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Gray Television (NYSE:GTN)

Q2 2011 Earnings Call

August 08, 2011 1:00 pm ET

Executives

Robert Prather - President, Chief Operating Officer, Director and Member of Executive Committee

Hilton Howell - Vice Chairman, Chief Executive Officer and Member of Executive Committee

James Ryan - Chief Financial Officer and Senior Vice President

Analysts

Aaron Watts - Deutsche Bank AG

Marci Ryvicker - Wells Fargo Securities, LLC

Steven Pfeiffer - Wells Capital Management

Unknown Analyst -

Barry Lucas - Gabelli & Company, Inc.

Bishop Cheen - Wells Fargo Securities, LLC

Operator

Good day, everyone, and welcome to the Gray Television Second Quarter 2011 Earnings Release Conference. Today's call is being recorded. At this time, I'd like to turn things over to Mr. Hilton Howell. Please go ahead, sir.

Hilton Howell

Thank you, operator, and good afternoon, everyone. Welcome to the second quarter and 6 months review of Gray TV's financial performance. Thank you for joining us on this sort of infamous day for our country and our markets. We appreciate your interest very, very much.

As usual, I will begin with just a few brief comments followed by Bob Prather, our President and Chief Operating Officer, who will add more color to this quarter's performance; and then to Jim Ryan, our Chief Financial Officer, who will follow with a brief discussion of our financial information and more information on the release we let go this morning.

We are happy with our results this quarter and think it speaks well for the TV assets of Gray Television, as well as the resiliency of the broadcast television industry as a whole. Our total revenue for the quarter advanced by 1% to $76.2 million from $75.6 million in Q2 2010 and exceeded our initial estimates for the quarter this year as well. The increase was driven primarily by increases in local advertising and Internet advertising, which rose 4% or $1.9 million and 56% or $1.7 million, respectfully. These gains were offset by expected decreases in political advertising during this off-year cycle and the national advertising, which decreased by 59% or $3.3 million and 3% or $400,000, respectfully.

Of our 5 largest advertising categories, automotive, restaurants, medical, communications and furniture and appliances, only automotive decreased and that by only 1%. Restaurants increased by 7%, medical increased by 16%, communications increased by 10% and furniture and appliances increased by 5%. We attribute the decrease in automotive advertising to the effects of the Japanese tsunami and the impacts it has had on the supply chain worldwide. As a consequence, we are cautiously optimistic that this will reverse itself out in the third quarter.

For the 6 months, total revenue was essentially flat decreasing by just $200,000 to $145.9 million, also driven by a decrease of political and national revenue and no Olympic-related advertising this year. Whereas in 2010, we received approximately $2.8 million Olympic advertising revenue on our NBC-affiliated stations. Furthermore, the Super Bowl was broadcast on FOX this year and our one primary FOX-affiliated station and 4 FOX-affiliated secondary digital channels generated just $200,000 of ad revenue this quarter compared to last year when the Super Bowl was broadcast on CBS and our 17 CBS-affiliated primary channels generated close to $1 million in Super Bowl revenue.

When you consider the magnitude of these 2 items alone, close to $3.8 million, we are very pleased with our performance this year. While there is a great deal of discussion of a second-dip recession and no one can predict what will happen in our markets after this unprecedented downgrade of the sovereign debt of United States by Standard & Poor's, we have seen no evidence yet of an advertising pullback in our local markets. And consequently, we remain optimistic about the balance of the year from all that we know so far.

I also want to quickly address the number of station groups that have recently come on the market. While we at Gray believe that the broadcast business needs to continue to consolidate and in time, we will continue to be one of those consolidators, we currently remain committed to improving our balance sheet, decreasing our debt and improving our shareholders' equity.

With that, I will bring my comments to a close and turn it over to Bob for more color on this quarter. Bob?

Robert Prather

I'm sorry. I apologize. I should welcome everybody. Thank you, Hilton. On a day like today in the market, I guess the thing for everybody to do is keep looking straight ahead and know things are going to get better. This debt issue downgrade is obviously serious for our country, but we've got to focus on what we can control and we can control what's going on at Gray Television, which we plan to keep working on every day.

As I mentioned in our last meeting, our focus over the last, really last year and a half has been to get our local HD news going as quickly as possible on all our stations. I'm happy to say, we currently have 18 of our 30 markets with full local HD news. We should have a couple of more finished by the end of the year. Probably 4 more and then have maybe 8 of our small markets left that we'll hopefully complete next year. So I think people are finding HD to be a great product. More and more people are watching HD sets. They demand local HD news. And if you have a competitor in a market that has local HD news and you don't have it, you'll feel it quick.

We continue to monitor the expenses. We feel like we've got a very good handle on our expenses. We think we will be down by the end of the year from last year with our expenses, and we plan to continue to try to keep our expenses. I think right now, expenses are running at a level less than they were in 2007, and we want to keep this trend going.

We're looking at other ways. We're looking at doing more with what's called backpack journalism, using less live trucks, less sat trucks. This is a very inexpensive way to use the Internet and use HD technology that we've -- are testing in several markets. It seems to be working real well. We've developed some hotspots, which will help spread the market size that we can use these units in. But I feel very good about this. We're looking at other efforts to continue hubbing things that we can do in our back office that the viewer doesn't really -- it doesn't affect the viewer at all. And frankly, they don't know or care where the product is coming from as long as this is a great product on the screen. So this is something we're continuing to look at as a way to keep our expenses low.

I know 2 big areas everybody wants to know about is retrans both from the cable side of things and the network. I'll address cable first. We've got roughly 45% of our subscribers up this year at the end of December, December 31, we'll be actively negotiating in the fourth quarter with the various cable operators. We've got over 200 cable systems overall. We have a lot of small systems in some of our old rural markets. So we'll be actively negotiating fourth quarter to get new deals worked out with the cable operators.

On the other side of the coin, the networks, I'm sure you've been following FOX and their efforts, too, and they were pretty successful. They virtually got every single operator in the country to go along with their demands other than Nextstar, and Nextstar is still in negotiation on several of their markets, but they have lost a few of their FOX markets. So I think this is something we will continue to monitor. We've been told off the record that the other networks, ABC has already made deals, although -- just for the good news, our NBC deals are up next year. We've got 10 stations. Our ABC, we've got 8 stations, are up at December 31 '13. And then our 17 CBS stations are up December 31, '14. So we've got some time to see what's going on in the marketplace, see what the other major groups out there are doing. And obviously, the good news is we've got time. The bad news is once the market's kind of set, it's hard to be an outliner from what other people have agreed to in the market. But I think it's something we will continue to monitor very closely.

There was a great article, I don't know if most of you saw it in New York Times today about Ad Money Reliably Goes to Television is the title of it and Les Moonves is quoted as saying that they continue to think advertising is going to remain strong.

Second half of the year, I would say is we're going to be cautious. I'm not sure -- it looks like third quarter, we're very good about hitting our guidance. I feel like we will. Fourth quarter is so far away at this point. I think it would be foolish for us to be trying to guess what fourth quarter is going to be. But this year so far has been a very good year. As Hilton mentioned, most of our categories are up and even auto, which pretty [ph] scared people, was down 1%. And I would say the auto would clearly be up if it hadn't been for the tsunami in Japan earlier in the year that curtailed the production of most of the Japanese car models. So I think, car business could be good in third and fourth quarter. We'll see.

On the merger and acquisition front, interesting times, the Young deal, we've heard, has been called off. They're not selling -- they're not for sale right now. The Freedom deal, I would use the term, is on hold I think right now. I don't -- I'm not sure if there's any buyers out there that are making any offers on Freedom at this point. McGraw-Hill is an interesting group, does not fit our profile at all. They're bigger markets. They're #3 stations. Probably get some good upside from the expense side, but they would not fit our profile. And our #1 focus this year, next year and the foreseeable future is going to be paying down debt. We want to get our debt to cash flow ratio in line with the rest of the industry and I'd even like for it to be better. But we're -- that's our #1 goal around here, other than continuing our news dominance. I always tell our managers, every day when you wake up, if you're #1 in the market, I want you to stay #1 and get stronger. And if you're not #1, try for #1.

And we just feel like as long as we put great news products on the air, we're going be the dominant factor in these local markets and we think that makes us technology-proof in the long run because people want local news, especially in the size towns we're in, I think local is much more important than a city like Atlanta or in bigger cities like Boston, New York, Chicago. Those cities are so massive and so spread out, there's almost no such thing as local news. But in our size towns, our local news is a vital part of these communities and I think will continue to be.

The other one I did mention, Nextstar is for sale. It's a group almost as big as we are. They have a good track record. I don't know -- they've had a longtime financial sponsor that may just be deciding it's time to do something else for money. That's the only speculation I got. But I have no idea what will happen on the Nextstar deal.

At this point, I'd like to turn it over to Jim Ryan to go through some more specific numbers, then we'll open up for questions. Jim?

James Ryan

Thanks, Bob. I'm going to keep my comments relatively brief. As both Bob and Hilton mentioned, we were pleased with second quarter revenues and they've already commented a little bit on the categories. Actually in second quarter, aside from auto, the only down categories we showed were financial insurance category and then the supermarkets. So we're pleased to see the depths of the categories increasing in second quarter. And then on the 6-month basis, as both Bob and Hilton commented, auto is still up about 1% year-over-year and the only categories that are still down are again financial and insurance, which kind of makes sense with the housing prices still working its way through, supermarkets, and then entertainment, a little bit, very slightly down, but that's probably more of a timing issue on movie releases.

Turning a little bit to the balance sheet at June 30, cash on hand was $3.5 million. Our total debt was $830.4 million. Our trailing 8-quarter operating cash flow, as defined in the senior credit agreement, was $110.7 million which placed our first lien leverage ratio under the senior credit agreement at 4.17 (changed from 7.14 at company's request as per its SEC filing) versus the covenant of 6.75. So there's ample headroom there. And on a T12 basis at the end of the quarter, our leverage to T12 operating cash flow would have been about 6.25. The preferred stock at the end of the quarter, including the accumulated dividend, was at $56.8 million and that -- of that number, $39.3 million is the actual liquidation value of the preferred. The remainder is the accrued dividend.

Briefly, on our third quarter guidance, we are pleased at the aggregate of our local, our Internet and our national combined, we're expecting to be up 2% to 3%, with local and Internet leading the way and we expect the continuing softness in national. We were exceedingly pleased with the strength of the Internet growth both in Q2 and Q3 and see that continuing for the rest of the year. As we talked about on our second quarter call, we have 3 major cross-company initiatives this year on the Internet front. One is to roll out an Internet vertical site dedicated to the local level to dedicated to mom and family issues that we've branded ourselves, and we've developed ourselves as Moms Everyday. We've partnered with WorldNow to roll out several of their Internet verticals, including medical or home improvement or legal. And we also are rolling out our own white-branded mobile couponing initiative this year too. We're -- on all 3 of those, we're somewhere between 1/2 and 2/3 of the way through our deployment this year, and all of our markets will be fully deployed by the end of the year. So we're expecting very strong growth in Internet for the remainder of this year and then obviously continuing strong growth next year, as we get the benefit of a full year deployment -- of a full 12 months next year after the deployment year this year.

On political, we were pleased in second quarter. It was certainly stronger than we expected. Our record in an off year is actually, it was set in 2009, was just shy of $10 million. It's a little early to tell yet whether we'll beat or exceed that record for this year. But certainly based on the strength of the first half of the year and our expectations for Q3, I'd say, that we are certainly getting into striking distance of tying or setting a new all-time off-year political record. And certainly with the budget compromise that was passed recently, there is at least a potential, late this year for we think, some political money on the remaining budgets [indiscernible] that will be coming out what appears to be in December. So that we again, while we can't guarantee anything, we're cautiously optimistic that late this year, there will be some additional political that we wouldn't have expected.

At this point, I'll turn it back to Bob.

Robert Prather

Thanks, Jim. Operator, at this time, we will open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Bishop Cheen with Wells Fargo.

Bishop Cheen - Wells Fargo Securities, LLC

So let me ask you sort of an odd one-off question. If we're going to talk about buybacks normally, we might be talking about your stock. But given the beating that the fixed income, the high yield debt has been taking in this correction, do you have any capacity to take in some of your higher coupon bonds? I know you've been focused on that much higher cost of capital preferred, but I just was wondering about your thoughts about arbitraging your balance sheet?

Robert Prather

Well, a couple of things, Bishop. One thing that our bonds are selling at a pretty good premium. That's the first thing, which is good news and bad news if you're trying to buy them in obviously. But on the other side of the coin, we've only got $10 million right now of restricted payment availability. And if we were trying to buy some stuff in, we'd probably trying to buy some of the preferred in, which we're looking at. And so I think that would be more prudent for us to be looking at that preferred we get got on the balance sheet that we'd love to get rid of.

Bishop Cheen - Wells Fargo Securities, LLC

Right. It certainly is a higher cost of capital. All right. And then last question, and I'll move it along. You always have a certain amount of conviction when you look forward and when you talk about the year. Given the uncertainties that our markets have gone through in the last 10 days certainly on the financial side, has that rocked your world in terms of your conviction and your visibility and what you see on the revenue side?

Robert Prather

That's a good question. I would say you'd have to be Rip Van Winkle for it not to have woken you up. But I think this thing probably since the Congressional fighting took several months, I think everybody has started kind of getting immune to the fact that we were going to have maybe some kind of debt downgrade and some kind of debt issues. I will tell you we've talked to good many investors, Jim and I both in the last few weeks, and they all used the word "very cautious" right now. That would be the word I would be using, "very cautious." And like I said, I think third quarter is starting out exactly like second quarter. We were kind of slow in the first month, picked up good in the second month and picked up good in the third month. I'm hoping we'll have the same result, like I said fourth quarter right now seems like a mile away. But we're going to keep our head down and keep going straight ahead. I think like I said, we have some mighty good local markets with strong economies that hadn't been affected as much by all this stuff as some of your bigger markets. So I think that's an advantage for us and I think we just -- we've got, the old saying, stick to our knitting. So overall though I feel pretty good.

Operator

We'll go next to Marci Ryvicker with Wells Fargo.

Marci Ryvicker - Wells Fargo Securities, LLC

Can you talk about the current pace of auto in the third quarter? I know it was down 1% in the second quarter. And then just as it relates to your Q3 guidance, are you incorporating any sort of auto recovery or is your guidance just mirroring what you're pacing today?

James Ryan

The guidance would mirror what the pace is showing today. There is always -- there's anecdotal evidence we've heard that Japanese manufacturers are stepping up inventory for late third quarter. We've heard a couple of GM's comment that their local dealers are saying they're being placed on notice, so [indiscernible] significantly more inventory late in the quarter, but we're not betting on that yet. We're going to wait and see if it really develops into a reality and then deal with it. So we're really talking about current pace. In the current pace of auto is running actually right now a little bit ahead of low single digit ahead, but there's still quite a ways to go in the quarter. So I'm not trying to be negative here. I'm just saying that it's -- there's a way to go. It's a little positive by a few percentage points, and we'll see how -- we're hoping or not hoping but expecting at least that will hold up as we move through the quarter. If we get gravy [ph] in September we'll be happy to deal with it.

Marci Ryvicker - Wells Fargo Securities, LLC

And then in terms of other ad categories, it seemed like as companies reported, the most recent reports have been a little bit worse than the earlier reports in terms of guidance and pacing. So it feels like other ad categories have decelerated from Q2 to Q3, some that I focused on are restaurants and media and communications. Can you comment on the ad categories outside of auto?

James Ryan

I think that in a general sense that's correct. There is -- if it is not an actual deceleration, I think it is a -- everybody is having a sense of caution. And I think some of that sense of caution is producing some choppiness in how business is coming in. I think the visibility has tightened up on a relative scale this quarter compared to last quarter. So it's kind of still tough with only basically one month in to see how the whole quarter is going to shake out. But I do -- I think it would be fair to say that there's -- that up and down the line, there is a little bit more sense of caution going into Q3 than there was in Q2.

Marci Ryvicker - Wells Fargo Securities, LLC

Okay. Then my last question, you did mention I think, Bob, that 45% of your retrans contracts come up for renewal. Any thoughts on the incremental dollar amount that you're going to bring in, in 2012?

Robert Prather

Marci, I wouldn't want to give away our negotiating strategy right now, but we feel like we deserve significant increase. As I mentioned before in talking to these cable guys, one of the things we point out, we've got, I want to say at least 1/3 of our markets where are our local news ratings are more than all of the cable channels in those markets ratings combined. So we are a valuable resource with these cable operators and it is up to us to show them how valuable we are to them. And I think in the long run, we'll be able to negotiate some favorable increases, and we certainly think so. But anyway, I think I wouldn't want to give away any other information than that. But we'll be out there hustling in the fourth quarter to get these deals done by the end of the year. We're very successful. We're going to use the same strategy we did a couple of years ago, which worked very well. And we actually have our regional Vice Presidents actually involved in the negotiations and they know the markets, they know the operators in the markets. So it's working real good for us.

Operator

[Operator Instructions] We'll go next to Aaron Watts with the Deutsche Bank.

Aaron Watts - Deutsche Bank AG

So Jim, maybe one quick one for you just to clarify. Your payment for program broadcast rights line item that you used to calculate cash flow, looks like after being pretty steady for a while, it stepped up around $1 million. Can you just tell me what was going on there?

James Ryan

That was just a timing difference for the entire year. I think it's going to go shake out around $15 million.

Aaron Watts - Deutsche Bank AG

Okay, so no big shift there?

James Ryan

No.

Aaron Watts - Deutsche Bank AG

Perfect. And then, also just so I'm clear in terms of your guidance. The gap between the local and national performance, is that mainly national auto? Is it just tougher comps for national? What's driving that gap right now?

James Ryan

I think it's a little bit -- it's definitely national auto for one thing. In general, it would be national kind of in broad-based. Remember, national is very price sensitive in win [ph] on a relative scale, things are a little bit softer. We're not going to chase the national business quite as hard because we can do very, very well with the local business. So -- and also as far as percentages go, you got to remember that it's still -- it's a very -- it's getting to be an increasingly smaller percentage of the overall sales. Any kind of fluctuation starts driving the percentages one way or the other into a larger degree than the local.

Aaron Watts - Deutsche Bank AG

Okay. That's helpful. And then maybe one more on retrans. I'm really thinking about your affiliation agreements as well, Bob, what you were saying before. So you were able to reach an agreement with FOX, and I know the idea of becoming an independent probably isn't the most appealing. So would you characterize these agreements you're reaching, not just with FOX but in general these new affiliation agreements as still being pretty good moneymaking opportunities for you when you think about retrans or you having to give so much back now that retrans has really kind of leveled out to more of a less positive proposition for you?

Robert Prather

Aaron, that's a good question. We're not far enough into it yet. I could tell you our goal is to keep what we got now and add to it in our negotiations, both from the cable side and the network side. The FOX deal, we've got basically 4 digital FOXs in small markets. We do really well with them. We think we made a reasonable deal with FOX on that. That's the only network we've had any negotiations with at this point. So my goal though is to keep what we got and frankly add to it. And I think to do that, obviously we got to negotiate some increases from the cable guys. And as I mentioned, I think we're in a good position to convince them they need to be paying us more. So I think I'm cautiously -- I'll use the word cautious again, but I'm cautiously optimistic that we can keep the retrans we got and add to it in the coming years. And as I said, the good news for us is we've got 2 years of ABC and 3 years of CBS before we even have to start talking to them. The NBC thing will be more current as it's coming up next year. So it will be a good -- we'll get a good idea at that point. And we've been told recently by NBC that they probably are not ready to do any kind of joint negotiating until sometime late in '12, so that would -- and here again, even then I think there's so many question marks. I'm willing to listen to anything and willing to try things. But I just think it's going to be very difficult to get enough mass to make that work. But I think it will be interesting to see what type of proposal they come up if they do come up with proposal at some point. But I'm optimistic we can maintain retrans and it be a continued source of revenue for us in the future.

Aaron Watts - Deutsche Bank AG

Okay. And then last one for me, and I don't think you're going to have -- you won't have the firm answer here, but just curious your thoughts. You've been doing this for 1 or 2 years now and you've gone through the ups and down in the market. You've seen good and bad. We have bad news right now in general. In your experience, what's the lag time between hearing the type of news you've been hearing over the past couple of weeks and maybe specifically this week and last? And when you're going to start to get a reaction from your advertisers, when you're going to start to see cancellations and that nervousness turn to actionable kind of pullback?

Robert Prather

You usually see the national guys first because their deals are longer, out longer. So if they're looking at putting ads in, in November, December for Christmas, they may be scaling some of those back in the near future if they feel like they need to. Our local guys are pretty steady in most cases. And I think here again, I think all of them are cautious. I think all of them are waiting for the last minute to do things, but we've got a pretty good roster of advertisers out there and they've been literally on our air every week for 50-plus years in a lot of our markets. Local guys, they watch what's going on around the world, but day in and day out, their customer traffic coming in and out of their store is more important to them than what's happening in New York or Washington. So I think we'd see it national first and then probably if there is Gambian effect, we'd see the local later in the year sometime.

Operator

Moving on to Barry Lucas with Gabelli and Company.

Barry Lucas - Gabelli & Company, Inc.

Not to beat the guidance to death too much more, but what do you have squirreled in there for political in the third quarter to get to sort of low mid-teens total revenue decline?

James Ryan

Barry, the political number right now we're saying 3 -- probably 3.6 to 3.9 is the guidance range we've put out for Q3. Right now, I mean, if I had to guess, I'm saying we're closer to the 3.9 than the 3.6. And like I said, that would -- that puts us not a slam dunk, but certainly beginning to get us in definite striking distance of being able to either tie or break our off-year political record of 10 by the time we get to the end of the year. We still have -- we've been -- the Wisconsin recall elections that are going on right now and this week and next week for our markets, but we still have the Nevada special election, the Kentucky governor's race which is a standard election for this year, as well as the -- also the off race in West Virginia. So we do have some things that will add as third and fourth quarter go on. Plus, as I said, depending on how things transpire in Washington as the year progresses, there could be a possibility of issue money coming out on budget debate issues late in the year.

Barry Lucas - Gabelli & Company, Inc.

That's helpful. And that was again $16 million year ago or so?

James Ryan

$16 million a year ago, yes. And remember, last year's political was an all-time on- year record for us at $58 million.

Barry Lucas - Gabelli & Company, Inc.

Okay. And as long as I've got you, Jim, given the comments about debt reduction and trying to knock out those preferreds, I'm sure it's odd right now, but how do you view the opportunities? Any opportunities for refinancing?

James Ryan

Well, as we've said in the last couple of calls, I think we need to look at that on a relatively opportunistic basis. As you can see from the tactical amendment we've got as a senior facility, we now have an ability to address that better if the credit markets give us a good opportunity. And I think it's a case of just being patient and seeing when and if that opportunity presents itself.

Barry Lucas - Gabelli & Company, Inc.

Good. Last here, should we -- maybe, Bob, if you could maybe touch on the whole spectrum reclamation issue and anything that may or may not have come out of the debt reduction proposals that could affect Congress or somebody trying to raise money to pay down the deficit?

Robert Prather

Yes, I think that's still on the air, Barry, nobody seems to know exactly how that would affect. I think Congress is obviously looking at ways to raise money without looking like it's taxes. But I think the -- I still think we -- one good thing is we've got 40 digital channels on the air now more than any other group. They're profitable. We're doing real well with them. We've got some extra space available for mobile, live mobile, and if that comes about which we're hoping it will. So I think we can go before Congress anytime and say, hey, we're using the spectrum exactly like you want us to use it. I think there are going to be people in some of these markets that get [indiscernible] station. At some point, it may be cheaper for them to actually go, sell their spectrum, but I think it will be voluntary. And I think when that happens, like I said, there may be some people who want to sell, but I think we use ours very well and we want to continue to grow our digital footprint. I think we've got a lot of more local program. We're looking at trying to do and especially in the high school sports area and even local programming that we're producing ourselves, new shows or live shows or outdoor shows. We're looking at various things right now that might make sense for us. So I think we're kind of immune to whatever that's going on in Congress from that standpoint. I don't think they can ever take it away from us, what we've got. But it wouldn't surprise me to see where other people could sell some of this spectrum at some point in the future.

Barry Lucas - Gabelli & Company, Inc.

Wish we can all be immune to what goes on in Congress.

Operator

We'll go now to Julie Gray [ph] with Columbia Management.

Unknown Analyst -

I was wondering if you could flesh out a little bit for us whether or not in your state capital cities that you're in, whether or not government cutbacks have begun to affect the local economies at all.

Robert Prather

Not that we've seen. And frankly most of the states we're in, we've seen very few cutbacks on the state government level. And here again, I think we're in some pretty good states that haven't been as hard hit with debt problems and problems where they really got issues on maintaining their solvency. A state like Wisconsin obviously has been in the news, but that state is in pretty good financial shape overall. And I think it will -- states like these that we're in. Georgia has their problems. But overall, we're strong. We got a very strong credit rating, and Georgia has always had a reputation of being a well-managed state, and I think most of the states we're in are in that category. I was surprised to see, for example, though, even there are states like Kentucky's got $29 billion of unfunded pension liability, which I was kind of surprised to see. But compare that to Illinois with $140-something billion, you realize there are some states out there with some serious problems, but it has not really affected us at this point that we can tell.

Unknown Analyst -

Okay. Just kind of a related question then. How big of a category is government advertising for you?

Robert Prather

It's not very big. I mean, it doesn't show up on our -- it's not something we look at enough to -- and show up on our radar when we look at our major categories.

Unknown Analyst -

It's not a top 20 category?

Robert Prather

Pardon?

Unknown Analyst -

It's not a top 20?

Robert Prather

I would be surprised. I don't think so, no.

Operator

We'll go now to Steven Pfeiffer with Wells Capital Management.

Steven Pfeiffer - Wells Capital Management

I was having some questions -- I was going through your disclosure on here about your network renewals with FOX, as that the one expired in June just a couple months ago. I notice that you have an NBC coming up in January. Are there -- have you begun negotiations with NBC?

Robert Prather

No, we're -- we'll probably start it during the fourth quarter.

Steven Pfeiffer - Wells Capital Management

Okay. How long did the negotiations...

Robert Prather

Normally, I think they would normally approach us first. And like I said, we're frankly trying to wait as long as we can to see what -- if we -- we're keeping our eyes and ears pretty close to the market, seeing what other people are doing at this point. So I think that's something that, like I said, we're going to be keeping a very, very close eye on in the next month or 2. And we'll be talking to NBC in, like said, September, early September most likely.

Steven Pfeiffer - Wells Capital Management

I see all your MyNetwork Televisions are going to be up and expire in the next couple of months. Any comment on that?

Robert Prather

We have a very good relationship with them and haven't had a bit of problem, as far as the economic turns we've got with them. And we've been -- our digital channels have been very profitable and growing. So we want to continue both the CNN and MyNetworks like we've got them now.

Steven Pfeiffer - Wells Capital Management

And any sort of expense on this front? What line item in your income statement will I see that expense show up in?

Robert Prather

Expense for what?

Steven Pfeiffer - Wells Capital Management

For fees paid to FOX or fees paid to NBC or anything along those lines?

Robert Prather

Jim, where would that show up?

James Ryan

There's a modest amount, and it's running actually as a program expense. So it'd showed up in the [indiscernible] broadcast line. It's not netted against the revenue.

Steven Pfeiffer - Wells Capital Management

Okay. So and right now, based on the FOX situation and NBC's or anything, you're not predicting -- we shouldn't be scheduling in guidance for a higher expense on that line item because of those contract negotiations?

Robert Prather

Right. Nothing would start -- like NBC would start sometime after January next year and so we would...

James Ryan

FOX, the FOX for this year and next year really was a de minimis impact and not very large that we may grow a little bit in the future. But again because FOX only involves 5 digital channels, it's still a tiny part of the overall number.

Steven Pfeiffer - Wells Capital Management

Okay. Also, I'm sorry, the last question I had on here, your actual broadcast license [indiscernible] TV stations have been out for, I don't know, over 5 years. Any idea when that actually gets done or it gets renewed?

James Ryan

The commission has been sitting on those renewal applications not only ours, but across the industry, and they all come back to the indecency complaints and fines that were issued years and years ago that are still lining their way through the courts, and we don't expect that the commission will actually finally proceed with the ordinary renewals of whether it's ours or anybody else's in the business until the courts make the final decisions on those indecency signs, for instance, the Janet Jackson wardrobe malfunction and the -- there was another one associated with the NBC program Without A Trace, that's not even on the air anymore.

Steven Pfeiffer - Wells Capital Management

Okay. And so you don't -- are there any fees associated with that renewal that we should expect to show up at some point or some...

James Ryan

No, our renewal in the ordinary course is really just a very small amount of cost to process the application. There's nothing big there.

Operator

And we'll take a follow-up from Bishop Cheen.

Bishop Cheen - Wells Fargo Securities, LLC

Just one housekeeping. The capacity and outstanding on the revolver today?

James Ryan

We have full capacity. Nothing is drawn on the revolver. We have a full $40 million available, and we currently have draw rights for the full $40 million as well.

Operator

[Operator Instructions] And gentlemen, we appear to have no further questions. I'll turn the conference back to you for closing remarks.

Robert Prather

Thank you very much, operator. I want to thank everybody for joining in today. As we always tell you, we're easy to find, we answer our own phones, so if you've got any follow-up or [indiscernible] don't hesitate to call. Thank you, everybody, and we look forward to being back with you on our third quarter conference call later in the year. Thanks, everybody.

Operator

That concludes today's conference. Thank you all for joining us.

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Source: Gray Television's CEO Discusses Q2 2011 Results - Earnings Call Transcript

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