##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D. C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 1-32422
 WINDSTREAM CORPORATION
  Delaware
    
    20-0792300(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)4001 Rodney Parham Road,Little Rock, Arkansas
    
    72212(Address of principal executive offices)
    
    (Zip Code)
 (501) 748-7000
 
  þ o
  o þ o
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##### 



WINDSTREAM CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 Page No.PART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets
    
    
    2Consolidated Statements of Income
    
    
    3Consolidated Statements of Cash Flow
    
    
    4Consolidated Statements of Shareholders Equity
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    25Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    43Item 4.
    
    Controls and Procedures
    
    
    44PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    45Item 1A.
    
    Risk Factors
    
    
    45Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    *Item 3.
    
    Defaults Upon Senior Securities
    
    
    *Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    *Item 5.
    
    Other Information
    
    
    *Item 6.
    
    Exhibits
    
    
    45Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  
 *
    
    No reportable information under this item.
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##### Table of Contents



WINDSTREAM CORPORATION
FORM 10-Q
 
 PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 CONSOLIDATED BALANCE SHEETS (UNAUDITED)(Millions)
    
    March 31,
    
    
    December 31,Assets
    
    2007
    
    
    2006Current Assets:Cash and short-term investments
    
    $
    397.6
    
    
    $
    386.8Accounts receivable (less allowance for doubtful
accounts of $10.1 and $10.4, respectively)
    
    
    312.8
    
    
    
    337.2Inventories
    
    
    37.0
    
    
    
    43.5Prepaid expenses and other
    
    
    35.4
    
    
    
    29.2Assets held for sale
    
    
    66.4
    
    
    
    80.0Total current assets
    
    
    849.2
    
    
    
    876.7Investments
    
    
    7.6
    
    
    
    7.7Goodwill
    
    
    1,965.0
    
    
    
    1,965.0Other intangibles
    
    
    1,088.8
    
    
    
    1,100.4Net property, plant and equipment
    
    
    3,917.3
    
    
    
    3,939.8Other assets
    
    
    133.3
    
    
    
    141.1Total Assets
    
    $
    7,961.2
    
    
    $
    8,030.7Liabilities and Shareholders EquityCurrent Liabilities:Current maturities of long-term debt
    
    $
    39.5
    
    
    $
    32.2Accounts payable
    
    
    169.9
    
    
    
    169.5Advance payments and customer deposits
    
    
    92.3
    
    
    
    82.8Accrued dividends
    
    
    119.3
    
    
    
    119.2Accrued taxes
    
    
    70.5
    
    
    
    31.9Accrued interest
    
    
    64.3
    
    
    
    148.2Other current liabilities
    
    
    52.6
    
    
    
    68.4Liabilities related to assets held for sale
    
    
    24.4
    
    
    
    32.4Total current liabilities
    
    
    632.8
    
    
    
    684.6Long-term debt
    
    
    5,449.1
    
    
    
    5,456.2Deferred income taxes
    
    
    987.5
    
    
    
    990.8Other liabilities
    
    
    431.7
    
    
    
    429.3Total liabilities
    
    
    7,501.1
    
    
    
    7,560.9Commitments and Contingencies (See Note 8)Shareholders Equity:Common stock, $0.0001 par value, 1,000.0 shares authorized, 477.3 shares
issued and outstanding at March 31, 2007
    
    
    
    
    
    
    Additional paid-in capital
    
    
    558.2
    
    
    
    550.5Accumulated other comprehensive income (loss)
    
    
    (148.9
    )
    
    
    (150.8
    )Retained earnings
    
    
    50.8
    
    
    
    70.1Total shareholders equity
    
    
    460.1
    
    
    
    469.8Total Liabilities and Shareholders Equity
    
    $
    7,961.2
    
    
    $
    8,030.7
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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)Three MonthsEnded March 31,(Millions, except per share amounts)
    
    2007
    
    
    2006Revenues and sales:Service revenues
    
    $
    717.9
    
    
    $
    604.7Product sales
    
    
    65.8
    
    
    
    98.3Total revenues and sales
    
    
    783.7
    
    
    
    703.0Costs and expenses:Cost of services (excluding depreciation of $99.9 and $85.1,
respectively, included below)
    
    
    235.6
    
    
    
    192.4Cost of products sold
    
    
    45.5
    
    
    
    84.3Selling, general, administrative and other
    
    
    103.1
    
    
    
    80.1Depreciation and amortization
    
    
    125.1
    
    
    
    102.6Royalty expense to Alltel
    
    
    
    
    
    
    67.2Restructuring and other charges
    
    
    4.8
    
    
    
    2.5Total costs and expenses
    
    
    514.1
    
    
    
    529.1Operating income
    
    
    269.6
    
    
    
    173.9Other income, net
    
    
    5.2
    
    
    
    1.2Intercompany interest income from Alltel
    
    
    
    
    
    
    13.9Interest expense
    
    
    (114.7
    )
    
    
    (3.9
    )Income before income taxes
    
    
    160.1
    
    
    
    185.1Income taxes
    
    
    60.2
    
    
    
    72.3Net income
    
    $
    99.9
    
    
    $
    112.8Earnings per share:Basic
    
    $
    .21
    
    
    $
    .28Diluted
    
    $
    .21
    
    
    $
    .28
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)Three MonthsEnded March 31,(Millions)
    
    2007
    
    
    2006Cash Provided from Operations:Net income
    
    $
    99.9
    
    
    $
    112.8Adjustments to reconcile net income to net cash provided from operations:Depreciation and amortization
    
    
    125.1
    
    
    
    102.6Provision for doubtful accounts
    
    
    3.7
    
    
    
    5.0Stock-based compensation expense
    
    
    3.8
    
    
    
    1.1Deferred taxes
    
    
    (5.7
    )
    
    
    4.0Other, net
    
    
    15.8
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    16.8
    
    
    
    3.1Accrued interest
    
    
    (83.9
    )
    
    
    3.7Accrued taxes
    
    
    38.6
    
    
    
    36.6Other liabilities
    
    
    5.3
    
    
    
    12.1Other, net
    
    
    (4.1
    )
    
    
    5.7Net cash provided from operations
    
    
    215.3
    
    
    
    286.7Cash Flows from Investing Activities:Additions to property, plant and equipment
    
    
    (80.0
    )
    
    
    (62.2
    )Other, net
    
    
    (4.4
    )
    
    
    (1.7
    )Net cash used in investing activities
    
    
    (84.4
    )
    
    
    (63.9
    )Cash Flows from Financing Activities:Dividends paid on common shares
    
    
    (119.1
    )
    
    
    Dividends paid to Alltel prior to spin-off
    
    
    
    
    
    
    (65.7
    )Repayments of borrowings
    
    
    (500.1
    )
    
    
    (0.1
    )Debt issued, net of issuance costs
    
    
    499.1
    
    
    
    Changes in advances to Alltel prior to spin-off
    
    
    
    
    
    
    (159.0
    )Net cash used in financing activities
    
    
    (120.1
    )
    
    
    (224.8
    )Increase (decrease) in cash and short-term investments
    
    
    10.8
    
    
    
    (2.0
    )Cash and Short-term Investments:Beginning of the period
    
    
    386.8
    
    
    
    11.9End of the period
    
    $
    397.6
    
    
    $
    9.9
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CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (UNAUDITED)AccumulatedAdditional
    
    OtherPaid-In
    
    Comprehensive
    
    Retained(Millions, except per share amounts)
    
    Capital
    
    Income (Loss)
    
    Earnings
    
    TotalBalance at December 31, 2006
    
    $
    550.5
    
    
    $
    (150.8
    )
    
    $
    70.1
    
    
    $
    469.8Net income
    
    
    
    
    
    
    
    
    
    
    99.9
    
    
    
    99.9Other comprehensive income (loss), net of tax: (See
Note 10)Amortization of actuarial gains/losses
    
    
    
    
    
    
    4.7
    
    
    
    
    
    
    
    4.7Unrealized holding losses on interest
rate swaps
    
    
    
    
    
    
    (2.8
    )
    
    
    
    
    
    
    (2.8
    )Comprehensive income
    
    
    
    
    
    
    1.9
    
    
    
    99.9
    
    
    
    101.8Additional transfers from Alltel (see Note 3)
    
    
    3.9
    
    
    
    
    
    
    
    
    
    
    
    3.9Stock-based
compensation expense
    
    
    3.8
    
    
    
    
    
    
    
    
    
    
    
    3.8Dividends of $0.25 per share declared to stockholders
    
    
    
    
    
    
    
    
    
    
    (119.2
    )
    
    
    (119.2
    )Balance at March 31, 2007
    
    $
    558.2
    
    
    $
    (148.9
    )
    
    $
    50.8
    
    
    $
    460.1
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##### Table of Contents



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
  1.
    
    Preparation of Interim Financial Statements:In this report, Windstream Corporation and its subsidiaries are referred to as
Windstream, we, or the Company. For all periods prior to the effective time of the
merger with Valor Communications Group, Inc. (Valor) described herein, references to the
Company include Alltel Holding Corp. or the wireline telecommunications division and related
businesses of Alltel Corporation (Alltel).The accompanying unaudited consolidated financial statements have been prepared based upon
Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim
periods. Certain information and footnote disclosures have been condensed or omitted in
accordance with those rules and regulations. In our opinion, these financial statements
reflect all adjustments that are necessary for a fair presentation of results of operations and
financial condition for the interim periods shown including normal recurring accruals and other
items. The results for the interim periods are not necessarily indicative of results for the
full year. For a more complete discussion of significant accounting policies and certain other
information, you should read this report in conjunction with the consolidated financial
statements and accompanying notes included in Windstreams Annual Report on Form 10-K for the
year ended December 31, 2006 filed with the SEC on March 1, 2007.The preparation of financial statements in conformity with generally accepted accounting
principles (GAAP) in the United States requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying notes, including
estimates of probable losses and expenses. Actual results could differ from those estimates,
and such differences could be material.2.
    
    Accounting Changes:Discontinuance of the Application of Statement of Financial Accounting Standards (SFAS)
No. 71 Accounting for the Effects of Certain Types of Regulation  - Historically, the
Companys regulated operations, except for certain operations acquired in Kentucky in 2002 and
in Nebraska in 1999, followed the accounting for regulated enterprises prescribed by SFAS No.
71. This accounting recognizes the economic effects of rate regulation by recording costs and
a return on investment as such amounts are recovered through rates authorized by regulatory
authorities. Accordingly, certain intercompany revenues and expenses earned and incurred by
the Companys regulated subsidiaries were not eliminated because they were priced in accordance
with Federal Communications Commission (FCC) guidelines and recovered through the regulatory
process.Due to continued access line loss resulting from increased levels of competition from
alternative voice providers, as well as due to a shift of the customer base from rate-of-return
markets to markets under an alternative form of regulation, Windstream determined in the third
quarter 2006 that it was no longer appropriate to continue the application of SFAS No. 71 for
reporting its financial results. Accordingly, the Company discontinued the application of SFAS
No. 71 according to the provisions of SFAS No. 101, Regulated Enterprises  Accounting for the
Discontinuance of the Application of Financial Accounting Standards Board (FASB) statement
No. 71, and began eliminating all intercompany revenues and related expenses.Transactions with affiliates that were not eliminated under the provisions of SFAS No. 71
during the three months ended March 31, 2006 primarily included product sales, directory
publishing royalties and sales, and sales of other telecommunications services. Sales of
telecommunications equipment from the Companys product distribution operations to the
Companys regulated subsidiaries resulted in $28.6 million in product sales and cost of
products sold for the three months ended March 31, 2006. These regulated subsidiaries also
recognized $9.6 million in service revenues for the three months ended March 31, 2006 related
to royalties received from the directory publishing subsidiary (Windstream Yellow Pages),
with Windstream Yellow Pages recognizing the offsetting royalty expense in cost of products
sold. Miscellaneous billings by Windstream Yellow Pages to the regulated subsidiaries resulted
in $1.7 million in product sales and cost of products sold for the three months ended March 31,
2006. Amounts billed to other affiliates of the Company for interconnection and toll services
resulted in $10.6 million of service revenues and cost of services for the three months ended
March 31, 2006.Change in Accounting Principle  Windstream adopted Financial Accounting Standards
Board Interpretation (FIN) No. 48 Accounting for Uncertainty in Income Taxes
on January 1,
2007. The adoption of FIN 48 resulted in no impact to either the Companys reserves for
uncertain tax positions or to retained earnings. At the adoption date, and as of March 31,
2007, the Company had approximately $1.3 million of gross unrecognized tax benefits, all of
which relate to periods preceding the spin-off from Alltel, and all of which would impact its
effective tax rate if recognized.
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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  2.
    
    Accounting Changes, Continued:The Company is indemnified for these reserves for uncertain tax positions in accordance with
the Tax Sharing Agreement with Alltel dated July 17, 2006; consequently, a corresponding
receivable from Alltel equaling the gross unrecognized tax benefits plus accrued interest
expense has been recognized.Interest and penalties related to uncertain tax positions are recognized in income tax expense.
As of the date of adoption, the Company had accrued approximately $0.2 million of interest
expense and penalties related to uncertain tax positions. For the three months ended March 31,
2007, interest expense recognized related to these uncertain positions was not significant.The tax years 2003  2006 remain open to examination by the major taxing jurisdictions to which
the Company is subject. The Company has identified its federal tax return and state tax
returns in Arkansas, Florida, Georgia, Kentucky, Nebraska, North Carolina, and Texas as major
taxing jurisdictions.The Company does not reasonably estimate that the unrecognized tax benefits will change
significantly within the next twelve months.Recently Issued Accounting Pronouncements  In September 2006, the FASB issued SFAS No.
157, Fair Value Measurements. SFAS No. 157 clarifies the definition of fair value,
establishes a framework for measuring fair value and expands the disclosures related to fair
value measurements that are included in a companys financial statements. SFAS No. 157 does not
expand the use of fair value measurements in financial statements, but emphasizes that fair
value is a market-based measurement and not an entity-specific measurement that should be based
on an exchange transaction in which a company sells an asset or transfers a liability (exit
price). SFAS No. 157 also establishes a fair value hierarchy in which observable market data
would be considered the highest level, while fair value measurements based on an entitys own
assumptions would be considered the lowest level. For calendar year companies like Windstream,
SFAS No. 157 is effective beginning January 1, 2008. The Company is currently evaluating the
effects, if any, that SFAS No. 157 will have on its consolidated financial statements.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities  Including an Amendment of FASB Statement No. 115. SFAS No. 159
allows measurement at fair value of eligible financial assets and liabilities that are not
otherwise measured at fair value. If the fair value option for an eligible item is elected,
unrealized gains and losses for that item shall be reported in current earnings at each
subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure
requirements designed to draw comparison between the different measurement attributes the
company elects for similar types of assets and liabilities. This statement is effective for
fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the
application of the fair value option and its effect on its consolidated financial statements.3.
    
    Spin-off of Company from Alltel Corporation and Merger with Valor Communications Group, Inc.:On November 2, 2005, Alltel Holding Corp. was incorporated as a wholly-owned subsidiary of
Alltel to hold Alltels wireline telecommunications business in connection with a contemplated
spin-off of these assets. This wireline business was operated by certain other Alltel
subsidiaries, which provided customers with local, long distance, network access, and Internet
services. These subsidiaries also sold and warehoused telecommunications products, published
telephone directories for affiliates and other independent telephone companies, and provided
billing and other information technology services to other carriers.On July 17, 2006, Alltel completed the spin-off of Alltel Holding Corp. to its stockholders.
Pursuant to the spin-off, Alltel transferred certain wireline assets and liabilities to Alltel
Holding Corp. at their historical cost basis. During the first quarter of 2007, $4.7 million of
additional net plant assets, $1.2 million of related deferred tax liabilities, and $0.4 million
of additional pension assets were identified by Alltel as being attributable to Alltel Holding
Corp. The Company recorded these balances in March 2007 as an adjustment to additional paid-in
capital in the consolidated balance sheet.Immediately after the consummation of the spin-off, Alltel Holding Corp. merged with and into
Valor, with Valor continuing as the surviving corporation. The resulting company was renamed
Windstream Corporation. The merger was accounted for using the purchase method of accounting
for business combinations in accordance with SFAS No. 141,
Business Combinations, with Alltel Holding Corp. serving as the accounting acquirer. The
accompanying unaudited interim consolidated financial statements reflect the operations of
Alltel Holding Corp. and Valor following the spin-off and
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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  3.
    
    Spin-off of Company from Alltel Corporation and Merger with Valor Communications Group, Inc.,
Continued:merger transactions on July 17, 2006. Results of operations prior to the merger and for all
historical periods presented are for Alltel Holding Corp.In connection with the merger, the Company recorded $13.7 million of severance and
severance-related costs and $4.1 million of contract termination costs in
goodwill in accordance with Emerging Issues Task Force (EITF) Issue No. 95-3, Recognition of
Liabilities in Connection with a Purchase Business Combination.
Of the remaining liability, $5.1 million in severance and severance-related costs and $0.5
million of contract termination costs were paid during the three months ended March 31, 2007.
The remaining costs, which are included in other current liabilities in the consolidated
balance sheet, will be paid over the remainder of 2007 with cash from operations.The following unaudited pro forma condensed consolidated statements of income of Windstream for
the three months ended March 31, 2007 and 2006, respectively, assume that the spin-off from
Alltel and merger with Valor occurred as of January 1, 2006:
 Three Months Ended(Millions, except per share amounts)
    
    2007
    
    
    2006Revenues and sales (a)
    
    $
    783.7
    
    
    $
    824.6Net income
    
    $
    100.4
    
    
    $
    104.5Earnings per share:Basic
    
    $
    .21
    
    
    $
    .22Diluted
    
    $
    .21
    
    
    $
    .22
 (a)
    
    The decline in pro forma revenues and sales is primarily due to the elimination of
intercompany revenues and sales during the first quarter of 2007 that were previously
recognized pursuant to the application of SFAS No. 71 (see Note 2).
 The unaudited pro forma information presents the combined operating results of Alltel Holding
Corp. and Valor, with the results prior to the acquisition date adjusted to include
the pro forma impact of the following: the elimination of transactions between Alltel Holding
Corp. and Valor; additional amortization of intangible assets resulting from the merger; the
elimination of merger expenses; the adjustment of interest expense reflecting the new
Windstream debt structure; and the impact of income taxes on these pro forma adjustments
utilizing Windstreams statutory tax rate of 39.6 percent.The unaudited pro forma results are presented for illustrative purposes only and do not reflect
the realization of potential cost savings, or any related restructuring costs. Certain cost
savings may result from the merger; however, there can be no assurance that these costs savings
will be achieved. These pro forma results do not purport to be indicative of the results that
would have actually been obtained if the merger occurred as of January 1, 2006, nor does the
pro forma data intend to be a projection of results that may be obtained in the future.4.
    
    Related Party Transactions:For the three months ended March 31, 2006, certain services such as information technology,
accounting, legal, tax, marketing, engineering, and risk and treasury management were provided
to the Company by Alltel. Expenses were allocated based on actual direct costs incurred.
Where specific identification of expenses was not practicable, the cost of such services was
allocated based on the most relevant allocation method to the service provided: either net
sales of the Company as a percentage of net sales of Alltel, total assets of the Company as a
percentage of total assets of Alltel, or headcount of the Company as a percentage of headcount
of Alltel. Total expenses allocated to the Company were $66.3 million in the three months
ended March 31, 2006. The costs of these services charged to the Company and the allocated
liabilities assigned to the Company are not necessarily indicative of the costs and liabilities
that would have been incurred if the Company had performed these functions as a stand-alone
entity. However, management believes that methods used to make such allocations were
reasonable.For the three months ended March 31, 2006, the Company maintained a licensing agreement with
The ALLTEL Kansas Limited Partnership, an Alltel affiliate, under which the Companys regulated
subsidiaries were charged a royalty fee for the use of the Alltel brand name in marketing and
distributing telecommunications products and services. The amount of the
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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  4.
    
    Related Party Transactions, Continued:royalty fee charged was computed by multiplying the regulated subsidiaries annual revenues and
sales by 12.5 percent. In anticipation of the spin-off, Alltel and the
Company terminated this licensing agreement on June 30, 2006 as the Company no longer uses the
Alltel brand name.For the three months ended March 31, 2006, the Company participated in the centralized cash
management practices of Alltel. Under those practices, cash balances were transferred daily to
Alltel bank accounts. The Company obtained interim financing from Alltel to fund its daily
cash requirements and invested short-term excess funds with Alltel. The Company earned
interest income on receivables due from Alltel and was charged interest expense for payables
due to Alltel. Subsequent to the spin-off, Windstream no longer participates in this program as
the Company has its own established cash management program. The interest rates charged on
payables to Alltel were 5.91 percent in the three months ended March 31, 2006. Interest rates
earned on receivables from Alltel were 4.75 percent in the three months ended March 31, 2006.Subsequent to the spin-off, Windstream and Alltel continue to provide each other certain of the
services discussed above, at negotiated rates pursuant to a transition services agreement. In
addition to the transition services agreement, Windstream and Alltel entered into certain other
agreements extending for periods of up to three years. Under those agreements, Alltel will
continue to provide Windstream with network transport for its long distance operations and
other services, while Windstream will continue to provide local phone service, long distance
and broadband Internet service as well as certain network management services to Alltel, all at negotiated rates. In addition, Windstream and
Alltel entered into a tax-sharing agreement that generally requires Alltel to indemnify
Windstream for any taxes attributable to Windstreams operations for periods prior to the
spin-off, while Windstream must indemnify Alltel for any taxes resulting from the spin-off in
certain circumstances.5.
    
    Goodwill and Other Intangible Assets:Goodwill represents the excess of cost over the fair value of net identifiable tangible and
intangible assets acquired through various business combinations. The Company has acquired
identifiable intangible assets through its acquisitions of interests in various wireline
properties. The cost of acquired entities at the date of the acquisition is allocated to
identifiable assets, and the excess of the total purchase price over the amounts assigned to
identifiable assets is recorded as goodwill.As of January 1, 2007, the Company completed the annual impairment reviews of its goodwill and
indefinite-lived franchise rights and determined that no write-down in the carrying value of
these assets was required. As of March 31, 2007 and December 31, 2006, the carrying value of
the indefinite-lived wireline franchise rights in the state of Kentucky acquired in 2002 was
$265.0 million. As of March 31, 2007 and December 31, 2006, the carrying value of the
indefinite-lived wireline franchise rights in the Valor properties acquired during 2006 was
$600.0 million.Intangible assets subject to amortization were as follows:
 March 31, 2007Gross
    
    
    Accumulated
    
    
    Net Carrying(Millions)
    
    Cost
    
    
    Amortization
    
    
    ValueValor customer list
    
    $
    210.0
    
    
    $
    (28.8
    )
    
    $
    181.2Other customer lists
    
    
    67.6
    
    
    
    (29.3
    )
    
    
    38.3Cable franchise
rights
    
    
    22.5
    
    
    
    (18.2
    )
    
    
    4.3$
    300.1
    
    
    $
    (76.3
    )
    
    $
    223.8
 December 31, 2006Gross
    
    
    Accumulated
    
    
    Net Carrying(Millions)
    
    Cost
    
    
    Amortization
    
    
    ValueValor customer list
    
    $
    210.0
    
    
    $
    (19.2
    )
    
    $
    190.8Other customer lists
    
    
    67.6
    
    
    
    (27.6
    )
    
    
    40.0Cable franchise
rights
    
    
    22.5
    
    
    
    (17.9
    )
    
    
    4.6$
    300.1
    
    
    $
    (64.7
    )
    
    $
    235.4
 9




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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  5.
    
    Goodwill and Other Intangible Assets, Continued:The Valor customer list is amortized on an accelerated sum-of-the-years digits methodology over
its estimated useful life of 9 years. Other customer lists are amortized on a straight-line
basis over their estimated useful lives of 10 years. Cable franchise rights subject to
amortization are amortized on a straight-line basis over their estimated useful lives of 15
years. Amortization expense for intangible assets subject to amortization was $11.6 million
and $2.0 million for the three month periods ended March 31, 2007 and 2006, respectively.
Amortization expense for intangible assets subject to amortization is estimated to be $48.0
million in 2007, $43.4 million in 2008, $38.7 million in 2009, $32.6 million in 2010 and $27.9
million in 2011.6.
    
    Debt and Derivative Instruments:Long-term debt was as follows:
 March 31,
    
    
    December 31,(Millions)
    
    2007
    
    
    2006Issued by Windstream Corporation:Senior secured credit facility, Tranche A  variable rates, due July 17, 2011
    
    $
    500.0
    
    
    $
    500.0Senior secured credit facility, Tranche B  variable rates, due July 17, 2013 (a)
    
    
    1,400.0
    
    
    
    1,900.0Debentures and notes, without collateral:2016 Notes  8.625%, due August 1, 2016
    
    
    1,746.0
    
    
    
    1,746.02013 Notes  8.125%, due August 1, 2013
    
    
    800.0
    
    
    
    800.02019 Notes  7.00%, due March 15, 2019 (a)
    
    
    500.0
    
    
    
    Issued by subsidiaries of the Company:Valor Telecommunications Enterprises LLC and Valor Telecommunications
Finance Corp.  7.75%, due February 15, 2015 (b)
    
    
    400.0
    
    
    
    400.0Windstream Holdings of the Midwest, Inc.  6.75%, due April 1, 2028 (b)
    
    
    100.0
    
    
    
    100.0Debentures and notes, without collateral:Windstream Georgia Communications Corp.  6.50%,
due November 15, 2013
    
    
    70.0
    
    
    
    70.0Teleview, Inc.  7.00%, due January 2, 2010 and May 2, 2010
    
    
    0.7
    
    
    
    0.8Discount on long-term debt, net of premiums
    
    
    (28.1
    )
    
    
    (28.4
    )5,488.6
    
    
    
    5,488.4Less current maturities
    
    
    (39.5
    )
    
    
    (32.2
    )Total long-term debt
    
    $
    5,449.1
    
    
    $
    5,456.2
 (a)
    
    On February 27, 2007, Windstream completed the private placement of $500.0 million
aggregate principal amount of
senior notes due 2019, with an interest rate of 7.0 percent (the February 27th
refinancing transaction). Windstream used the net proceeds of the offering to repay
$500.0 million of amounts outstanding under the term loan portion of its senior secured
credit facilities. Additionally, Windstream received the consent of lenders to an
amendment and restatement of its $2.9 billion secured credit facilities. Windstream
amended and restated its senior secured credit facilities to, among other things, reduce
the interest payable under tranche B of the term loan portion of the facilities; modify the
pre-payment provision; and modify certain covenants to permit the consummation of the
previously announced split off of its directory publishing business.(b)
    
    The Companys collateralized subsidiary debt is equally and ratably secured with
debt under the senior secured credit facilities.The terms of the credit facility and indentures include customary covenants that, among
other things, require Windstream to maintain certain financial ratios and restrict its
ability to incur additional indebtedness. These financial ratios include a minimum
interest coverage ratio of 2.75 to 1.0 and a maximum leverage ratio of 4.5 to 1.0. In
addition, the covenants include restrictions on capital expenditures, which must not exceed
a specified amount in any fiscal year (for 2007 this amount is $530.0 million). The
Company was in compliance with these covenants as of March 31, 2007.
 10




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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  6.
    
    Debt and Derivative Instruments, Continued:Maturities and sinking fund requirements for debt outstanding as of March 31, 2007 for each
of the twelve month periods ended March 31, 2008, 2009, 2010, and 2011 are $39.5 million,
$68.0 million, $93.0 million and $117.8 million, respectively.Interest expense was as follows for the three months ended March 31:
 (Millions)
    
    2007
    
    
    2006Interest expense related to long-term debt (c)
    
    $
    114.8
    
    
    $
    4.4Other interest expense
    
    
    0.1
    
    
    
    Impacts of interest rate swaps
    
    
    0.9
    
    
    
    Less capitalized interest expense
    
    
    (1.1
    )
    
    
    (0.5
    )$
    114.7
    
    
    $
    3.9
 (c)
    
    In connection with the February
27, 2007 refinancing transaction, the Company recorded additional
non-cash interest expense of $5.3 million due to a write-off of the unamortized debt
issuance costs associated with $500.0 million of the term loan
that was paid down.
 Due to the interest rate risk inherent in the variable rate senior credit facilities, the
Company entered into four pay fixed, receive variable interest rate swap agreements on notional
amounts totaling $1,600.0 million to convert variable interest rate payments to fixed. The
four interest rate swap agreements amortize quarterly to a notional value of $906.3 million at
maturity on July 17, 2013. The variable rate received by Windstream on these swaps is the
three-month LIBOR (London-Interbank Offered Rate), and the weighted-average fixed rate paid by
Windstream is 5.604 percent. The interest rate swap agreements are designated as cash flow
hedges of the interest rate risk created by the variable interest rate paid on the senior
credit facilities pursuant to the guidance in SFAS No. 133, Derivative Financial Instruments,
as amended. After the completion of the February 27th refinancing transaction, a
portion of one of the four interest rate swap agreements with a notional value of $125.0
million is no longer effective as a hedge as the portion of the Companys senior secured credit
facility that it was designated to hedge against was repaid. Changes in the market value of
this portion of the swap will now be recognized in net income, including $0.4 million
recognized as other income in the unaudited consolidated statement of income for the three
months ended March 31, 2007.7.
    
    Employee Benefit Plans and Postretirement Benefits Other Than Pensions:Prior to the spin-off from Alltel, substantially all of the Companys employees participated in
a non-contributory, qualified defined benefit pension plan maintained by Alltel. In December
2005, the qualified defined benefit pension plan was amended such that future benefit accruals
for all eligible nonbargaining employees ceased as of December 31, 2005 (December 31, 2010 for
employees who had attained age 40 with two years of service as of December 31, 2005).
Following the spin-off, Windstream established a qualified defined benefit pension plan whose
provisions are substantially equivalent to the provisions of the plan maintained by Alltel. The
Company also assumed certain obligations from a qualified pension plan formerly sponsored by
Valor, which is also non-contributory.The components of pension expense were as follows for the three months ended March 31, 2007:
 (Millions)Service cost
    
    $
    4.1Interest cost
    
    
    12.8Expected return on plan assets
    
    
    (19.4
    )Prior service cost
    
    
    (0.1
    )Net actuarial loss
    
    
    5.5Net periodic benefit expense
    
    $
    2.9
 11




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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  7.
    
    Employee Benefit Plans and Postretirement Benefits Other Than Pensions, Continued:Pension expenses allocated to the Company by Alltel amounted to $2.9 million for the
three months ended March 31, 2006. Pension expenses are included in cost of services and
selling, general, administrative and other expenses in the unaudited consolidated statements of
income.Windstream also maintains supplemental executive retirement plans that provide unfunded,
non-qualified supplement retirement benefits to a select group of former management employees.
There are no assets held in these supplemental retirement pension plans, as the Company funds
the accrued costs of the plans as benefits are paid. For the three months ended March 31,
2007, Windstream contributed $0.2 million to fund the supplemental executive retirement plans.The Company provides postretirement healthcare and life insurance benefits for eligible
employees. Employees share in the cost of these benefits. The Company funds the costs of
these plans as benefits are paid. The Company also assumed certain obligations from a
postretirement healthcare plan formerly sponsored by Valor. The components of postretirement
benefits expense were as follows for the three months ended March 31:
 Three Months Ended(Millions)
    
    2007
    
    
    2006Service cost
    
    $
    0.1
    
    
    $
    Interest cost
    
    
    3.7
    
    
    
    2.4Transition obligation
    
    
    0.2
    
    
    
    Prior service cost
    
    
    0.4
    
    
    
    0.5Net actuarial loss
    
    
    1.6
    
    
    
    1.3Net periodic benefit expense
    
    $
    6.0
    
    
    $
    4.2
 Windstream disclosed in its financial statements for the year ended December 31, 2006 that it
expected to contribute $6.6 million and $15.6 million for pension and postretirement benefits,
respectively, in 2007. Windstream contributed $4.8 million to the postretirement plan during
the three months ended March 31, 2007. Of the $6.6 million pension contribution, the Company
expects to contribute $5.9 million to the Windstream pension plan during 2007 related to the
plan formerly sponsored by Valor, calculated in accordance with the minimum funding
requirements of the Employee Retirement Income Security Act of 1974. Future discretionary
contributions to the plan will depend on various factors, including future investment
performance, changes in future discount rates and changes in the demographics of the population
participating in the Companys qualified pension plan.The profit-sharing plan assets were merged into the employee savings plan under section 401(k)
of the Internal Revenue Code during the three months ended March 31, 2007. Pursuant to the
merger of these plans, the Company no longer contributes to employee profit sharing accounts,
and has increased its matching contribution to employee savings accounts from a maximum of 4%
to a maximum of 6% of employee pretax contributions. The Companys final cash contribution to
the profit sharing plan, totaling $5.2 million, was made in April 2007. This amount is included
in other current liabilities in the accompanying consolidated balance sheet at March 31, 2007.8.
    
    Commitments and Contingencies:On October 16, 2006, the Company received a negative ruling in a binding arbitration proceeding
previously brought against Valor Communications Southwest LLC and Valor Communications Group,
Inc., by former employees regarding stock option award agreements. On January 8, 2007, the
arbitrator entered a final award for the former employees of $7.2 million for the value of
options that the Company asserts were without value immediately prior to Valors initial public
offering in February 2005. The Company had established a
liability for this amount accounting for the merger with Valor in 2006. The basis for the award was the arbitrators finding that these
particular claimants options were extended past the initial public offering date. The
claimants have filed separate complaints to confirm the award in Oklahoma federal district
court. The Company has filed motions in Oklahoma to dismiss, or alternatively to transfer, the
complaints to Texas federal district court and also filed a separate motion to vacate the
arbitrators award in Texas federal district court. The Company intends to vigorously assert
and defend its position in the matter.
 12




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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  8.
    
    Commitments and Contingencies, Continued:The Company is party to various other legal proceedings. Although the ultimate resolution of
these various proceedings cannot be determined at this time, management of the Company does not
believe that such proceedings, individually or in the aggregate, will have a material adverse
effect on the future consolidated results of income, cash flows or financial condition of the
Company.In addition, management of the Company is currently not aware of any environmental matters
that, individually or in the aggregate, would have a material adverse effect on the
consolidated financial condition or results of operations of the Company.9.
    
    Restructuring and Other Charges:A summary of the restructuring and other charges recorded in the three month periods ended
March 31, 2007 and 2006 is as follows:
 Three Months Ended(Millions)
    
    2007
    
    
    2006Fees associated with spin-off from Alltel
    
    $
    
    
    
    $
    2.5Severance and employee benefit costs
    
    
    3.2
    
    
    
    Costs associated with split off of directory publishing business
    
    
    1.6
    
    
    
    Total restructuring and other charges
    
    $
    4.8
    
    
    $
    2.5
 The company incurred $3.2 million in severance and employee related costs during the first
quarter of 2007, primarily related to the continuation of a planned workforce reduction
announced during the fourth quarter of 2006. The Company also incurred $1.6 million in
accounting and legal fees and other expenses related to the anticipated sale of its directory
publishing business (see Note 15).During the three months ended March 31, 2006, in connection with the spin-off from Alltel and
merger with Valor, the Company incurred $2.5 million of incremental costs, primarily consisting
of consulting and legal fees.The following is a summary of the activity related to the liabilities associated with the
Companys restructuring and other charges for the three months ended March 31, 2007:
 (Millions)Balance, beginning of period
    
    $
    28.9Restructuring expenses and other charges
    
    
    4.8Cash outlays during the period
    
    
    (12.7
    )Balance, end of period
    
    $
    21.0
 In the Companys unaudited interim consolidated balance sheet at March 31, 2007, other
current liabilities include a portion of this unpaid restructuring liability totaling
$11.8 million, which consists of $0.2 million of costs related to
the spin-off from Alltel, $8.1 million in severance and employee-related expenses related
to the realignment of its operational functions, $0.2 million in severance and
employee-related expenses related to the integration of Valor, and $3.3 million related to
the early termination of Valor leases. The remaining unpaid restructuring liability of $9.2
million related to fees resulting from the split off of the
publishing business is
included in liabilities related to assets held for sale in the unaudited interim
consolidated balance sheet.
 13




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##### Table of Contents



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  10.
    
    Comprehensive Income:Other comprehensive income (loss) was as follows for the three month periods ended March 31:
 Three Months Ended(Millions)
    
    2007
    
    
    2006Other comprehensive income (loss):Unrealized holding losses on interest rate swaps
    
    $
    (4.6
    )
    
    $
    Income tax benefit
    
    
    1.8
    
    
    
    (2.8
    )
    
    
    Amortization of actuarial gains/losses
    
    
    7.7
    
    
    
    Income tax expense
    
    
    (3.0
    )
    
    
    4.7
    
    
    
    Other comprehensive income (loss) before tax
    
    
    3.1
    
    
    
    Income tax expense
    
    
    (1.2
    )
    
    
    Other comprehensive income (loss)
    
    $
    1.9
    
    
    $
    
 11.
    
    Earnings per Share:Basic earnings per share of common stock was computed by dividing net income applicable to
common shares by the weighted average number of common shares outstanding during each period.
Diluted earnings per share reflects the potential dilution that could occur assuming conversion
or exercise of all dilutive outstanding stock instruments.Common shares in historical periods totaled 402.9 million and represented the shares issued to
Alltel shareholders pursuant to the spin-off of the Alltel wireline division.A reconciliation of the net income and numbers of shares used in computing basic and diluted
earnings per share was as follows for the three month periods ended March 31:
 Three Months Ended(Millions, except per share amounts)
    
    2007
    
    
    2006Basic earnings per share:Net income applicable to common shares
    
    $
    99.9
    
    
    $
    112.8Weighted average common shares outstanding for the period
    
    
    473.5
    
    
    
    402.9Basic earnings per share
    
    $
    .21
    
    
    $
    .28Diluted earnings per share:Net income applicable to common shares
    
    $
    99.9
    
    
    $
    112.8Weighted average common shares outstanding for the period
    
    
    473.5
    
    
    
    402.9Increase in shares resulting from:Non-vested restricted stock awards
    
    
    1.1
    
    
    
    Weighted average common shares assuming conversion
    
    
    474.6
    
    
    
    402.9Diluted earnings per share
    
    $
    .21
    
    
    $
    .28
 14




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##### Table of Contents



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  12.
    
    Stock-Based Compensation:Under the Companys stock-based compensation plans, Windstream may issue restricted stock and
other equity securities to directors, officers and other key employees. The maximum number of
shares available for issuance under the Windstream 2006 Equity Incentive Plan is 10.0 million
shares.In February 2007, the Windstream Board of Directors approved grants of restricted stock to
officers, executives, and non-employee directors totaling approximately 575,000 common shares
with a fair value on the date of the grant of $8.5 million. This grant represents a standard
annual grant to this group as a key component of their annual incentive compensation plan. Of
the shares granted, approximately 325,000 shares contingently vest over a three-year period if
performance-based operating targets are met each period. The operating target for the first
vesting period was approved by the Board of Directors on February 6, 2007. Management has
determined that it is probable that the target will be met for fiscal year 2007. The remaining
shares vest ratably over a three-year service period, with the exception of approximately
35,000 shares granted to non-employee directors that vest over a one-year service period.Non-vested Windstream restricted stock activity for the three months ended March 31, 2007 was
as follows:
 (Thousands)Number of
    
    
    Weighted AverageShares
    
    
    Fair Value Per ShareNon-vested at December 31, 2006
    
    
    3,243.2
    
    
    $
    12.55Granted
    
    
    574.9
    
    
    $
    14.81Forfeited
    
    
    (49.0
    )
    
    $
    12.34Non-vested at March 31, 2007
    
    
    3,769.1
    
    
    $
    12.90
 At March 31, 2007, unrecognized compensation expense for non-vested Windstream restricted
shares was $32.7 million. The unrecognized compensation expense for these non-vested
restricted shares has a remaining weighted average vesting period of 2.0 years. Stock-based
compensation expense was $3.8 million and $1.1 million for the three months ended March 31,
2007 and 2006, respectively. Expense recorded prior to the spin-off from Alltel was related to
shares of Alltel common stock issued to the Companys employees under Alltels stock
compensation plans.On May 8, 2007, the Board of Directors approved an
annual grant of approximately 215,000 shares
of restricted stock with a fair value on the date of the grant of approximately $3.3 million to
certain management employees not participating in the February grant. As of May 8, 2007, the balance available for grant under
the 2006 Equity Incentive Plan is approximately 6.1 million
shares.13.
    
    Business Segment Information:The Company disaggregates its business operations based upon differences in products and
services. The Companys wireline segment consists of Windstreams retail and wholesale
telecommunications services, including voice service, long distance, data and special access,
switched access and Universal Service Funds and miscellaneous and other services in 16 states.
The Company does not have separate segment managers overseeing its retail and wholesale
telecommunications services. Therefore, in assessing operating performance and allocating
resources, the chief operating decision makers focus is at a level that consolidates the
results of all services. In addition, incentive-based compensation for the wireline segment
manager is directly tied to the combined operating results of the Companys total wireline
operations. Accordingly, the Company manages its wireline-based services as a single operating
segment.The product distribution segment consists of warehouse and
logistics operations, and it procures and sells telecommunications
infrastructure and equipment to both affiliated and non-affiliated
businesses. It operates four warehouses across the United States.Other operations consist of the Companys directory publishing and telecommunications
information services. The Companys publishing subsidiary coordinates advertising, sales,
printing, and distribution for 369 telephone directory
 15




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##### Table of Contents



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  13.
    
    Business Segment Information, Continued:contracts in 35 states. On December 12, 2006, Windstream announced that it would split off its
directory publishing business (see Note 15). Immediately after the consummation of the spin-off
and merger with Valor, the telecommunications information services operations no longer incurs
revenues and expenses for providing data processing and outsourcing services as Valor was its
sole external customer.The Company accounts for intercompany sales at current market prices. The Company evaluates
performance of the segments based on segment income, which is computed as revenues and sales
less operating expenses, excluding the effects of the restructuring and other charges discussed
in Note 9. In addition, non-operating items such as other income, net, intercompany interest
income from Alltel, interest expense and income taxes have not been allocated to the segments.Segment operating results were as follows for the three month periods ended March 31:
 Three Months Ended(Millions)
    
    2007
    
    
    2006Revenues and Sales from External Customers:Wireline
    
    $
    732.6
    
    
    $
    590.1Product distribution
    
    
    30.8
    
    
    
    33.8Other operations
    
    
    20.3
    
    
    
    28.6Total
    
    $
    783.7
    
    
    $
    652.5Intersegment Revenues and Sales:Wireline
    
    $
    17.8
    
    
    $
    32.8Product distribution
    
    
    52.4
    
    
    
    35.3Other
operations
    
    
    1.8
    
    
    
    1.9Total
    
    $
    72.0
    
    
    $
    70.0Total Revenues and Sales:Wireline
    
    $
    750.4
    
    
    $
    622.9Product distribution
    
    
    83.2
    
    
    
    69.1Other
operations
    
    
    22.1
    
    
    
    30.5Total business segments
    
    
    855.7
    
    
    
    722.5Less intercompany eliminations
    
    
    (72.0
    )
    
    
    (19.5
    )Total revenues and sales
    
    $
    783.7
    
    
    $
    703.0Segment Income:Wireline
    
    $
    277.2
    
    
    $
    175.4Product distribution
    
    
    (0.8
    )
    
    
    1.2Other
operations
    
    
    (2.0
    )
    
    
    (0.2
    )Total segment income
    
    
    274.4
    
    
    
    176.4Restructuring and other charges
    
    
    (4.8
    )
    
    
    (2.5
    )Other income, net
    
    
    5.2
    
    
    
    1.2Intercompany interest income from Alltel
    
    
    
    
    
    
    13.9Interest expense
    
    
    (114.7
    )
    
    
    (3.9
    )Income before income taxes
    
    $
    160.1
    
    
    $
    185.1
 Segment assets were as follows:
    
    March 31,
    
    
    December 31,(Millions)
    
    2007
    
    
    2006Wireline
    
    $
    7,854.9
    
    
    $
    7,897.1Product distribution
    
    
    40.2
    
    
    
    53.8Other
operations (a)
    
    
    66.1
    
    
    
    79.8Total consolidated assets
    
    $
    7,961.2
    
    
    $
    8,030.7
 Notes:(a)
    
    Other segment assets consist of directory publishing assets held for sale.
 
 16




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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  13.
    
    Business Segment Information, Continued:Supplemental information pertaining to other operations was as follows for the three month
periods ended March 31:
 Three Months Ended(Millions)
    
    2007
    
    
    2006Revenues and Sales from External Customers:Directory publishing
    
    $
    20.3
    
    
    $
    24.6Telecommunications information services
    
    
    
    
    
    
    4.0Total
    
    $
    20.3
    
    
    $
    28.6Intersegment Revenues and Sales:Directory publishing
    
    $
    1.8
    
    
    $
    1.9Total
    
    $
    1.8
    
    
    $
    1.9Total Revenues and Sales:Directory publishing
    
    $
    22.1
    
    
    $
    26.5Telecommunications information services
    
    
    
    
    
    
    4.0Total
revenues and sales
    
    $
    22.1
    
    
    $
    30.5
 17




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##### Table of Contents



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  14.
    
    Supplemental Guarantor Information:In connection with the issuance of the 2016 Notes, the 2013 Notes and the 2019 Notes (the
guaranteed notes), certain of our wholly-owned subsidiaries (the Guarantors), including all former subsidiaries
of Valor, provided guarantees of those debentures. These guarantees are
full and unconditional as well as joint and several. Certain Guarantors may be subject to
restrictions on their ability to distribute earnings to the Company. The remaining
subsidiaries (the Non-Guarantors) of Windstream are not guarantors of the guaranteed notes.
In conjunction with the merger with Valor, Windstream assumed $400.0 million principal value of
unsecured notes (the Valor Notes) guaranteed by all of Valors operating subsidiaries. The
terms of those notes were amended to reflect the non-Valor Guarantors as guarantors of the
Valor notes.The following information presents condensed consolidated statements of
income for the three months ended March 31, 2007 and 2006,
condensed consolidated balance sheets as of March 31, 2007 and
December 31, 2006, and condensed consolidated statements of cash flows for the three months ended March 31, 2007 and 2006 of the
parent companies, the Guarantors, and the Non-Guarantors. Investments include investments in a
non-consolidated affiliate as well as investments in net assets of subsidiaries held by the
parent company and have been presented using the equity method of accounting.
 Consolidated Statement of Income (Unaudited)Three Months Ended March 31, 2007Non-(Millions)
    
    Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedRevenues and sales:Service revenues
    
    $
    
    
    
    $
    192.9
    
    
    $
    532.9
    
    
    $
    (7.9
    )
    
    $
    717.9Product sales
    
    
    
    
    
    
    96.7
    
    
    
    11.3
    
    
    
    (42.2
    )
    
    
    65.8Total revenues and sales
    
    
    
    
    
    
    289.6
    
    
    
    544.2
    
    
    
    (50.1
    )
    
    
    783.7Costs and expenses:Cost of services (excluding depreciation
of $99.9, included below)
    
    
    
    
    
    
    51.8
    
    
    
    184.7
    
    
    
    (0.9
    )
    
    
    235.6Cost of products sold
    
    
    
    
    
    
    84.3
    
    
    
    10.4
    
    
    
    (49.2
    )
    
    
    45.5Selling, general, administrative and other
    
    
    0.4
    
    
    
    31.8
    
    
    
    70.9
    
    
    
    
    
    
    
    103.1Depreciation and amortization
    
    
    
    
    
    
    42.7
    
    
    
    82.4
    
    
    
    
    
    
    
    125.1Restructuring and other charges
    
    
    
    
    
    
    2.7
    
    
    
    2.1
    
    
    
    
    
    
    
    4.8Total costs and expenses
    
    
    0.4
    
    
    
    213.3
    
    
    
    350.5
    
    
    
    (50.1
    )
    
    
    514.1Operating income
    
    
    (0.4
    )
    
    
    76.3
    
    
    
    193.7
    
    
    
    
    
    
    
    269.6Earnings from consolidated subsidiaries
    
    
    177.6
    
    
    
    9.6
    
    
    
    (3.6
    )
    
    
    (183.6
    )
    
    
    Other income (expense), net
    
    
    5.1
    
    
    
    0.2
    
    
    
    (0.1
    )
    
    
    
    
    
    
    5.2Intercompany interest income (expense)
    
    
    (11.5
    )
    
    
    (10.0
    )
    
    
    21.5
    
    
    
    
    
    
    
    Interest expense
    
    
    (112.8
    )
    
    
    (1.4
    )
    
    
    (0.5
    )
    
    
    
    
    
    
    (114.7
    )Income before income taxes
    
    
    58.0
    
    
    
    74.7
    
    
    
    211.0
    
    
    
    (183.6
    )
    
    
    160.1Income taxes (benefit)
    
    
    (41.9
    )
    
    
    22.8
    
    
    
    79.3
    
    
    
    
    
    
    
    60.2Net income
    
    $
    99.9
    
    
    $
    51.9
    
    
    $
    131.7
    
    
    $
    (183.6
    )
    
    $
    99.9
 18




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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  14.
    
    Supplemental Guarantor Information, Continued:
 Consolidated Statement of Income (Unaudited)Three Months Ended March 31, 2006Non-(Millions)
    
    Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedRevenues and sales:Service revenues
    
    $
    
    
    
    $
    78.8
    
    
    $
    538.5
    
    
    $
    (12.6
    )
    
    $
    604.7Product sales
    
    
    
    
    
    
    89.4
    
    
    
    9.1
    
    
    
    (0.2
    )
    
    
    98.3Total revenues and sales
    
    
    
    
    
    
    168.2
    
    
    
    547.6
    
    
    
    (12.8
    )
    
    
    703.0Costs and expenses:Cost of services (excluding depreciation of
$85.1, included below)
    
    
    
    
    
    
    23.4
    
    
    
    180.9
    
    
    
    (11.9
    )
    
    
    192.4Cost of products sold
    
    
    
    
    
    
    78.4
    
    
    
    6.8
    
    
    
    (0.9
    )
    
    
    84.3Selling, general, administrative and other
    
    
    
    
    
    
    18.7
    
    
    
    61.4
    
    
    
    
    
    
    
    80.1Depreciation and amortization
    
    
    
    
    
    
    16.5
    
    
    
    86.1
    
    
    
    
    
    
    
    102.6Royalty expense to Alltel
    
    
    
    
    
    
    9.3
    
    
    
    57.9
    
    
    
    
    
    
    
    67.2Restructuring and other charges
    
    
    
    
    
    
    
    
    
    
    2.5
    
    
    
    
    
    
    
    2.5Total costs and expense
    
    
    
    
    
    
    146.3
    
    
    
    395.6
    
    
    
    (12.8
    )
    
    
    529.1Operating income
    
    
    
    
    
    
    21.9
    
    
    
    152.0
    
    
    
    
    
    
    
    173.9Earnings from consolidated subsidiaries
    
    
    Other income, net
    
    
    
    
    
    
    0.6
    
    
    
    0.6
    
    
    
    
    
    
    
    1.2Intercompany interest income from Alltel
    
    
    
    
    
    
    0.9
    
    
    
    13.0
    
    
    
    
    
    
    
    13.9Interest expense
    
    
    
    
    
    
    (1.9
    )
    
    
    (2.0
    )
    
    
    
    
    
    
    (3.9
    )Income before income taxes
    
    
    
    
    
    
    21.5
    
    
    
    163.6
    
    
    
    
    
    
    
    185.1Income taxes
    
    
    
    
    
    
    5.5
    
    
    
    66.8
    
    
    
    
    
    
    
    72.3Net income
    
    $
    
    
    
    $
    16.0
    
    
    $
    96.8
    
    
    $
    
    
    
    $
    112.8
 19




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##### Table of Contents



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  14.
    
    Supplemental Guarantor Information, Continued:
 Consolidated Balance Sheet (Unaudited)As of March 31, 2007Non-(Millions)
    
    Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and short-term investments
    
    $
    377.7
    
    
    $
    1.5
    
    
    $
    18.4
    
    
    $
    
    
    
    $
    397.6Accounts receivable (less allowance
for doubtful accounts of $10.1)
    
    
    0.7
    
    
    
    99.7
    
    
    
    212.4
    
    
    
    
    
    
    
    312.8Inventories
    
    
    
    
    
    
    22.4
    
    
    
    14.6
    
    
    
    
    
    
    
    37.0Prepaid expenses and other
    
    
    3.9
    
    
    
    4.2
    
    
    
    27.3
    
    
    
    
    
    
    
    35.4Assets held for sale
    
    
    
    
    
    
    66.4
    
    
    
    
    
    
    
    
    
    
    
    66.4Total current assets
    
    
    382.3
    
    
    
    194.2
    
    
    
    272.7
    
    
    
    
    
    
    
    849.2Investments
    
    
    5,796.6
    
    
    
    182.7
    
    
    
    3.0
    
    
    
    (5,974.7
    )
    
    
    7.6Goodwill and other intangibles
    
    
    
    
    
    
    1,550.6
    
    
    
    1,503.2
    
    
    
    
    
    
    
    3,053.8Net property, plant and equipment
    
    
    7.6
    
    
    
    1,189.6
    
    
    
    2,720.1
    
    
    
    
    
    
    
    3,917.3Other assets
    
    
    35.7
    
    
    
    7.7
    
    
    
    89.9
    
    
    
    
    
    
    
    133.3Total Assets
    
    $
    6,222.2
    
    
    $
    3,124.8
    
    
    $
    4,588.9
    
    
    $
    (5,974.7
    )
    
    $
    7,961.2LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    29.3
    
    
    $
    0.2
    
    
    $
    10.0
    
    
    $
    
    
    
    $
    39.5Accounts payable
    
    
    8.0
    
    
    
    29.1
    
    
    
    132.8
    
    
    
    
    
    
    
    169.9Affiliate payable
    
    
    275.7
    
    
    
    1,052.7
    
    
    
    (1,328.4
    )
    
    
    
    
    
    
    Advance payments and customer deposits
    
    
    
    
    
    
    19.2
    
    
    
    73.1
    
    
    
    
    
    
    
    92.3Accrued dividends
    
    
    119.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119.3Accrued taxes
    
    
    (73.8
    )
    
    
    34.9
    
    
    
    109.4
    
    
    
    
    
    
    
    70.5Accrued interest
    
    
    59.1
    
    
    
    3.4
    
    
    
    1.8
    
    
    
    
    
    
    
    64.3Other current liabilities
    
    
    14.7
    
    
    
    10.8
    
    
    
    27.1
    
    
    
    
    
    
    
    52.6Liabilities related to assets held for sale
    
    
    
    
    
    
    24.4
    
    
    
    
    
    
    
    
    
    
    
    24.4Total current liabilities
    
    
    432.3
    
    
    
    1,174.7
    
    
    
    (974.2
    )
    
    
    
    
    
    
    632.8Long-term debt
    
    
    5,289.5
    
    
    
    100.0
    
    
    
    59.6
    
    
    
    
    
    
    
    5,449.1Deferred income taxes
    
    
    (29.6
    )
    
    
    391.4
    
    
    
    625.7
    
    
    
    
    
    
    
    987.5Other liabilities
    
    
    69.9
    
    
    
    36.5
    
    
    
    325.3
    
    
    
    
    
    
    
    431.7Total liabilities
    
    
    5,762.1
    
    
    
    1,702.6
    
    
    
    36.4
    
    
    
    
    
    
    
    7,501.1Commitments and Contingencies (See Note 8)Shareholders Equity:Common stock
    
    
    
    
    
    
    (0.4
    )
    
    
    25.9
    
    
    
    (25.5
    )
    
    
    Additional paid-in capital
    
    
    558.2
    
    
    
    1,153.0
    
    
    
    2,626.6
    
    
    
    (3,779.6
    )
    
    
    558.2Accumulated other comprehensive income (loss)
    
    
    (148.9
    )
    
    
    
    
    
    
    (122.4
    )
    
    
    122.4
    
    
    
    (148.9
    )Retained earnings
    
    
    50.8
    
    
    
    269.6
    
    
    
    2,022.4
    
    
    
    (2,292.0
    )
    
    
    50.8Total shareholders equity
    
    
    460.1
    
    
    
    1,422.2
    
    
    
    4,552.5
    
    
    
    (5,974.7
    )
    
    
    460.1Total Liabilities and Shareholders Equity
    
    $
    6,222.2
    
    
    $
    3,124.8
    
    
    $
    4,588.9
    
    
    $
    (5,974.7
    )
    
    $
    7,961.2
 20




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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  14.
    
    Supplemental Guarantor Information, Continued:
 Consolidated Balance Sheet (Unaudited)As of December 31, 2006Non-(Millions)
    
    Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent Assets:Cash and short-term investments
    
    $
    362.4
    
    
    $
    0.6
    
    
    $
    23.8
    
    
    $
    
    
    
    $
    386.8Accounts receivable (less allowance for doubtful
accounts of $10.4)
    
    
    0.9
    
    
    
    110.0
    
    
    
    226.3
    
    
    
    
    
    
    
    337.2Inventories
    
    
    
    
    
    
    28.7
    
    
    
    14.8
    
    
    
    
    
    
    
    43.5Prepaid expenses and other
    
    
    10.0
    
    
    
    3.1
    
    
    
    16.1
    
    
    
    
    
    
    
    29.2Assets held for sale
    
    
    
    
    
    
    80.0
    
    
    
    
    
    
    
    
    
    
    
    80.0Total current assets
    
    
    373.3
    
    
    
    222.4
    
    
    
    281.0
    
    
    
    
    
    
    
    876.7Investments
    
    
    5,781.8
    
    
    
    62.1
    
    
    
    6.7
    
    
    
    (5,842.9
    )
    
    
    7.7Goodwill and other intangibles
    
    
    
    
    
    
    1,560.6
    
    
    
    1,504.8
    
    
    
    
    
    
    
    3,065.4Net property, plant and equipment:
    
    
    7.6
    
    
    
    1,201.3
    
    
    
    2,730.9
    
    
    
    
    
    
    
    3,939.8Other assets
    
    
    41.4
    
    
    
    7.1
    
    
    
    92.6
    
    
    
    
    
    
    
    141.1Total Assets
    
    $
    6,204.1
    
    
    $
    3,053.5
    
    
    $
    4,616.0
    
    
    $
    (5,842.9
    )
    
    $
    8,030.7LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Current maturities of long-term debt
    
    $
    22.0
    
    
    $
    0.2
    
    
    $
    10.0
    
    
    $
    
    
    
    $
    32.2Accounts payable
    
    
    10.6
    
    
    
    35.9
    
    
    
    123.0
    
    
    
    
    
    
    
    169.5Affiliate payable
    
    
    167.9
    
    
    
    1,025.6
    
    
    
    (1,193.5
    )
    
    
    
    
    
    
    Advance payments and customer deposits
    
    
    
    
    
    
    14.5
    
    
    
    68.3
    
    
    
    
    
    
    
    82.8Accrued dividends
    
    
    119.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119.2Accrued taxes
    
    
    (84.3
    )
    
    
    56.6
    
    
    
    59.6
    
    
    
    
    
    
    
    31.9Accrued interest
    
    
    145.8
    
    
    
    1.7
    
    
    
    0.7
    
    
    
    
    
    
    
    148.2Other current liabilities
    
    
    13.6
    
    
    
    16.3
    
    
    
    38.5
    
    
    
    
    
    
    
    68.4Liabilities related to assets held for sale
    
    
    
    
    
    
    32.4
    
    
    
    
    
    
    
    
    
    
    
    32.4Total current liabilities
    
    
    394.8
    
    
    
    1,183.2
    
    
    
    (893.4
    )
    
    
    
    
    
    
    684.6Long-term debt
    
    
    5,296.5
    
    
    
    100.1
    
    
    
    59.6
    
    
    
    
    
    
    
    5,456.2Deferred income taxes
    
    
    (20.2
    )
    
    
    388.8
    
    
    
    622.2
    
    
    
    
    
    
    
    990.8Other liabilities
    
    
    63.2
    
    
    
    37.3
    
    
    
    328.8
    
    
    
    
    
    
    
    429.3Total liabilities
    
    
    5,734.3
    
    
    
    1,709.4
    
    
    
    117.2
    
    
    
    
    
    
    
    7,560.9Commitments and Contingencies (See Note 8)Shareholders Equity:Common stock
    
    
    
    
    
    
    (0.4
    )
    
    
    25.9
    
    
    
    (25.5
    )
    
    
    Additional paid-in capital
    
    
    550.5
    
    
    
    1,153.0
    
    
    
    2,626.6
    
    
    
    (3,779.6
    )
    
    
    550.5Accumulated other comprehensive income (loss)
    
    
    (150.8
    )
    
    
    
    
    
    
    (127.2
    )
    
    
    127.2
    
    
    
    (150.8
    )Retained earnings
    
    
    70.1
    
    
    
    191.5
    
    
    
    1,973.5
    
    
    
    (2,165.0
    )
    
    
    70.1Total shareholders equity
    
    
    469.8
    
    
    
    1,344.1
    
    
    
    4,498.8
    
    
    
    (5,842.9
    )
    
    
    469.8Total Liabilities and Shareholders Equity
    
    $
    6,204.1
    
    
    $
    3,053.5
    
    
    $
    4,616.0
    
    
    $
    (5,842.9
    )
    
    $
    8,030.7
 21




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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  14.
    
    Supplemental Guarantor Information, Continued:
 Consolidated Statement of Cash Flows (Unaudited)Three Months Ended March 31, 2007Non-(Millions)
    
    Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCash Provided from Operations:Net income
    
    $
    99.9
    
    
    $
    51.9
    
    
    $
    131.7
    
    
    $
    (183.6
    )
    
    $
    99.9Adjustments to reconcile net income to net cash provided
from operations:Depreciation and amortization
    
    
    
    
    
    
    42.7
    
    
    
    82.4
    
    
    
    
    
    
    
    125.1Provision for doubtful accounts
    
    
    
    
    
    
    0.5
    
    
    
    3.2
    
    
    
    
    
    
    
    3.7Stock-based compensation expense
    
    
    0.4
    
    
    
    0.3
    
    
    
    3.1
    
    
    
    
    
    
    
    3.8Deferred taxes
    
    
    (10.6
    )
    
    
    2.6
    
    
    
    2.3
    
    
    
    
    
    
    
    (5.7
    )Equity in earnings (losses) from subsidiaries
    
    
    (177.6
    )
    
    
    (9.6
    )
    
    
    3.6
    
    
    
    183.6
    
    
    
    Other, net
    
    
    7.4
    
    
    
    0.6
    
    
    
    7.8
    
    
    
    
    
    
    
    15.8Changes in operating assets and liabilities:
    
    
    116.8
    
    
    
    (52.3
    )
    
    
    (91.8
    )
    
    
    
    
    
    
    (27.3
    )Net cash provided from operations
    
    
    36.3
    
    
    
    36.7
    
    
    
    142.3
    
    
    
    
    
    
    
    215.3Cash Flows from Investing Activities:Additions to property, plant and equipment
    
    
    
    
    
    
    (18.7
    )
    
    
    (61.3
    )
    
    
    
    
    
    
    (80.0
    )Other, net
    
    
    
    
    
    
    (0.9
    )
    
    
    (3.5
    )
    
    
    
    
    
    
    (4.4
    )Net cash used in investing activities
    
    
    
    
    
    
    (19.6
    )
    
    
    (64.8
    )
    
    
    
    
    
    
    (84.4
    )Cash Flows from Financing Activities:Dividends paid on common shares
    
    
    (119.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (119.1
    )Dividends from subsidiaries
    
    
    99.0
    
    
    
    (16.1
    )
    
    
    (82.9
    )
    
    
    
    
    
    
    Repayments of borrowings
    
    
    (500.0
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (500.1
    )Debt issued, net of issuance costs
    
    
    499.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    499.1Net cash used in financing activities
    
    
    (21.0
    )
    
    
    (16.2
    )
    
    
    (82.9
    )
    
    
    
    
    
    
    (120.1
    )Increase (decrease) in cash and short-term investments
    
    
    15.3
    
    
    
    0.9
    
    
    
    (5.4
    )
    
    
    
    
    
    
    10.8Cash and Short-term Investments:Beginning of the period
    
    
    362.4
    
    
    
    0.6
    
    
    
    23.8
    
    
    
    
    
    
    
    386.8End of the period
    
    $
    377.7
    
    
    $
    1.5
    
    
    $
    18.4
    
    
    $
    
    
    
    $
    397.6
 22




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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  14.
    
    Supplemental Guarantor Information, Continued:
 Consolidated Statement of Cash Flows (Unaudited)Three Months Ended March 31, 2006Non-(Millions)
    
    Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCash Provided from Operations:Net income
    
    $
    
    
    
    $
    16.0
    
    
    $
    96.8
    
    
    $
    
    
    
    $
    112.8Adjustments to reconcile net income to net cash provided
from operations:Depreciation and amortization
    
    
    
    
    
    
    16.5
    
    
    
    86.1
    
    
    
    
    
    
    
    102.6Provision for doubtful accounts
    
    
    
    
    
    
    5.0
    
    
    
    
    
    
    
    
    
    
    
    5.0Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    1.1
    
    
    
    
    
    
    
    1.1Deferred taxes
    
    
    
    
    
    
    (5.3
    )
    
    
    9.3
    
    
    
    
    
    
    
    4.0Changes in operating assets and liabilities:
    
    
    
    
    
    
    (17.7
    )
    
    
    78.9
    
    
    
    
    
    
    
    61.2Net cash provided from operations
    
    
    
    
    
    
    14.5
    
    
    
    272.2
    
    
    
    
    
    
    
    286.7Cash Flows from Investing Activities:Additions to property, plant and equipment
    
    
    
    
    
    
    (7.5
    )
    
    
    (54.7
    )
    
    
    
    
    
    
    (62.2
    )Other, net
    
    
    
    
    
    
    (0.9
    )
    
    
    (0.8
    )
    
    
    
    
    
    
    (1.7
    )Net cash used in investing activities
    
    
    
    
    
    
    (8.4
    )
    
    
    (55.5
    )
    
    
    
    
    
    
    (63.9
    )Cash Flows from Financing Activities:Dividends paid to Alltel prior to spin-off
    
    
    
    
    
    
    (260.8
    )
    
    
    (361.8
    )
    
    
    556.9
    
    
    
    (65.7
    )Repayments of borrowings
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Changes in advances to Alltel prior to spin-off
    
    
    
    
    
    
    253.9
    
    
    
    144.0
    
    
    
    (556.9
    )
    
    
    (159.0
    )Net cash used in financing activities
    
    
    
    
    
    
    (7.0
    )
    
    
    (217.8
    )
    
    
    
    
    
    
    (224.8
    )Decrease in cash and short-term investments
    
    
    
    
    
    
    (0.9
    )
    
    
    (1.1
    )
    
    
    
    
    
    
    (2.0
    )Cash and Short-term Investments:Beginning of the period
    
    
    
    
    
    
    7.1
    
    
    
    4.8
    
    
    
    
    
    
    
    11.9End of the period
    
    $
    
    
    
    $
    6.2
    
    
    $
    3.7
    
    
    $
    
    
    
    $
    9.9
 15.
    
    Pending Transactions:On December 12, 2006, Windstream announced that it would split off its directory publishing
business (the Publishing Business) in what Windstream expects to be a tax-free transaction
with entities affiliated with Welsh, Carson, Anderson & Stowe (WCAS), a private equity
investment firm and Windstream shareholder.Prior to completing the transaction, Windstream will contribute the Publishing Business to a
newly formed subsidiary (Holdings). Holdings will then pay a special dividend to Windstream
in an amount equal to Windstreams tax basis in the Publishing Business (currently estimated to
be approximately $40.0 million), issue additional shares of Holdings common stock to
Windstream, and distribute to Windstream certain debt securities of Holdings having an
aggregate principal amount of approximately $250.0 million less the amount of the special
dividend. Windstream expects to exchange the Holdings debt securities for outstanding
Windstream debt with an equivalent fair market value and then retire that Windstream debt.
Windstream also intends to use the proceeds of the special dividend to retire Windstream debt
or repurchase Windstream equity. Following the completion of these transactions, Windstream
will exchange all of the outstanding equity of Holdings (the Holdings Shares) for an
aggregate of 19,574,422 shares of Windstream common stock (the Exchanged WIN Shares), which
will then be retired. Based on the trailing average of Windstream common stock at April 30,
2007 of $14.76, the Exchanged WIN Shares have a value of approximately $290.0 million, and the
expected total value of the transaction will be approximately $540.0 million.
 23




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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
  15.
    
    Pending Transactions, Continued:The transaction is subject to customary conditions, including (i) expiration of the required
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (ii) the parties
having received certain private letter rulings from the Internal Revenue Service (IRS) with
respect to the tax treatment of the transactions, (iii) the receipt of customary solvency and
surplus opinions by the Boards of Directors of Windstream and Holdings, and (iv) the
contribution of the Publishing Business to Holdings and the exchange of Holdings debt for
outstanding Windstream debt. The Company has since satisfied the requirements of the Hart-Scott-Rodino Act. The final closing of the transaction is conditioned on the absence of any
injunction and certain terms of the Companys debt instruments, but the terms of the
transaction require it to be completed by December 31, 2008. This transaction is expected to
be completed in the third quarter of 2007, although approximately
20 percent of the share exchange may occur in the fourth quarter
of 2007.The Share Exchange Agreement provides for a customary working capital adjustment pursuant to
which the parties will make cash payments to each other to the extent that the working capital
of the Publishing Business is less than or greater than a specified target working capital
amount at the time of closing. The Share Exchange Agreement contains customary
representations, warranties and covenants and may be terminated if,
among other things, a first-step closing of the transaction has not been completed within twelve months or the IRS
private letter rulings are not received. The parties have also agreed to customary
indemnification for breaches of representations, warranties, covenants and other matters.In connection with the consummation of the transaction, the parties and their affiliates will
enter into certain related ancillary agreements, including a Publishing Agreement, a Billing
and Collection Agreement and a Tax Sharing Agreement. Pursuant to the Publishing Agreement,
Windstream will grant Windstream Yellow Pages, Inc. (Windstream Yellow Pages), the Windstream
subsidiary that currently operates the Publishing Business, an exclusive license to publish
Windstream directories. Windstream Yellow Pages will, at no charge to Windstream or its
affiliates or subscribers, publish directories with respect to each Windstream service area in
which Windstream or its affiliates are required to publish such directories by applicable law,
tariff or contract. Subject to the termination provisions in the agreement, the Publishing
Agreement will remain in effect for a term of fifty years. As part of this agreement,
Windstream agreed to forego future royalty payments from Windstream Yellow Pages on advertising
revenues generated from its directories for the duration of the Publishing Agreement. In
conjunction with the Publishing Agreement, the Company has entered into an at-market executory
contract to purchase minimum advertising in its directories for a period of three years, with a
renewal option for two additional years available to WCAS. Due to the significant continuing
involvement that Windstream will retain in the publishing business, as evidenced by these
agreements and its obligation to provide telephone listings, publishing results are reflected
in income from continuing operations in the accompanying unaudited
consolidated statements of income.The following table summarizes the net assets of the directory publishing operations that are
classified as held for sale in the accompanying consolidated balance sheets:
 March 31,
    
    
    December 31,(Millions)
    
    2007
    
    
    2006Current assets
    
    $
    58.3
    
    
    $
    71.5Net property, plant and equipment
    
    
    8.1
    
    
    
    8.5Other assets
    
    
    
    
    
    
    Assets held for sale
    
    $
    66.4
    
    
    $
    80.0Current liabilities
    
    $
    19.3
    
    
    $
    26.5Deferred income taxes
    
    
    4.8
    
    
    
    5.5Other liabilities
    
    
    0.3
    
    
    
    0.4Liabilities related to assets held for sale
    
    $
    24.4
    
    
    $
    32.4
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WINDSTREAM CORPORATION
FORM 10-Q
PART I  FINANCIAL INFORMATION
 
 Item 2 . Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Basis of Presentation
   .
 EXECUTIVE SUMMARY
  
    
    The Company added approximately 59,000 broadband customers, increasing its broadband
customer base to over 715,000. The growth in broadband customers continues to more than
offset the loss of local access lines.
    
    Revenues and sales increased $80.7 million compared to the first quarter of 2006, due
primarily to the acquisition of Valor. The acquisition of Valor accounted for an increase
in revenue and sales of $123.6 million. An offsetting decrease in revenues and sales of
$42.9 million was primarily due to the loss of access lines discussed below, and the
increase in intercompany eliminations due to the discontinuance of the application of
Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects
of Certain Types of Regulation, as further discussed below. Average revenue per wireline
customer, however, increased 7 percent from a year ago to $77.53 due primarily to growth
in broadband revenues.
    
    Operating income increased 55 percent from a year ago, primarily reflecting the
acquisition of Valor, the termination of a licensing agreement with Alltel as of June 30,
2006, and a decline in depreciation and amortization resulting from reductions in
depreciation rates for certain assets associated with studies performed during 2006.
    
    The Company paid approximately $120.0 million in dividends to shareholders, and
finished the quarter with almost $400.0 million in cash and short-term investments.
    
    The Company incurred $114.7 million in interest expense in the first quarter of 2007
primarily due to the debt issued and assumed in conjunction with the spin-off from Alltel
and merger with Valor.
 
 25




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Pending Transaction
  Adoption of Accounting Standards
      26




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CONSOLIDATED RESULTS OF OPERATIONSThree Months EndedMarch 31,(Millions, except per share amounts)
    
    2007
    
    
    2006Revenues and sales:Service revenues
    
    $
    717.9
    
    
    $
    604.7Product sales
    
    
    65.8
    
    
    
    98.3Total revenues and sales
    
    
    783.7
    
    
    
    703.0Costs and expenses:Cost of services
    
    
    235.6
    
    
    
    192.4Cost of products sold
    
    
    45.5
    
    
    
    84.3Selling, general, administrative and other
    
    
    103.1
    
    
    
    80.1Depreciation and amortization
    
    
    125.1
    
    
    
    102.6Royalty expense to Alltel
    
    
    
    
    
    
    67.2Restructuring and other charges
    
    
    4.8
    
    
    
    2.5Total costs and expenses
    
    
    514.1
    
    
    
    529.1Operating income
    
    
    269.6
    
    
    
    173.9Other income, net
    
    
    5.2
    
    
    
    1.2Intercompany interest income from Alltel
    
    
    
    
    
    
    13.9Interest expense
    
    
    (114.7
    )
    
    
    (3.9
    )Income before income taxes
    
    
    160.1
    
    
    
    185.1Income taxes
    
    
    60.2
    
    
    
    72.3Net income
    
    $
    99.9
    
    
    $
    112.8Earnings per share:Basic
    
    $
    .21
    
    
    $
    .28Diluted
    
    $
    .21
    
    
    $
    .28
     27




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##### Table of Contents



Restructuring and Other Charges
  Product
    
    
    Other(Millions)
    
    Wireline
    
    
    Distribution
    
    
    Operations
    
    
    TotalSeverance and employee benefit costs
    
    $
    3.2
    
    
    $
    
    
    
    $
    
    
    
    $
    3.2Costs associated with split off of directory publishing
    
    
    
    
    
    
    
    
    
    
    1.6
    
    
    
    1.6Total restructuring and other charges
    
    $
    3.2
    
    
    $
    
    
    
    $
    1.6
    
    
    $
    4.8
    28




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Other Income, Net
  Intercompany Interest Income
  Interest Expense
  Income Taxes
  Weighted Average Common Shares Outstanding
  29




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##### Table of Contents



RESULTS OF OPERATIONS BY BUSINESS SEGMENTWireline OperationsThree Months EndedMarch 31,(Millions, access lines and customers in thousands)
    
    2007
    
    
    2006Revenues and sales:Voice service
    
    $
    314.2
    
    
    $
    291.3Long distance
    
    
    62.0
    
    
    
    44.0Data and special access
    
    
    162.8
    
    
    
    128.7Switched access and USF
    
    
    145.1
    
    
    
    111.8Miscellaneous
    
    
    44.4
    
    
    
    30.9Directory publishing rights
    
    
    9.0
    
    
    
    6.6Product sales
    
    
    12.9
    
    
    
    9.6Total revenues and sales
    
    
    750.4
    
    
    
    622.9Costs and expenses:Cost of services
    
    
    246.9
    
    
    
    201.8Cost of products sold
    
    
    12.2
    
    
    
    7.4Selling, general, administrative and other
    
    
    89.6
    
    
    
    69.5Depreciation and amortization
    
    
    124.5
    
    
    
    101.6Royalty expense to Alltel
    
    
    
    
    
    
    67.2Total costs and expenses
    
    
    473.2
    
    
    
    447.5Segment income
    
    $
    277.2
    
    
    $
    175.4Access lines in service (excludes broadband lines)
    
    
    3,214.3
    
    
    
    2,862.5Average access lines in service
    
    
    3,226.3
    
    
    
    2,872.7Average revenue per customer per month (a)
    
    $
    77.53
    
    
    $
    72.28Broadband customers
    
    
    715.4
    
    
    
    441.5Digital satellite television customers
    
    
    122.3
    
    
    
    20.7Long distance customers
    
    
    1,981.5
    
    
    
    1,750.6
 (a)
    
    Average revenue per customer per month is calculated by dividing total
wireline revenues by average access lines in service for the period.
    30




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31




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32




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(Millions)
    
    2007
    
    
    2006Costs associated with spin-off from Alltel
    
    $
    
    
    
    $
    2.5Severance and employee benefit costs
    
    
    3.2
    
    
    
    Total restructuring and other charges
    
    $
    3.2
    
    
    $
    2.5
 Regulatory Matters  Wireline Operations
  Federal Regulation
   Inter-carrier Compensation
    33




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Universal Service
      34




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VoIP Telephony
  Broadband Services
  Communications Assistance for Law Enforcement Act
  Customer Proprietary Network Information
   35




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##### Table of Contents



State Regulation
 Local and Intrastate Rate Regulation
  Universal Service
  Other Regulations
   Product DistributionThree Months EndedMarch 31,(Millions)
    
    2007
    
    
    2006Revenues and sales:Product sales
    
    $
    83.2
    
    
    $
    69.1Total revenues and sales
    
    
    83.2
    
    
    
    69.1Costs and expenses:Cost of products sold
    
    
    77.9
    
    
    
    64.3Selling, general, administrative and other
    
    
    6.0
    
    
    
    3.2Depreciation and amortization
    
    
    0.1
    
    
    
    0.4Total costs and expenses
    
    
    84.0
    
    
    
    67.9Segment income (loss)
    
    $
    (0.8
    )
    
    $
    1.2
 36




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##### Table of Contents



Other OperationsThree Months EndedMarch 31,(Millions)
    
    2007
    
    
    2006Revenues and sales:Directory publishing
    
    $
    22.1
    
    
    $
    26.5Telecommunications information services
    
    
    
    
    
    
    4.0Total revenues and sales
    
    
    22.1
    
    
    
    30.5Costs and expenses:Cost of services
    
    
    
    
    
    
    2.9Cost of products sold
    
    
    16.1
    
    
    
    19.8Selling, general, administrative and other
    
    
    7.6
    
    
    
    7.4Depreciation and amortization
    
    
    0.4
    
    
    
    0.6Total costs and expenses
    
    
    24.1
    
    
    
    30.7Segment loss
    
    $
    (2.0
    )
    
    $
    (0.2
    )
      37




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##### Table of Contents



FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCESThree Months EndedMarch 31,(Millions)
    
    2007
    
    
    2006Cash flows from (used in):Operating activities
    
    $
    215.3
    
    
    $
    286.7Investing activities
    
    
    (84.4
    )
    
    
    (63.9
    )Financing activities
    
    
    (120.1
    )
    
    
    (224.8
    )Increase (decrease) in cash and short-term investments
    
    $
    10.8
    
    
    $
    (2.0
    )
 Cash Flows-Operating Activities
  Cash Flows-Investing Activities
  Cash Flows-Financing Activities
    38




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##### Table of Contents



Liquidity and Capital Resources
 th
  Description
    
    Moodys
    
    S&P
    
    FitchSenior secured credit rating
    
    Baa3
    
    BBB-
    
    BBB-Senior unsecured credit rating
    
    Ba3
    
    BB-
    
    BB+Outlook
    
    Stable
    
    Negative
    
    Stable
      
 39




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##### Table of Contents



Off-Balance Sheet Arrangements
  Contractual Obligations and Commitments
  40




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##### Table of Contents



th
 Payments Due by PeriodLess than
    
    
    1-3
    
    
    3-5
    
    
    More than(Millions)
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 Years
    
    
    TotalLong-term debt, including current maturities (a)
    
    $
    39.5
    
    
    $
    161.0
    
    
    $
    416.7
    
    
    $
    4,899.5
    
    
    $
    5,516.7Interest payments on long-term debt obligations (b)
    
    
    413.5
    
    
    
    833.9
    
    
    
    800.9
    
    
    
    1,364.7
    
    
    
    3,413.0Total projected
long-term debt and
interest payments
    
    $
    453.0
    
    
    $
    994.9
    
    
    $
    1,217.6
    
    
    $
    6,264.2
    
    
    $
    8,929.7
 (a)
    
    Excludes $(28.1) million of unamortized discounts included in long-term debt at March 31,
2007.(b)
    
    Variable rates are calculated in relation to LIBOR.
  Critical Accounting Policies
  Recently Issued Accounting Pronouncements
   41




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Forward-Looking Statements
   www.sec.gov
 42




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WINDSTREAM CORPORATION
FORM 10-Q
PART I  FINANCIAL INFORMATION
 
 Item 3 . Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
   th
  43




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WINDSTREAM CORPORATION
FORM 10-Q
PART I  FINANCIAL INFORMATION
 
 Item 4. Controls and Procedures
 (a)
    
    Evaluation of disclosure controls and procedures.The term disclosure controls and procedures (defined in Exchange Act Rule 13a-15(e)) refers
to the controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files or submits
under the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed,
summarized and reported within required time periods. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by the company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the companys management, including the
companys principal executive and financial officers, as appropriate to allow timely
decisions regarding required disclosure. Windstreams management, with the participation of
the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of
the Companys disclosure controls and procedures as of the end of the period covered by this
quarterly report (the Evaluation Date). Based on that evaluation, Windstreams Chief
Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date,
such disclosure controls and procedures were effective.(b)
    
    Changes in internal control over financial reporting.The term internal control over financial reporting (defined in SEC Rule 13a-15(f)) refers
to the process of a company that is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Windstreams
management, with the participation of the Chief Executive Officer and Chief Financial
Officer, have evaluated any changes in the Companys internal control over financial
reporting that occurred during the period covered by this quarterly report, and they have
concluded that there were no changes to Windstreams internal control over financial
reporting that have materially affected, or are reasonably likely to materially affect,
Windstreams internal control over financial reporting.
 44




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##### Table of Contents



WINDSTREAM
CORPORATIONFORM 10-QPART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
    
 Item 1A. Risk Factors
  
 Item 6. Exhibits
  45




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SIGNATURE
  WINDSTREAM CORPORATION

(Registrant)/s/ Brent Whittington

Brent WhittingtonExecutive Vice President  Chief Financial Officer(Principal Financial Officer)May 10, 2007
 46




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WINDSTREAM CORPORATION
FORM 10-Q
 
 INDEX OF EXHIBITS
 Form 10-QExhibit No.
    
    Description of Exhibits31(a)
    
    Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
    
    (*)31(b)
    
    Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
    
    (*)32(a)
    
    Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
    
    (*)32(b)
    
    Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
    
    (*)
 
 (*)
    
    Filed herewith.
 47