OREANDA-NEWS. FairPoint Communications, Inc. (Nasdaq:FRP) (“FairPoint” or the “Company”), a leading communications provider, today announced its financial results for the second quarter ended June 30, 2016.  As previously announced, the Company will hold a conference call and simultaneous webcast to discuss its results today at 8:30 a.m. (EDT).

“Our second quarter results reflect the positive impact of our focus on improving productivity and providing excellent customer service,” said Paul H. Sunu, Chief Executive Officer.  “We delivered a second consecutive quarterly increase in broadband subscribers and our residential voice subscriber lines declined at their lowest rate in many years.”

“In addition, we experienced continued success with our business and advanced services offering in the quarter as we work to develop products and services that meet current and anticipate future customer needs,” Sunu continued.  “We managed expenses well in the quarter to deliver solid profitability and a strong cash position.  Our focus on mitigating legacy revenue losses while continuing to develop and deploy advanced products and services are key components of achieving revenue stability over time.”

“Finally, I am pleased to announce that on July 29, 2016 we completed an acquisition of a Maine-based value added reseller of unified communications, data networking and cabling infrastructure solutions focused on small and medium sized businesses,” Sunu concluded.  “We believe this small acquisition provides a valuable platform that allows us to better serve the SMB market while more fully leveraging our geographic reach and unmatched network across northern New England.”

Operating Highlights

The Company experienced a second consecutive quarter of growth in broadband subscribers and lower churn in residential voice subscribers relative to the first quarter of 2016.  These trends reflect continued efforts to highlight the Company's network investments that extend service availability and improve offered broadband speeds in addition to the Company's strong focus on providing excellent customer service.

Strategic investments in the network continued during the quarter, including taking a thoughtful and methodical approach to network design related to meeting the Company’s CAF Phase II commitments.  This approach will help ensure the Company builds a smarter, more flexible network that not only meets current bandwidth requirements but is also ready to evolve to reliably meet future customer demands.

The Company is focused on driving growth revenue2 as a critical component of its continued revenue transformation.  In the second quarter of 2016, the Company achieved record growth revenue of $63.8 million, which exceeded 30% of total revenue for the first time.

Broadband revenue grew quarter over quarter driven by seasonal reconnects, existing customer speed upgrades and subscriber growth.  Network investments and targeted marketing efforts stimulated demand in the quarter.

In the second quarter of 2016, Ethernet services revenue grew to a record $24.9 million, or 12.1% of total revenue as compared to $23.4 million or 10.9% of total revenue in the second quarter of 2015, as Ethernet circuits grew 10.7% year-over-year.  Growth in the Company's Ethernet products is expected to continue based on demand from customers such as regional banks, healthcare networks and wireless carriers.

The Company continues to drive growth in advanced services including hosted services revenue.  While still a relatively small part of total revenue, these growth-related revenues provide state of the art services to a growing customer base.

As of June 30, 2016, FairPoint had 2,663 employees, a decrease of 268 employees versus a year ago.

Financial Highlights

Second Quarter 2016 as compared to First Quarter 2016

Revenue decreased $0.2 million during the second quarter of 2016 to $206.6 million. 

The following strategic revenue categorization2 is presented to provide visibility into revenue trends for the Company as a result of product and service evolution within our industry as well as the Company's efforts to continue to transform revenue to more sustainable growth products.  We intend to present this strategic revenue categorization each quarter.

  • Growth revenue increased by $2.4 million, or 3.9%, primarily due to an increase in broadband revenue due in part to seasonality, Ethernet revenue growth resulting from an increase in circuits and settlements recorded in the first quarter of 2016, as well as an increase in hosted and advanced services revenue.
  • Convertible revenue2 decreased by $2.5 million as customers continued to migrate from non-Ethernet circuits and businesses shifted from traditional voice products to VoIP and hosted products.
  • Legacy revenue2 was down $1.4 million resulting from the decline in legacy switched access and residential voice revenue primarily due to fewer lines in service partially offset by seasonal reconnects. 
  • Regulatory funding revenue2 was flat.
  • Miscellaneous revenue2 increased $1.3 million primarily due to higher revenue from special purpose construction projects as well as settlements in the first quarter of 2016 that did not recur.

The following traditional categorization of revenue is presented to provide reporting continuity.

  • Voice services revenue decreased $0.8 million primarily due to fewer lines in service partially offset by seasonal reconnects.
  • Access revenue decreased $1.3 million due to the continued loss and conversion of legacy transport circuits to fiber-based Ethernet services.
  • Data and Internet services revenue grew $1.6 million driven by increased revenue from retail Ethernet due in part to customer settlements that negatively impacted first quarter retail Ethernet revenue and higher broadband revenue due in part to seasonal subscriber reconnects.
  • Regulatory funding revenue was flat.
  • Other services revenue increased $0.3 million primarily due to higher revenue from special purpose construction projects in the second quarter of 2016.

Operating expenses, excluding depreciation and amortization, decreased $12.8 million to $89.3 million in the second quarter of 2016 compared to $102.1 million in the first quarter of 2016 primarily resulting from lower employee expenses related to compensated absences as well as lower severance expense, partially offset by higher bad debt expense relative to the first quarter that included nonrecurring write-off recoveries.

Adjusted Operating Expenses1 were $143.5 million in the second quarter of 2016 compared to $144.9 million in the first quarter of 2016.  The decrease was primarily due to lower employee expenses and lower building expenses, partially offset by higher bad debt expense.  Bad debt expense in the first quarter of 2016 included nonrecurring write-off recoveries.

Net income was $29.3 million in the second quarter of 2016 compared to $18.6 million in the first quarter of 2016.  The change was primarily due to lower operating expenses partially offset by higher income tax expense.

Adjusted EBITDA increased $1.1 million to $63.1 million in the second quarter of 2016 compared to $62.0 million in the first quarter of 2016.  The increase was driven by favorable adjusted operating expenses slightly offset by lower revenue.

Capital expenditures were $26.8 million in the second quarter of 2016 compared to $25.9 million in the first quarter of 2016.  The increase was primarily due to the timing of planned capital projects.

Cash was $41.1 million as of June 30, 2016 compared to $23.1 million as of March 31, 2016. The increase is primarily due to favorable cash flow from operations and the scheduled timing of the semi-annual interest payment towards the Company's senior notes.  Total gross debt outstanding was $919.2 million as of June 30, 2016, after the regularly scheduled principal payment of $1.6 million on the term loan made during the second quarter of 2016, as compared to $920.8 million as of March 31, 2016.  The Company's $75.0 million revolving credit facility was undrawn, with $60.2 million available for borrowing after applying $14.8 million of outstanding letters of credit.

Net cash provided by operating activities was $46.4 million in the second quarter of 2016 compared to $24.0 million in the first quarter of 2016.  The increase was primarily due to favorable changes in our working capital and higher net income partially offset by a scheduled pension contribution during the second quarter.

Unlevered Free Cash Flow was $31.5 million in the second quarter of 2016 compared to $34.7 million in the first quarter of 2016.  Unlevered Free Cash Flow was lower in the second quarter of 2016 primarily due to a scheduled pension contribution during the quarter and slightly higher capital expenditures, partially offset by higher Adjusted EBITDA and lower OPEB payments.  

Second Quarter 2016 as compared to Second Quarter 2015

Revenue was $206.6 million in the second quarter of 2016 compared to $214.1 million a year earlier.

Strategic revenue categorization:

  • Growth revenue increased by $3.6 million as we experienced growth in broadband revenue and Ethernet revenue, as well as hosted and advanced services revenue, compared to the prior year.
  • Convertible revenue decreased by $7.9 million as customers continued to migrate from non-Ethernet circuits and businesses shifted from traditional voice products to VoIP and hosted products.
  • Legacy revenue decreased by $6.1 million resulting from a decline in voice access lines and legacy switched access revenue versus a year ago. 
  • Regulatory funding revenue grew by $1.8 million primarily due to CAF Phase II transitional revenue in 2016.
  • Miscellaneous revenue increased $1.1 million due to higher late payment fees.

The following traditional categorization of revenue is presented to provide reporting continuity.

  • Voice services revenue declined $6.4 million resulting from the loss of voice access lines versus a year ago combined with lower long distance usage.
  • Access revenue declined $5.1 million due to the continued loss and conversion of legacy transport circuits to Ethernet services.  That impact was partially offset by an increase in wholesale Ethernet revenue, as a higher number of circuits more than offset the impact of the renewal of certain expiring long-term Ethernet contracts and lower service quality credits.
  • Data and Internet services revenue increased $1.7 million as speed upgrades and price increases on broadband products more than fully offset subscriber declines. 
  • Regulatory funding revenue grew $1.8 million primarily due to CAF Phase II transitional revenue in 2016.
  • Other services revenue increased $0.5 million due to higher late payment fees.

Operating expenses, excluding depreciation and amortization, decreased $9.6 million to $89.3 million in the second quarter of 2016 compared to $98.9 million in the second quarter of 2015 primarily due to lower employee expenses, including severance, lower pension expense and lower bad debt expense.

Adjusted Operating Expenses were $143.5 million in the second quarter of 2016 compared to $150.4 million in the second quarter of 2015.  The decrease was primarily the result of lower employee costs and lower bad debt expense. Lower employee costs primarily resulted from lower salary costs due to fewer headcount and lower overtime partially offset by a higher bonus accrual.

Net income was $29.3 million in the second quarter of 2016 compared to $40.3 million in the second quarter of 2015.  The change was primarily due to additional income tax expense and lower revenue partially offset by a decrease in operating expenses.  Net income was positive in the second quarter of 2016 largely due to the non-cash GAAP treatment for the change in the liability of the OPEB plan due to the elimination of post-employment health benefits for active represented employees.  The impact of this treatment will continue through 2016, but we do not expect that it will impact our cash income taxes or change our accumulated federal net operating loss carryforwards. 

Adjusted EBITDA was $63.1 million in the second quarter of 2016 compared to $63.7 million a year earlier.  The decrease is due to lower revenue partially offset by operating expense savings.

Capital expenditures were $26.8 million in the second quarter of 2016 compared to $28.3 million a year earlier.

Net cash provided by operating activities was $46.4 million in the second quarter of 2016 compared to $28.8 million in the second quarter of 2015.  The increase was primarily due to favorable changes in our working capital.

Unlevered Free Cash Flow of $31.5 million in the second quarter of 2016 increased $0.8 million compared to $30.7 million in the second quarter of 2015.  The increase was due to lower capital expenditures and lower OPEB payments partially offset by higher cash contributions towards our pension plans and lower Adjusted EBITDA.
_________________
1 Unlevered Free Cash Flow, Adjusted EBITDA and Adjusted Operating Expenses are non-GAAP financial measures.  Additional information regarding the calculation of these non-GAAP measures and a reconciliation to net income (loss) are contained under "Use of Non-GAAP Financial Measures" and in the attachments to this press release.
2 Additional information and definitions for regulatory funding revenue and strategic revenue categorization and its components are contained in the attachments to this press release.

2016 Guidance

For full year 2016, the Company expects to generate $105 million to $120 million of Unlevered Free Cash Flow. In addition, Adjusted EBITDA is expected to be $245 million to $255 million, annual capital expenditures are expected to be $115 million to $120 million and aggregate annual cash pension contributions and cash OPEB payments are expected to be approximately $20 million for 2016.

The Company is not able to provide a reconciliation of its forward-looking non-GAAP financial measures to GAAP measures because the Company does not forecast certain items used to prepare net income/(loss) in accordance with GAAP.

Quarterly Report

The information in this press release should be read in conjunction with the financial statements and footnotes contained in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2016, which will be filed with the SEC no later than August 9, 2016. The Company's results for the quarter ended June 30, 2016 are subject to the completion of such quarterly report.

About FairPoint Communications, Inc.

FairPoint Communications, Inc. (Nasdaq:FRP) provides advanced data, voice and video technologies to single and multi-site businesses, public and private institutions, consumers, wireless companies and wholesale re-sellers in 17 states. Leveraging an owned, fiber-based Ethernet network — with more than 21,000 route miles of fiber, including approximately 17,000 route miles of fiber in northern New England — FairPoint has the network coverage, scalable bandwidth and transport capacity to support enhanced applications, including the next generation of mobile and cloud-based communications, such as small cell wireless backhaul technology, voice over IP, data center colocation services, managed services and disaster recovery. 

 

FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2016 and December 31, 2015
(in thousands, except share data)
 
  June 30, 2016   December 31, 2015
 
(unaudited)    
Assets:      
Cash $ 41,116     $ 26,560  
Accounts receivable, net 61,281     60,136  
Prepaid expenses 26,536     24,410  
Other current assets 3,650     5,030  
Total current assets 132,583     116,136  
Property, plant and equipment, net 1,064,630     1,118,781  
Intangible assets, net 78,379     83,879  
Restricted cash 652     651  
Other assets 3,012     3,079  
Total assets $ 1,279,256     $ 1,322,526  
       
Liabilities and Stockholders' Deficit:      
Current portion of long-term debt $ 6,400     $ 6,400  
Current portion of capital lease obligations 1,110     918  
Accounts payable 28,861     28,157  
Claims payable and estimated claims accrual —     216  
Accrued interest payable 9,983     9,983  
Accrued payroll and related expenses 24,361     24,753  
Other accrued liabilities 52,139     49,802  
Total current liabilities 122,854     120,229  
Capital lease obligations 1,269     1,223  
Accrued pension obligations 149,911     150,562  
Accrued post-employment benefit obligations 93,545     94,042  
Deferred income taxes, net 17,335     35,075  
Other long-term liabilities 18,822     22,739  
Long-term debt, net of current portion 899,206     900,145  
Total long-term liabilities 1,180,088     1,203,786  
Total liabilities 1,302,942     1,324,015  
Stockholders' deficit:      
Common stock, $0.01 par value, 37,500,000 shares authorized, 27,050,600 and 26,921,066
shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively		 271     269  
Additional paid-in capital 525,377     521,842  
Retained deficit (659,709 )   (707,592 )
Accumulated other comprehensive income 110,375     183,992  
Total stockholders' deficit (23,686 )   (1,489 )
Total liabilities and stockholders' deficit $ 1,279,256     $ 1,322,526  
               
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three and Six Months Ended June 30, 2016 and 2015
(Unaudited)
(in thousands, except per share data)
   
  Three Months Ended June 30,   Six Months Ended June 30,
  2016   2015   2016   2015
Revenues $ 206,557     $ 214,098     $ 413,373     $ 428,072  
Operating expenses:              
Cost of services and sales, excluding depreciation and
amortization		 93,302     97,968     198,341     232,349  
Other post-employment benefit and pension expense (53,486 )   (52,460 )   (106,714 )   (59,358 )
Selling, general and administrative expense 49,440     53,434     99,776     109,280  
Depreciation and amortization 55,105     55,818     112,743     111,124  
Reorganization related expense —     20     —     27  
Total operating expenses 144,361     154,780     304,146     393,422  
Income from operations 62,196     59,318     109,227     34,650  
Other income/(expense):              
Interest expense (20,583 )   (19,974 )   (41,193 )   (39,793 )
Other, net 95     97     253     272  
Total other expense (20,488 )   (19,877 )   (40,940 )   (39,521 )
Income/(loss) before income taxes 41,708     39,441     68,287     (4,871 )
Income tax (expense)/benefit (12,393 )   824     (20,404 )   (77 )
Net income/(loss) $ 29,315     $ 40,265     $ 47,883     $ (4,948 )
               
Weighted average shares outstanding:              
Basic 26,858     26,655     26,835     26,622  
Diluted 27,084     27,025     27,071     26,622  
               
Income/(loss) per share, basic $ 1.09     $ 1.51     $ 1.78     $ (0.19 )
               
Income/(loss) per share, diluted $ 1.08     $ 1.49     $ 1.77     $ (0.19 )
                               
FAIRPOINT COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2016 and 2015 
(Unaudited)
(in thousands)
   
  Six Months Ended June 30,
  2016   2015
Cash flows from operating activities:      
Net income/(loss) $ 47,883     $ (4,948 )
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:      
Deferred income taxes 20,123     (678 )
Provision for uncollectible revenue (1,095 )   4,065  
Depreciation and amortization 112,743     111,124  
Other post-employment benefits (113,365 )   (70,191 )
Qualified pension 498     3,816  
Stock-based compensation 3,917     4,109  
Other non-cash items 2,509     2,066  
Changes in assets and liabilities arising from operations:      
Accounts receivable (48 )   1,605  
Prepaid and other assets (1,031 )   4,089  
Accounts payable and accrued liabilities 1,784     (24,480 )
Accrued interest payable —     (1 )
Other assets and liabilities, net (3,510 )   (939 )
Total adjustments 22,525     34,585  
Net cash provided by operating activities 70,408     29,637  
Cash flows from investing activities:      
Net capital additions (52,685 )   (54,728 )
Distributions from investments and proceeds from the sale of property and equipment 498     217  
Net cash used in investing activities (52,187 )   (54,511 )
Cash flows from financing activities:      
Repayments of long-term debt (3,200 )   (3,200 )
Restricted cash (1 )   —  
Proceeds from exercise of stock options 9     13  
Repayment of capital lease obligations (473 )   (378 )
Net cash used in financing activities (3,665 )   (3,565 )
Net change 14,556     (28,439 )
Cash, beginning of period 26,560     37,587  
Cash, end of period $ 41,116     $ 9,148  
 
FAIRPOINT COMMUNICATIONS, INC.
Supplemental Financial Information
(Unaudited)
 
  2Q16 1Q16 4Q15 3Q15 2Q15   YTD 2016 YTD 2015
Summary Income Statement (in thousands):            
Revenue:                
Voice services $ 75,099   $ 75,903   $ 77,401   $ 81,247   $ 81,470     $ 151,002   $ 164,764  
Access 60,579   61,933   62,065   64,304   65,713     122,512   130,248  
Data and Internet services 46,159   44,560   44,876   46,018   44,455     90,719   87,726  
Regulatory funding (1) 13,117   13,117   13,143   17,927   11,338     26,234   22,748  
Other services 11,603   11,303   12,339   12,073   11,122     22,906   22,586  
Total revenue 206,557   206,816   209,824   221,569   214,098     413,373   428,072  
Operating expenses:                
Operating expenses, excluding
depreciation and amortization (2)		 89,256   102,147   90,907   92,838   98,942     191,403   282,271  
Depreciation and amortization 55,105   57,638   56,399   56,296   55,818     112,743   111,124  
Reorganization expense (post-
emergence)		 —   —   5   6   20     —   27  
Total operating expenses 144,361   159,785   147,311   149,140   154,780     304,146   393,422  
Income/(loss) from operations 62,196   47,031   62,513   72,429   59,318     109,227   34,650  
Other income/(expense):                
Interest expense (20,583 ) (20,610 ) (20,739 ) (20,186 ) (19,974 )   (41,193 ) (39,793 )
Other income, net 95   158   60   153   97     253   272  
Total other expense (20,488 ) (20,452 ) (20,679 ) (20,033 ) (19,877 )   (40,940 ) (39,521 )
Income/(loss) before income taxes 41,708   26,579   41,834   52,396   39,441     68,287   (4,871 )
Income tax benefit/(expense) (12,393 ) (8,011 ) 476   658   824     (20,404 ) (77 )
Net income/(loss) $ 29,315   $ 18,568   $ 42,310   $ 53,054   $ 40,265     $ 47,883   $ (4,948 )
                 
Reconciliation of Adjusted EBITDA and Unlevered Free Cash
Flow to Net Income/(Loss) (in thousands):		                        
Net income/(loss) $ 29,315   $ 18,568   $ 42,310   $ 53,054   $ 40,265     $ 47,883   $ (4,948 )
Income tax (benefit)/expense 12,393   8,011   (476 ) (658 ) (824 )   20,404   77  
Interest expense 20,583   20,610   20,739   20,186   19,974     41,193   39,793  
Depreciation and amortization 55,105   57,638   56,399   56,296   55,818     112,743   111,124  
Pension expense (3a) 2,020   2,036   2,297   (1,861 ) 3,088     4,056   8,199  
OPEB expense (3a) (55,506 ) (55,264 ) (55,710 ) (55,707 ) (55,548 )   (110,770 ) (67,556 )
Compensated absences (3b) (2,226 ) 6,287   (3,995 ) (6,084 ) (3,803 )   4,061   8,434  
Severance 38   1,459   2   (106 ) 3,760     1,497   4,118  
Restructuring costs (3c) —   —   6   5   20     —   27  
Other non-cash items, net (3e) 1,401   2,694   2,243   1,441   1,780     4,095   4,513  
Labor negotiation related expense (3f) —   —   95   160   (850 )   —   48,678  
All other allowed adjustments, net (3f) (40 ) (88 ) (20 ) (35 ) (16 )   (128 ) (115 )
Adjusted EBITDA (3) 63,083   61,951   63,890   66,691   63,664     125,034   152,344  
Estimated Avoided Costs (6) —   —   —   —   —     —   (27,000 )
Adjusted EBITDA minus Estimated
Avoided Costs		 $ 63,083   $ 61,951   $ 63,890   $ 66,691   $ 63,664     $ 125,034   $ 125,344  
Adjusted EBITDA minus Estimated
Avoided Costs Margin		 30.5 % 30 % 30.4 % 30.1 % 29.7 %   30.2 % 29.3 %
                 
Adjusted EBITDA (3) $ 63,083   $ 61,951   $ 63,890   $ 66,691   $ 63,664     $ 125,034   $ 152,344  
Pension contributions (3,558 ) —   (5,828 ) (3,958 ) (3,182 )   (3,558 ) (4,382 )
OPEB payments (1,182 ) (1,414 ) (1,505 ) (1,457 ) (1,486 )   (2,596 ) (2,635 )
Capital expenditures (26,805 ) (25,880 ) (33,238 ) (28,193 ) (28,298 )   (52,685 ) (54,728 )
Unlevered Free Cash Flow (4) 31,538   34,657   23,319   33,083   30,698     66,195   90,599  
Estimated Avoided Costs (6) —   —   —   —   —     —   (27,000 )
Unlevered Free Cash Flow minus
Estimated Avoided Costs		 $ 31,538   $ 34,657   $ 23,319   $ 33,083   $ 30,698     $ 66,195   $ 63,599  
                 
                 
                 
Reconciliation of Adjusted Operating Expenses to Operating
Expenses, excluding depreciation and amortization (in thousands):		                        
Operating expenses, excluding
depreciation and amortization		 $ 89,256   $ 102,147   $ 90,907   $ 92,838   $ 98,942     $ 191,403   $ 282,271  
Pension expense (2,020 ) (2,036 ) (2,297 ) 1,861   (3,088 )   (4,056 ) (8,199 )
OPEB expense 55,506   55,264   55,710   55,707   55,548     110,770   67,556  
Compensated absences 2,226   (6,287 ) 3,995   6,084   3,803     (4,061 ) (8,434 )
Severance (38 ) (1,459 ) (2 ) 106   (3,760 )   (1,497 ) (4,118 )
Other non-cash items, net (1,456 ) (2,764 ) (2,284 ) (1,558 ) (1,861 )   (4,220 ) (4,670 )
Labor negotiation related expense —   —   (95 ) (160 ) 850     —   (48,678 )
Adjusted Operating Expenses (5) 143,474   144,865   145,934   154,878   150,434     288,339   275,728  
Estimated Avoided Costs (6) —   —   —   —   —     —   27,000  
Adjusted Operating Expenses plus
Estimated Avoided Costs		 $ 143,474   $ 144,865   $ 145,934   $ 154,878   $ 150,434     $ 288,339   $ 302,728  
                 
                 
Strategic Revenue Categorization and Product Revenue Detail
(in millions): (7)		                        
Growth (8)                
Broadband (8a) $ 34.8   $ 34   $ 33.9   $ 34.9   $ 33.7     $ 68.8   $ 66.8  
Ethernet (8b) 24.9   23.6   24.8   24.8   23.4     48.5   46.3  
Hosted and Advanced Services (8c) 4.1   3.8   3.7   3.6   3.1     7.9   6.1  
Subtotal Growth 63.8   61.4   62.4   63.3   60.2     125.2   119.2  
Growth as a % of Total Revenue 30.9 % 29.7 % 29.7 % 28.6 % 28.1 %      
                 
Convertible (9)                
Non-Ethernet Special Access (9a) 16.7   18.2   17.9   19.6   21.3     34.9   42.4  
Business Voice (9b) 29.9   30.5   31   31.2   32.2     60.4   65.5  
Other convertible (9c) 5   5.4   5.5   6   6     10.4   12.4  
Subtotal Convertible 51.6   54.1   54.4   56.8   59.5     105.7   120.3  
Convertible as a % of Total Revenue 25 % 26.2 % 25.9 % 25.6 % 27.8 %      
                 
Legacy (10)                
Residential Voice (10a) 53.4   53.9   53.8   57.7   57.3     107.3   114.5  
Switched Access and Other (10b) 16.8   17.7   18.1   17.6   19     34.5   39  
Subtotal Legacy 70.2   71.6   71.9   75.3   76.3     141.8   153.5  
Legacy as a % of Total Revenue 34 % 34.6 % 34.3 % 34 % 35.6 %      
                                     
Regulatory funding (1) 13.1   13.1   13.2   17.9   11.3     26.2   22.7  
Regulatory funding as a % of Total
Revenue		 6.3 % 6.3 % 6.3 % 8.1 % 5.3 %      
                                     
Miscellaneous (11) 7.9   6.6   7.9   8.3   6.8     14.5   12.4  
Miscellaneous as a % of Total Revenue 3.8 % 3.2 % 3.8 % 3.7 % 3.2 %      
                 
Total Revenue $ 206.6   $ 206.8   $ 209.8   $ 221.6   $ 214.1     $ 413.4   $ 428.1  
                 
                 
Summary Cash Flows (in thousands):                
Cash Flows from operating activities:                
Net income/(loss) $ 29,315   $ 18,568   $ 42,310   $ 53,054   $ 40,265     $ 47,883   $ (4,948 )
Deferred income taxes 12,215   7,908   343   (925 ) (1,255 )   20,123   (678 )
Provision for uncollectible revenue 311   (1,406 ) 187   1,541   1,706     (1,095 ) 4,065  
Depreciation and amortization 55,105   57,638   56,399   56,296   55,818     112,743   111,124  
OPEB (56,687 ) (56,678 ) (57,213 ) (57,165 ) (57,034 )   (113,365 ) (70,191 )
Pension (1,538 ) 2,036   (3,533 ) (5,817 ) (95 )   498   3,816  
Other non-cash items 2,658   3,768   2,148   2,245   2,294     6,426   6,175  
Changes in assets and liabilities
arising from operations		 4,998   (7,803 ) 3,868   (11,374 ) (12,853 )   (2,805 ) (19,726 )
Net cash provided by operating
activities		 46,377   24,031   44,509   37,855   28,846     70,408   29,637  
Net cash used in investing activities (26,482 ) (25,705 ) (33,180 ) (28,180 ) (28,276 )   (52,187 ) (54,511 )
Net cash used in financing activities (1,843 ) (1,822 ) (1,802 ) (1,790 ) (1,738 )   (3,665 ) (3,565 )
Net change 18,052   (3,496 ) 9,527   7,885   (1,168 )   14,556   (28,439 )
Cash, beginning of period 23,064   26,560   17,033   9,148   10,316     26,560   37,587  
Cash, end of period $ 41,116   $ 23,064   $ 26,560   $ 17,033   $ 9,148     $ 41,116   $ 9,148  
                 
Select Operating Metrics (12):              
Broadband subscribers (13) 311,440   311,323   311,130   313,982   315,320        
% change y-o-y (1.2 )% (1.7 )% (2.7 )% (4.2 )% (5.0 )%      
% change q-o-q — % 0.1 % (0.9 )% (0.4 )% (0.4 )%      
                                     
Ethernet Circuits 15,137   14,813   14,507   14,100   13,680        
% change y-o-y 10.7 % 13.2 % 15 % 21 % 27.7 %      
% change q-o-q 2.2 % 2.1 % 2.9 % 3.1 % 4.5 %      
                                     
Residential voice lines 388,983   398,488   409,852   423,667   437,303        
% change y-o-y (11.0 )% (11.7 )% (12.2 )% (12.4 )% (12.9 )%      
% change q-o-q (2.4 )% (2.8 )% (3.3 )% (3.1 )% (3.1 )%      
                                     
Employee Headcount 2,663   2,704   2,718   2,728   2,931        
% change y-o-y (9.1 )% (9.7 )% (10.9 )% (11.7 )% (7.2 )%      
                 
   
(1) We receive certain federal and state government funding that we classify as regulatory funding including:  CAF Phase II support effective January 1, 2015 to build and operate broadband services; CAF Phase II transition funding (scheduled to phase down over three-years); CAF Phase I frozen support (for Kansas and Colorado in 2015 and until a reverse auction is conducted); CAF funding under the CAF/ICC Order; and universal service fund support from certain states in which we operate.
(2) Excludes reorganization costs.
(3) For purposes of calculating Adjusted EBITDA (in accordance with the definition of Consolidated EBITDA in the Company's credit agreement), the Company adjusts net (loss) income for interest, income taxes, depreciation and amortization, in addition to:
a) the add-back of aggregate pension and other post-employment benefits (OPEB) expense,
b) the add-back (or subtraction) of the adjustment to the compensated absences accrual to eliminate the impact of changes in the accrual,
c) the add-back of costs related to the reorganization, including professional fees for advisors and consultants,
d) the add-back of costs and expenses, including those imposed by regulatory authorities, with respect to casualty events, acts of God or force majeure to the extent they are not reimbursed from proceeds of insurance,
e) the add-back of other non-cash items, including stock compensation expense, except to the extent they will require a cash payment in a future period, and
f) the add-back (or subtraction) of other items, including facility and office closures, labor negotiation expenses (including losses related to disruption of operations), non-cash gains/losses, non-operating dividend and interest income and other extraordinary gains/losses.
(4) Unlevered Free Cash Flow refers to Adjusted EBITDA (calculated in accordance with the definition of Consolidated EBITDA in the Company's credit agreement) minus capital expenditures, cash pension contributions and cash payments for OPEB.
(5) For purposes of calculating Adjusted Operating Expenses, the Company adjusts operating expenses, excluding depreciation and amortization for pension and OPEB expense see (3a), compensated absences see (3b), severance, storm expenses see (3d), other non-cash items, net see (3e), labor negotiation related expense see (3f), all other allowed adjustments, net see (3f) and settlement proceeds see (7).
(6) See "Use of Non-GAAP Financial Measures" above for information regarding the calculation. The first quarter of 2015 represents 39 business days of estimated avoided costs.
(7) Management believes the Strategic Revenue Categorization provides key metrics that will enhance investors' ability to evaluate our business and assist investors in their understanding of the changing composition of our revenue as well as period-to-period revenue trends as a result of product and service evolution within our industry.
(8) Growth revenue is comprised of products and services that are generally viewed as in-demand by telecommunications consumers over the medium- to long-term and are expected to increase over time.
a) Broadband revenue is comprised of both residential and business customers delivered through DSL, ADSL, VDSL or other similar services.
b) Ethernet revenue includes Ethernet over copper ("EOC") or Ethernet over fiber ("EOF") services delivered to end-users or to wholesalers, who then sell to their end-users.
c) Hosted and Advanced Services includes VoIP and other digital voice services including unified messaging and other IP features as well as revenue generated from our various advanced services including the next-generation emergency 9-1-1 contracts in several of our service territories as well as data center and managed services.
(9) Convertible revenues are revenues that could move from TDM-based technologies to Ethernet or other advanced services.
a) Non-Ethernet Special Access includes high-capacity circuits.  The revenues are primarily comprised of business revenue from T1's, DS3's and SONET products.
b) Business Voice is traditional voice, long distance, ISDN and Centrex services for a business customer.
c) Other convertible revenue primarily includes Unbundled Network Element ("UNE"), Asynchronous Transfer Mode ("ATM"), Frame Relay, ISDN, Analog Private Line and Internet services such as dial-up.
(10) Legacy revenues are TDM-based voice related consumer revenue largely related to residential customers.
a) Residential Voice is comprised of TDM voice services to residential customers.
b) Switched Access and Other primarily includes Switched Transport, Local Switching, NECA pooling elements and colocation of miscellaneous equipment.
(11) Miscellaneous is comprised of special purpose projects, late payment fees from our customers and pole rental revenues among other various service revenues.
(12) We believe access lines as a measure of the business are increasingly less meaningful measures of trend and are being replaced by revenue generating broadband subscribers and Ethernet circuits.  Following a peer review, we excluded non-revenue generating Company official lines from broadband subscribers, Ethernet circuits and residential voice access lines beginning in the third quarter of 2015.  In aggregate, access line equivalents for the second quarter of 2015 and prior periods would have been reduced by approximately 40,000 lines as a result of this change.  In addition, as we evaluated the historic presentation of business and wholesale access lines, management determined that the evolution of technology made these metrics less informative than in the past and therefore such presentation has been discontinued.  Finally, we have combined wholesale and retail Ethernet circuits as management believes these products are similar.
(13) Broadband subscribers include DSL, fiber-to-the-premise, cable modem and fixed wireless broadband, but exclude Ethernet and other high-capacity circuits.