariffs may be changed but must be approved by the appropriate regulatory agency before they go into effect. In
addition, interconnection agreements with the ILEC must be negotiated whenever Windstream enters a new CLEC
market or an existing agreement expires. If interconnection agreements with the ILECs cannot be negotiated on
favorable terms, or at all, Windstream may invoke binding arbitration by state regulatory agencies. The arbitration
process is expensive and time consuming, and the results of arbitration may be unfavorable to Windstream. The
inability to obtain interconnection on favorable terms would be detrimental to operations in the CLEC territories.
Access to the ILEC-provisioned facilities and services is essential for providing communication services in the CLEC
territories. Because of this dependence, communications services in these territories are susceptible to changes in the
availability and pricing of ILEC facilities and services. If the ILECs become legally entitled to deny or limit access to
network elements such as UNEs, or if state commissions allow ILECs to increase their rates for these elements or
services, Windstream may not be able to effectively compete in these CLEC territories. In addition, if the ILECs do not
adequately maintain or timely install these facilities, which they are legally obligated to do, Windstream’s service to
customers may be adversely affected. As a result, Windstream’s business, results of operations and financial condition
could be materially impacted as Windstream may have difficulty retaining existing customers and attracting new ones.
Our operations require substantial capital expenditures.
We require substantial capital to maintain, upgrade and enhance our network facilities and operations. During 2010, we
incurred $415.2 million in capital expenditures. In addition, our current dividend practice utilizes a significant portion
of our cash generated from operations and therefore limits our operating and financial flexibility and our ability to
significantly increase capital expenditures. While we have historically been able to fund capital expenditures from cash
generated from operations, the other risk factors described in this section could materially reduce cash available from
operations or significantly increase our capital expenditure requirements, and these outcomes could cause capital to not
be available when needed. This could adversely affect our business.
In addition, we filed numerous applications with the Rural Utilities Services (“RUS”) as part of the American
Recovery and Reinvestment Act of 2009 and were notified during the third quarter of 2010 that 18 applications in
thirteen states totaling $181.3 million were approved. The Company must fund 25 percent of the project cost, or $60.4
million, for a total cost of $241.7 million. These projects must be substantially completed over the next two years.
Unfavorable changes in financial markets could adversely affect our pension plan investments resulting in material
funding requirements to meet pension obligations.
The Company’s pension plan invests in marketable equity securities, including marketable debt and equity securities
denominated in foreign currencies, which are exposed to changes in the financial markets. During 2010, the fair market
value of these investments increased 11.0 percent to $870.2 million primarily due to increases in the market value of
assets held of $95.9 million, transfers from Iowa’s qualified pension plan of $12.0 million and contributions of $41.7
million, including a voluntary contribution of $41.0 million during the third quarter. Partially offsetting these increases
were routine and lump sum benefit payments of $57.8 million and $5.6 million, respectively. Returns generated on plan
assets have historically funded a large portion of the benefits paid under the Company’s pension plan. The Company
estimates that the long term rate of return on plan assets will be 8.0 percent, but returns below this estimate could
significantly increase our contribution requirements, which could adversely affect our cash flows from operations.
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