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Financial Considerations in the New World!!

Financial Considerations in the New World!!. GTA Annual Meeting Hilton Head, SC June 19, 2012 Leo Staurulakis – Executive Vice President. Discussion Topics. Rate Base Regulation The Impact of the Order Are we still really rate of return carriers? Price Cap Carrier discussion

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Financial Considerations in the New World!!

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  1. Financial Considerations in the New World!! GTA Annual Meeting Hilton Head, SC June 19, 2012 Leo Staurulakis – Executive Vice President

  2. Discussion Topics • Rate Base Regulation • The Impact of the Order • Are we still really rate of return carriers? • Price Cap Carrier discussion • Comparative profiles • Structural Changes and Share Resources • The importance of proper planning and execution in our evolution

  3. Rate Base Regulation • A regulatory process meant for capital intensive monopolistic utilities • Over a prescribed period of time, recover your investment in the regulated plant • Earn a Regulated Return on your Regulated Rate Base annually • Recover specific expense activity related to your Regulated Rate Base

  4. Benefits of Rate Base Regulation • Provides stable environment to attract investors and incent capital investment • Provides financial predictability and stability • Helps to ensure the offering and delivery of communications services • Limits financial effects of competition in rural markets

  5. Top Seven Rate-Of-Return USF Reforms

  6. Top seven rate-of-return USF Reforms • Limit Reimbursements • Broadband Overlap Service • HCLS Benchmark • Phase out of SNA • Corporate Operations • Overall Support Cap • Move LSS to CAF-RM

  7. ICC Policy Reforms

  8. FCC Abandons Access Policy • We reject the notion that only the calling party benefits from a call and therefore should bear the entire cost of originating, transporting, and terminating a call. As a result, we now abandon the calling-party-network-pays model that dominated ICC regimes of the last century. • Although we adopt bill-and-keep as a national framework, governing both inter- and intrastate traffic, states will have a key role in determining the scope of each carrier’s financial responsibility for purposes of bill-and-keep.

  9. What Does This Imply?

  10. Are We Really RoR Carriers If: • If we are limited on how much of our rate base we can recover on due to caps • If we have an obligation to serve but are not allowed to recover on our investment or expenses if there is competition • If key programs that are meant to get us our authorized return levels are capped or eliminated

  11. Are We Really RoR Carriers • Or are we forced to become more like Price Cap Carriers? • While maintaining what we can from Rate of Return Regulation

  12. Price Cap Form of Regulation

  13. What Is Price Cap Regulation? • Method adopted by the FCC in 1990 for regulating the interstate access rates of larger ILECs that focused on prices rather than earnings to maintain just and reasonable interstate access rates • RBOCs & former GTE operating companies considered “mandatory” price cap filers • Other ILECs can opt for price caps on an “elective” or voluntary basis

  14. Expected Benefits of Price Caps • “Price cap regulation encourages incumbent LECs to improve their efficiency by harnessing profit-making incentives to reduce costs, invest efficiently in new plant and facilities, and develop and deploy innovative service offerings, while setting price ceilings at reasonable levels. Individual companies retain an incentive to cut costs and to produce efficiently, because in the short run their behavior has no effect on the prices they are permitted to charge, and they are able to keep any additional profits resulting from reduced costs.”

  15. Performance Comparisons • Public Price Cap Companies versus Public and Private Rate or Return Carriers • Focused on wireline voice activities only • ILEC ROR company information from the JSI Peer Group of 150+ co’s

  16. Price Cap versus RORMonthly Total Regulated Voice Revenue Per Line

  17. Price Cap versus RORMonthly Regulated Local Revenue Per Line

  18. Price Cap versus RORMonthly Access/USF Revenue Per Line

  19. Price Cap Versus RORMonthly Cash Expense Per Line

  20. Price Cap Versus RORAnnual Operating Margin/Amount Per Line

  21. Price Cap Versus RORMonthly Cash Flow Per Line

  22. Price Cap Versus RORCash Flow Margin

  23. Price Cap Versus RORCAPX Margins

  24. Price Cap Versus RORMonthly CAPX Per Voice Line

  25. Price Cap Versus RORGross PPE per Line

  26. Why we do not Operate Under Price Caps (Historically) • Lumpy investment • Lack of true control of expenses • Less predictable demand • Lack of size, market density and diversification • Need for higher regulated support

  27. How Do We Change • Change our Mind Set!! • Carefully assess future capital investments • Determine return expectations for every new product, service, and investment • Become a sales driven company • Continued to lessen reliance on regulated revenues

  28. How Do We Change (cont’d) • Be prepared to create “Haves and Have Not’s” • Create realistic and viable business plans and follow them (update as required) • Form Partnerships for operations and business development • Evaluate mergers, acquisitions and consolidations

  29. MERGERS, ACQUISITIONS, CONSOLIDATIONS AND PARTNERSHIPS - How Can You Achieve Scale • Organic growth • Merger, consolidation and/or federation • Acquire commercial and cooperative companies • Vertical acquisitions • Operational consolidations

  30. The Reality • Many companies will never be able to transition to the performance levels of the current price cap structured companies, alone or as a larger group • Some improvements can, and should, be made regardless • Some level or regulated support will always be needed • The goal is to Survive? Thrive?

  31. Transition - Reasons for Success or Failure • Take advantage of opportunities • Use realistic expectations and assumptions in planning • Ability to execute to plan • Proper staffing and other resources • Proper structure and capital resources • Proper market and competitive analysis

  32. Questions that Need to be Answered • What actions can we take over the next 3-5 years to help ensure our survival? • How do we meet the service expectations of our customers? • How do we avoid being “the carrier of last resort”?

  33. THANK YOU Leo Staurulakis lstaurulakis@jsitel.com 301-459-7590

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