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Executives

Kevin Enda – IR

Michael Weaver – Chairman, President and CEO

Curtis Garner – CFO

Analysts

Frank Louthan – Raymond James

Timothy Horan – Oppenheimer & Co.

Richard Diamond – Strait Lane Capital

Eric Will – Fertile Mind Capital

David Coleman – RBC Capital Markets

William Span – Raymond James

Otelco, Inc. (OTT) Q4 2011 Earnings Call February 22, 2012 11:30 AM ET

Operator

Good day everyone and welcome to the Otelco Inc. conference call. Today’s conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Kevin Enda.

Please go ahead sir.

Kevin Enda

Thank you Vicky, and welcome to this Otelco conference call to review the company's results for the fourth quarter and year ended December 31, 2011, which we released yesterday afternoon. Conducting the call today will be Michael Weaver, President and Chief Executive Officer; and Curtis Garner, Chief Financial Officer.

Before we start, let me offer the cautionary note that statements made on this conference call that are not statements of historical or current fact constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other unknown factors that could cause the actual results of the company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements.

In addition to statements, which explicitly describes such risks and uncertainties, listeners are urged to consider statements labeled with the terms belief, expects, intends, anticipates, plans, or similar terms to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the company's filings with the SEC.

With that stated, I'll now turn the call over to Mike Weaver.

Michael Weaver

Thanks, Kevin. Good morning, and welcome to our call. As usual I want to cover a few highlights for the quarter and 2011 before I ask Curtis to cover the fourth quarter financial information.

The fourth quarter produced adjusted EBITDA of $10.9 million, which was negatively impacted by $400,000 of non-recurring and one time cost. Included in the fourth quarter costs are legal expense for the Shoreham acquisition, bad debts and inventory write offs for obsolete items as well as cable equipment for operations in Missouri as we transition customers from our cable system to satellite.

In addition to these non-recurring expenses we recorded RLEC estimated cost study adjustments that reduced revenue by $174,000. These cost study adjustments are in annual occurrence and the adjustment base from year-to-year as an example that 2010 cost study adjustments which we recorded in the fourth quarter of last year was a positive $203,000 which if we do the math means we had a quarter over quarter difference of $377,000 when you compare fourth quarter 2010 with fourth quarter 2011.

The change in this adjustment amount is primarily attributable to more CapEx dollars being spent in the non-regulated portion of our business. Our EBITDA margin for the quarter was 42.5% versus a 43.8% margin for the third quarter of this year. The percentage of our total EBITDA generated by our CLEC operations was higher in the fourth quarter than in the previous quarter which has the effect of lowering the overall EBITDA margin.

For the year we generated EBITDA of $45.3 million which is below our expectations. Our overall performance was hampered by the growing pains we felt as we expanded our available markets in our CLEC operations with the addition of eight new collocation sites. The delays in bringing these sites online coupled with the increased cost we incurred for the expansion of the service area, resulted in lower revenue and EBITDA generated by our non-regulated operations.

In addition, the competitive pressures increased and we see more downward pricing pressure in our markets. Our response to these changes has been to restructure our sales organization and the leadership and improve our product offerings. We believe these changes have us headed in the right direction as we posted our best results of the year in the fourth quarter for our CLEC operations.

Our hosted PBX product continues to perform well as we installed more than 2100 PBX seats in 2011. The new location sites I mentioned earlier provide new marketing opportunities for us in this year and will allow us to continue the geographic expansion of our services.

We also completed the acquisition of Shoreham Telephone Company, a Vermont RLEC in the fourth quarter, which further expanded our operations in New England and added approximately 5000 excess line equivalents to our customer base. With the addition of Shoreham we generated a 2.7% increase in customer units for 2011. Exploiting the acquisition our total excess line equivalents declined by 3.2%.

We are pleased with the results so far from this acquisition and we intend and expect to use it as a base for future CLEC expansion in the State. Our integration efforts are underway and we expect them to be completed by the end of the first quarter or early in the second quarter. There remain some uncertainties surrounding the FCC reform plan that became effective January 1st as a number of states have challenged the order in federal courts. Based on the information we reviewed we expect the USF revenue we receive and our RLECs to remain relatively unchanged subject to normal variations in the computation.

After 2013, we expect a gradual shift away from USF and more towards the broadband phones for the following three to five years. While the FCC wants to eventually move the current access revenue process to bill and keep, the plan cost for a multi-year transition for terminating access rights for companies like Otelco. In addition, there are recovery mechanisms that allow RLECs to increase charges to end users by modest amounts.

Currently, Interstate switched access revenue amounts to 10% and the [indiscernible] portion of USF represents 4% of our total revenue in 2011. Another aspect of this reform is to lower intra-state rates in some of the states where we operate. The first rate reduction occurs in Maine on July 1st and will negatively impact our CLEC operations by reducing our access revenue by an estimated $500,000 or 2% of total CLEC revenue.

As a reminder, finally, we paid our 28th consecutive IDS distribution in December.

I will now ask Curtis to discuss the financial results.

Curtis Garner

Thank you Mike and I appreciate everybody joining us today on the call. I'll provide a brief overview of our financial performance for the fourth quarter and the year 2011, and then we can take questions. As a reminder all of the financial information I will discuss includes the acquisition of Shoreham as of October 14th. It’s also worth noting that fourth quarter of 2010 reflected the benefits of the final settlement of the FairPoint bankruptcy related items and several carrier disputes impacting both the comparative revenue and expense numbers for fourth quarter of 2010 as you compare that to 2011.

Total revenues decreased 1.2% in the fourth quarter to $25.6 million from $25.9 million a year ago. The addition of Shoreham and CLEC revenue gains from local services and network access were offset by lower RLEC revenues in 2011 and the one-time settlement impacts for the CLEC in 2010.

For the year total revenues decreased 2.4% to $101.8 million $104.4 million in 2010. Breaking down the revenue pieces a little bit, local services revenue decreased 2.2% in the fourth quarter of 2011 to $11.8 million from $12.1 million in the same period a year ago. Shoreham added just under $200,000 which was offset by lower RLEC basic services revenues of $0.3 million and lower CLEC revenue of $0.1 million reflecting that one-time benefit in 2010 of the settlements that I just mentioned.

For the year local services revenues decreased 3.2% to $47.5 million from $49 million in 2010. One time recoveries during 2010 associated with the settlement of bankruptcy and interest rate traffic claims accounted for change of $0.5 million when compared with the current year.

RLEC revenue including bundled services such as long distance decreased $1 million reflecting the decline in voice access lines. Billing and collecting charges and directory assistance or directory advertising revenue declined $0.2 million.

Network access revenue decreased 2.1% in the fourth quarter to $8.1 million from $8.3 million in the same quarter a year ago. Shoreham added $0.3 million, this increase was offset by lower access revenue related to RLEC subscriber usage and lower NECA settlements including 2011 cost study estimates that Mike mentioned, combined they accounted for $0.5 million decrease.

For the year, network access revenue decreased 2.6% to $32.1 million from $33 million in 2010. Onetime recoveries during 2010 associated with the settlement of bankruptcy and total claims accounted for change of $0.4 million when compared to current year. In exchange carrier compensation declined by $0.7 million.

Cable television revenue for the fourth quarter increased 4.7% to $0.8 million compared to just over $0.7 million in the same period in 2010. Growth in digital family packages and IPTV of $100,000 was partially offset by less than $100,000 decrease in basic cable services.

For the year, cable television revenue increased 6.5% to $3 million from $2.8 million in 2010, the growth in IPTV and the conversion high definition television including digital video recording and video on demand services in Alabama accounted for an increase of $0.3 million.

Conversion of our Missouri cable subscribers to satellite television during the first quarter of 2010 reduced revenue by $0.1 million for 2011. Internet revenue for the fourth quarter of 2011 increased 3.9% to $3.6 million from $3.5 million in the fourth quarter of 2010. Shoreham accounted for $0.2 million which was partially offset by the loss of dial-up subscribers.

For the year, internet revenue decreased 0.5% to $13.9 million from $14 million in 2010. Shoreham accounted for an increase of $0.2 million, new fiber rental accounted for an increase of $0.1 million, these increases were more than offset by a decrease of $0.4 million associated with a loss of dial-up internet customers we served outside of our territory. Primarily in Maine where we are not able to offer them a high speed data line alternative like we do in Missouri.

Transport services, revenue decreased 2.4% to remain at $1.4 million in the three months ended December 31, 2011 and 2010. The reduction reflects small pricing changes for contract renewals. For the year transport services revenue decreased the same 2.4% to $5.3 million from $5.6 million in 2010. Changes in the industry pricing for services over our fiber backbone network in Maine and New Hampshire accounted for the decline.

Moving to expenses, operating expenses in the fourth quarter increased 3.1% to $19.8 million from $19.2 million a year ago. For the year operating expenses decreased 1% to $77.2 million from $78 million in 2010. Cost of services in products increased 13.3% to $11.2 million in the fourth quarter of 2011 from $9.9 million in the fourth quarter of 2010. The one time benefits of the settlement of FairPoint bankruptcy and the carrier claims in 2010, plus the Shoreham cost services of $0.3 million, increases in cable and internet capacity of $0.2 million and other operational cost of $0.2 million were partially offset by lower total cost of $0.3 million.

For the year costs the services in products increased 6.6% to $44 million from $41.3 million in 2010. Shoreham accounted for an increase of $0.3 million, one time expense reductions during 2010 associated with the settlements that I keep mentioning, accounted for change of $1.7 million when compared to the current year. Other increases included higher employee salaries of $0.9 million including the augmentation of CLEC sales and services function, increased cable expense for programming and growth of $0.2 million and higher pole attachments costs of $0.2 million. The increase was partially offset by reduction in total cost of $0.6 million.

Selling, general and administrative expenses increased 6% to $3.5 million in fourth quarter from $3.3 million a year ago. The increase reflects Shoreham expenses including the acquisition expense of $0.3 million and benefits of carrier settlements in 2010, a $0.4 million, but they were more than offset by lower management expenses of $0.5 million.

For 2011, SG&A decreased 0.7% to $13 million from $13.1 million in 2010. Shoreham accounted for an increase of $0.1 million, one time recoveries from the settlements and had an impact of $0.8 million when compared to the current year. These increases were more than offset by lower employee costs of $0.5 million, reductions in property taxes of $0.2 million, reductions in sales commissions of $0.2 million, and insurance costs of $0.1 million.

Depreciation and amortization for the fourth quarter 2011 decreased 15.4% to $5.1 million from $6 million in the fourth quarter of 2010, an increase for the acquisition of Shoreham of $0.2 million was offset by a decrease of $0.3 million in the amortization of intangible assets associated with country road acquisition including a covenant not to compete and contract and customer base intangible assets.

The remaining decrease of $0.8 million reflected lower appreciation of plant assets and their regulated properties. Looking at it for the whole year, depreciation and amortization decreased 14.5% to $20.2 million in 2011 from $23.7 million in 2010. Again, Shoreham accounted $0.2 million. The amortization of intangible assets accounted for a decrease of $1.2 million.

A plant and equipment adjustment associated with the Maine acquisition back in 2006 was fully amortized in June of 2011, reflecting a decrease of $0.4 million. The balance of the decrease consisted of reduction and depreciation of $2 million associated with the PT&E investment in our RLECs.

Interest expense decreased 1.2% to $6.2 million in the fourth quarter from $6.3 million a year ago. The decrease in interest expense was driven by lower outstanding balance on our senior long-term notes payable. Interest expense for the year of 2011 and 2010 were basically the same at $24.7 million. Interest on our senior debt decreased $0.2 million on the lower outstanding senior debt associated with voluntary principle payments, prepayments made in 2010 and 2011.

The interest on the senior sub notes associated with the IDSS increased $0.2 million reflecting the conversion of the outstanding class fee common stock to IDSS through June of 2010. That one aside, our two interest rate swaps expired two weeks ago. The change in their valuation has had an impact on book net income running changes through the fair value of derivatives line on the income statement. The net impact over the life of the swaps is zero, but the swings in their value has had an impact on net income which was negative in 2010 and positive in 2011, again no cash impact.

Adjusted EBITDA for the fourth quarter was $10.9 million compared to $12.8 million in the same period of 2010 and $11.1 million when compared to the third quarter of 2011. For 2011 the adjusted EBITDA was $45.3 million compared to $50.7 million in 2010, but approximately half of that change relating to the settlements that I have keep mentioning.

Cash flow from operating activities was $19.5 million in 2011 compared to $26.4 million in 2010. Cash used in investing activities amounted to $15.6 million compared to $10.2 million a year ago, reflecting the acquisition of Shoreham and our continued investment in both our CLEC and RLEC businesses. Investments in property, plant and equipment in the fourth quarter was $2.1 million as we continue to grow and invest in the infrastructure particularly in our CLEC capabilities in Maine and New Hampshire, our existing DSL and broadband, wireless broadband capacity as well expanding our IPTV capability in Alabama.

Cash flow used in financing activities for 2011 amounted to $9.8 million compared to $15.7 million in 2010, reflecting the dividends for the converted Class B shares beginning in the second quarter of 2010, and the voluntary payments on our senior debt of $6.1 million in 2010 and $0.4 million in the current year.

As of December 31, 2011 the Company had cash and cash equivalents of $12.4 million compared to $18.2 million at the end of 2010. The Company used a little over $5 million in cash to acquire Shoreham during fourth quarter plus expenses associated with the transaction.

Total long-term notes payable was reduced to $271.1 million, reflecting a voluntary payment of $0.4 million made in May 2011 on our senior credit facility which is now a $162 million and has a maturity date of October of 2013.

We may consider refinancing this debt prior to the maturity of the market, and conditions make it prudent to amend and extend the agreement. Based on the terms we’ve see and completed financing packages we would anticipate – the revised terms might move us toward some lower leverage ratios.

The fourth quarter distribution of $5.6 million in interest and dividends to the share owners and $0.3 million in interest to our bond holders occurred on December 30, 2011. We’re currently conducting an updated earnings and profit study to determine how 2012 dividends will be treated. We anticipate that a portion of any dividends declared by the board of directors in 2012 will be qualified dividends and the balance will be treated as a nontaxable return of capital of tax purposes.

Historically, the board considers the declaration of dividends during its normal scheduled quarterly meeting. For this quarter, the Board is meeting on February 27. The scheduled interest and any dividends declared will be paid on March 30 to holders of record as of the close of business of March 15, 2012. The interest payments will cover the period from December 30, 2011 to March 29, 2012.

Vicky, if you’ll provide directions, we can take questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions] We’ll take a question from Frank Louthan with Raymond James.

Frank Louthan – Raymond James

Great, thank you. A lot of numbers information here on the call, and in the release, and I want to try and maybe simply this. Can you give you an idea what the current run rate revenue in EBITDA or for Shoreham? And full amount of any sort of onetime items related deal or other thing that impacted the quarter that may not have been included as you calculate the adjusted EBITDA in the press release. Can you just give us a full amount of anything that we maybe should be added back look at our more normalized basis?

Curtis Garner

We can kind of give you ballpark figures on that Frank, thank you for the questions. Shoreham acquisition I think the total cost which were legal and some appraisals and other normal cost associated with the acquisition were around $0.5 million, somewhere between $25.5 million, all of that hit the courses expensed according to proper accounting and the P&Ls. Shoreham, I think it’s reasonable to expect that the Shoreham acquisition should add a $1 or so EBITDA to our bottom-line once all the synergies are in place and the integration process is completed. I think that’s the summary I would give you as far as you question relates to Shoreham.

Frank Louthan – Raymond James

Okay, great. Can you give us an idea about the integrated comp revenue that’s being lost from the CLEC? Any chance to recover that through some higher rates or is that just a zip comp that’s disappearing, can you characterize that any chance of try and get any of that back over time?

Curtis Garner

Sure, and that’s almost a byproduct by the way of the SEC reform. What’s happening on our CLEC operations by the way, I don’t think we’re special I think this is happening to our peers in the CLEC business across the industry. Part of the RLEC reform require that the federal access rates ultimately be designed or are very, very close designed. What you see in one of the state that we are re-affected by that is in mind. And that right decline is over a period of years then the first decline becomes effective July 1st almost terminating intra-state access rights. And the decline of that, what I mentioned in the $0.5 million in revenue decline that’s the geneses or the source of that decline. That decline, certainly we have the option as a non-regulated business to tweak our pricing and raise our pricing. We will see what the market will stand and if that’s a market-smart move and certainly that’s something that we would consider.

You should not assume that that’s a worst-case scenario that – there would be no recovery of expenses or no recovery due to price increases from the $0.5 million in our – that’s our estimate for 2012 on a worst-case basis in the CLEC operation.

Frank Louthan – Raymond James

Can you give us an idea what sort of your net exposure is for the whole company from gear comp perform from net revenue that is going away minus any cost of terminating access or other similar zip comp type expenses that you have? What’s sort of your net exposure there or an annual basis?

Michael Weaver

I am reluctant to put that number out now because – here is why. I mean, the order is effective, that’s a fact. But there still remains a great deal of uncertainty around that order. I am comfortable telling you that we are on top of that situation and we do not, at least based on the order as it exists today and based on our understanding of that we do not think that has a material impact on our RLEC operations at all.

Now, we separated that on purpose with the CLEC and the RLEC because it’s more easily understood that way, and that’s why we chose to define the CLEC losses, the $0.5 million in the access revenue. I think our – as we have mentioned in press releases and in previous calls, our high-cost loop funds that we receive is less than 4% of our total revenue, and we don’t feel that based on our understanding of the order, for the next two years, our high-cost loop funds should be relatively stable. So, I am not anticipating a major change in our revenue in the next couple of years on the RLEC side.

I know that is not as definitive an answer as you want. I want to be careful that I don’t – because the order is in flux state despite being out there and there is a great deal of confusion and likes this deal there remains a lack of concrete details as to how exactly the program will be implemented.

Frank Louthan – Raymond James

Shocking for me, a government program, all right, thank you very much.

Michael Weaver

You are welcome.

Operator

Next we will hear from Tim Horan with Oppenheimer.

Timothy Horan – Oppenheimer & Co.

Thanks, good morning guys. Mike, just a follow up on that. What’s the difference between why the CLEC rate is coming down and the RLECs aren’t? Or how come they are not happening at the same time?

Michael Weaver

The CLEC rates are being affected by the terminating access and they simply – they are being affected at the same time. The volume of traffic that we have in the CLEC is so much greater than in our RLECs, it’s almost a non-event in the RLECs but because of the volume of minutes that go through our CLEC, that’s more significant to the CLECs and not the RLECs, and I am sorry if I gave you impression that it was not a common occurrence. You are exactly right, I mean it is occurring at the same time. It just doesn’t – it’s not impactful to our RLEC operations.

Timothy Horan – Oppenheimer & Co.

All right, got you, sorry. And that’s just because the minutes are fairly low that you can charge access charges for?

Michael Weaver

That's correct. It’s per minutes, yeah.

Timothy Horan – Oppenheimer & Co.

Got you. On the CLEC front, maybe – can you just discuss a little bit what’s going on in North England? Is FairPoint just executing a little bit better, are they getting more competitive than some of the other CLECs? What do you think, you have seen the pricing competition, and it seems also be impacting your CLEC volumes there, unless I am missing something?

Michael Weaver

No, you are not missing anything. It certainly had an impact on us. It has grown more competitive and one of our larger competitors in the Northeast is on the CLEC side, it’s Time Warner. They are actually – they have an extensive network because of their cable properties, and they are becoming quite adept in the CLEC market there. There are marketing the advantages they have with cable network, and they are extreme, and they have a very – their transport network because of the nature of their business with cable is quite extensive and quite good. They are a formidable competitor. In addition, there is other local CLEC competitors that are just in the focus more on price than any other – than in the past as far as offering competitive services in our markets. They are all big companies and they are all good competitors. But we don’t believe competing on price makes sense long-term. So, we stay away from that. We certainly try to improve our efficiency and improve our bandwidth and increase the services, but we don’t feel that competing on price makes sense for Otelco.

Timothy Horan – Oppenheimer & Co.

Great. And how long has Time Warner really been in those markets? I think that they have been there for a while. I guess they just have been ramping up their capabilities and something hit really last year for the first time?

Michael Weaver

No, I don’t think it’s that exact, I certainly think they have been ramping up their capabilities. The difference from my personal observation is initially they were going after the smaller accounts as they – also learned the business, but that is they acquainted with the market. As they became more aggressive and become more successful and they – it appears to me that their target clients had gotten more into the small and medium sized which is – it’s traditionally been our strong suit. We still get, you know, this is not a [indiscernible] and we still get our share of the market, and we are very competitive and we are very aggressive, but they are formidable.

The difference is, a couple of years ago we didn’t see them in the same mid market size companies that we – if they had been operating better. So, we – the hosted think the X product is something that we have that’s doing quite well for us. We still in my opinion have the premier service offering that’s out in the market for that. We have revamped our sales effort both internally, with our internal sales force and with our external sales force, with our agents. I believe that we have properly addressed the issues that we needed to and I'm hopeful that coupled with the fact that the eight new sites that we put on mid to late 2011 absolutely expanded geographic footprint and we should see additional revenue from both sides.

Timothy Horan – Oppenheimer & Co.

What was the delay in ramping up those sites, and how much of expense was really associated with that in the year versus the lack of getting revenue with it?

Michael Weaver

I made two mistakes on that Tim, we absolutely had great plans on paper, and on those of the eight sites, six of those we were depending on third parties to provision the network site, the collocation sites, and the third parties to do the work. There were unforeseeable delays in that. One of the sites is in Massachusetts, there was a union strike during that period of time that caused delays on that. There was some issues getting the proper equipment in place. We had some issues with permitting and getting the proper documents for that. It simply took much longer than I anticipated.

The other mistake I made was because I had thought those sites would come on much quicker, we ramped up our sales force. We went from 4.5 sales people to 12. Because we had gone through the effort and identified what we thought and believe our good sales people we elected not to start that process over.

During that period of time in addition to the normal expense that you incur with the time you bring these sites online we had quite a bit of additional personnel costs and training costs as we brought new sales people on board without the new territory for them to marketing it. I actually thought those sites would come online at the end of the first quarter as you guys have heard before, it was late in the second, early in the third quarter before they became operational and we were able to start a marketing efforts in New Hampshire, Northern Maine, and Massachusetts.

Timothy Horan – Oppenheimer & Co.

Got you. That’s extremely helpful. Okay, thanks.

Michael Weaver

Sure.

Operator

Next we will hear from Richard Diamond with Strait Lane Capital.

Richard Diamond – Strait Lane Capital

Yes, the stock is under pressure today, you guys have been wonderful stewards of your shareholder’s capital over the years. Given the competitive pressure do you foresee any change in their dividend policy near term understanding that the dividend is at the discretion of the board of directors?

Michael Weaver

Thank you for your question Richard. The dividends are under the discretion of our board and every quarter is – there is discussion and conversation around what’s the appropriate level of dividend to pay and we paid the same dividend for 28 consecutive quarters. That’s the decision that’s entirely up to our board. So I think that’s the comment that I would make on that.

Richard Diamond – Strait Lane Capital

Let me ask the question in a different way. As managers, will you be recommending that the board consider changing their dividend policy?

Michael Weaver

I'm not trying to avoid your question. I mean our cash flow – we had a down year. There is no question about that, and as I said in my remarks I'm disappointed in that. We still – it’s over $45 million of EBITDA and we managed our cash I think appropriately and we will continue to do that. What the board decides on the dividend will be up for discussion at the board meeting.

Richard Diamond – Strait Lane Capital

Yes, I understand that, but I don’t think the market is giving you credit for your cash generation abilities or the [indiscernible] for which you have a dividend. But I understand what we have accounted for. Thank you.

Michael Weaver

You are welcome.

Operator

Next we will hear from Eric Will with Fertile Mind Capital.

Eric Will – Fertile Mind Capital

Hi, thanks. Can you just give us maybe broad color on where you see the access line loss is coming with respect to like geography or suburban areas?

Michael Weaver

Sure I'm happy to do that. As it’s happening across our industry our access line losses are coming from our RLEC operations. Our Maine competitor in the majority of our RLEC operations is wireless, and that’s not true in some of our New England markets. We have the income of cable properties offering telephony as well.

But our markets are all in small rural areas and we’ve phone service through the landline, we are in at least over half of those markets, we are the only wire-line provider in those markets. The good news for us is that the access one lost, it certainly has been from our RLEC market. Certainly has remained relatively stable. We think that may have a feet and hopefully we will some slight improvement on that. I think it would be ridiculous for us to tell you that we think we can stop access line loss, we don’t. We have bundled offerings in place and we have all the appropriate programs for customer retention.

As an example in our Alabama markets, we have a bundled offering that’s $99 for phone service, internet, and cable TV. That’s been quite popular. So we are cognizant of access line losses in our rural RLEC markets and we have plans in place as we have always in aggressive marketing to try to maintain and control that access line loss as much as possible.

Eric Will – Fertile Mind Capital

Okay, and maybe talk a little bit about debt coming due next year. Do you think that refinancing process will involve like an equity raise and what's the expected cost of that will be under the current leverage ratio versus the more optimal leverage ratio?

Michael Weaver

Let me ask our CFO, Curtis to speak to that question, if you don’t mind.

Curtis Garner

Eric that’s a good question. I think the $162 million that we have got in senior debt is not due until October of next year. I know you and the market would expect us to either amend and extend the existing facility or replace it sometime this year. And so I think you will see that happening. The current facility then require a principle amortization that we voluntarily made 6.6% repayments or $11.5 million over the last three years. So while there is no amortization in the loan we’ve made what would be the equivalent of two plus percentage point payback. So within their cash flow we have covered that. I think the markets are going to be pushing everybody toward a lower – within the telecommunications industry anyway, to a lower senior leverage ratio.

Will that require us to either use cash on our balance sheet or do an equity raised or do an acquisition using equity as part of the acquisition to lower the senior leverage ratio? All of those things are possible. So, it could happen. I don’t think we have got anything priced out that says here is what it would cost us to do it, and it quite honestly depends on the price of the stock in terms of how we might approach that.

Eric Will – Fertile Mind Capital

Okay, thanks a lot.

Operator

Next, we will hear from David Coleman with RBC Capital Markets.

David Coleman – RBC Capital Markets

Great, thanks a lot. Can you guys talk about 2012 CapEx, how you expect that to compare to 2011? Then categories in which you anticipate investing next year or this year rather? Thanks.

Michael Weaver

Thanks Dave. Sure, we are happy to do that. I wouldn’t think you will see less CapEx in 2012 than you’ve done – than what we’ve spend in the two previous years for pretty obvious reasons. If you think about what we’ve done over the last couple of years, we certainly added – implemented sites. So I expect we added [indiscernible] gives us eight new markets for our CLEC. So we think that that will – that’s a lot, that’s a lot for us and we need to take advantage of that and really turn that profitable on a collocation site by site basis before we make any other significant CLEC investments in 2012.

In addition we spent over $5 million expanding in the Vermont which again is another new market for us for RLEC and eventually for CLEC in that space. So, while that’s not exactly CapEx, it certainly expands our footprint and it gives us that green field for us.

As Curtis mentioned, we have continued expand our IPTV market in Alabama and one of the things that’s a byproduct of that it requires pretty significant plan upgrades and our guys have done a great job with that. And that process is probably 90% complete. So the point of all that is that your CapEx is in great shape on an overall basis which will allow us to dedicate less resources to that in 2012. I think as far as where the money will be spent because we have made those big investments in our CLEC you will certainly see more larger percentage of the cash going to our RLEC markets than perhaps in the past simply because we think our CLEC is in great shape from an opportunity for new markets standpoint.

David Coleman – RBC Capital Markets

Just a follow-up on that the $2.1 million spent on CapEx in each of the last two quarters, is that good run rate for each quarter in ’12 or average for each quarter in ’12?

Michael Weaver

I think it will be lumpier than that frankly just because of the projects that we have that we are looking at and thinking about. That total might be close, but I don’t think it will be – I don’t think you can necessarily straight line that across the quarter. We are still – I mean certainly we work on the CapEx thing and it’s not a project or it’s not an event where once you get the budget done you don’t talk about it anymore. It’s some kind of an ever evolving things as we have new opportunities arise during the year and new products. So, I don’t think you will be far off with the use of that number on the total basis. I don’t think you can strike line. I expect what you will see are heavier CapEx expenditures in the last half of the year. Some of that has to do with who we are at this time of the year, in New England there is not a lot you can do outside. So that’s not necessarily departure from what we have done in the past.

David Coleman - RBC Capital Markets

Great and then can you talk about this 4G wireless competition in the RLEC properties whether you are seeing anything incremental than what you have seen in the past you know 6 to 12 months?

Michael Weaver

Sure. We have not seen anything significant in the markets that we are in today. As a matter of fact I'm glad you asked me the question, because one of the byproducts of that’s has been a positive for us we are beginning to get some contracts for backhaul with transport by bringing sales sites in some of our RLEC territories. While it is not a massive amount that I can point to and say there is a huge contract out there we’ve more or less steadily added additional sites over the years, over the last year in particular in Missouri and Alabama. So, as of today and at this point that has been more of an opportunity than a detriment. It remains to be seen what impact that will have on our rural markets as those spill outs are complete.

David Coleman - RBC Capital Markets

That’s great. Thanks a lot.

Operator

Next we will hear from William Span [ph] with Raymond James.

William Span – Raymond James

Yes, with regard to the senior debt if you will look into refinance in and around now with your financing course be higher or lower than where they are now?

Michael Weaver

I think they probably will be higher if they were you know based on the market conditions that we will see today. That’s a little bit difficult question to answer because of the number of variables involved. Let me explain what I mean. The swaps that Curtis mentioned that just went away two weeks ago effectively lower our interest rate. We had a LIBOR floor. Some of the debts we are seeing in the market today don’t have LIBOR floor, so while you might see an increase in the rate it doesn’t necessarily follow that your total interest expense would go up if you go from having a LIBOR floor to not having a LIBOR floor. It’s a pretty difficult question to answer. I think our terms today are LIBOR plus four. You know we see the market at a more of a 4.5 to 5.5 range for deals that we think are comparable to what we would see. I'm not trying to avoid your question, it’s just there is a lot of variables and I'm not certain how to give you a really definitive answer to that.

William Span – Raymond James

Thanks.

Operator

We will take a follow-up from Frank Louthan with Raymond James.

Frank Louthan – Raymond James

Okay, I just want to be clear about the question on the dividend and I think the concern with investors is in the last couple of months as seen Alaska cut a dividend frontier dividend. So with the promise that when majority of what investor sees your yield is the debt payment on the idea – the subject portion of the ideas and the dividend being a smaller part so you know not as representative of all of your cash flow. And also understanding that it’s not your decision. To you is there anything that you see in the outlook for your cash flow this year that would in your opinion okay jeopardize your ability to continue to pay that pay off at the same rate?

Michael Weaver

No, let me be exclusive about that. Thank you for bringing up, I failed to do that before. The total yield on our stock has been with the dividends at the – at the rate they have historically been, which is ¢70.5 on an annual basis. The interest on the sub-debt on a per share basis is ¢98. So we have talked often in the past about the yield on our security being $1.68. That's made out of ¢98 interest on the sub-debt and ¢70 for the dividends that the board has historically declared.

As you can see from the $45 million in EBITDA that we generated in 2011, we more than – we paid our four quarters of dividends, we paid all the sub-debt interests that was due. We funded our CapEx and we spent $5 million on Shoreham. If you assume that that EBITDA and I would, as you all – those who [indiscernible] $45 million is lower EBITDA than we have had in the last couple of years. And there was ample cash to do everything we needed to do based on that run-rate. So if you assume that EBITDA is that level or slightly higher then it would be safest option that based on reports knows today that the cash would be there to do everything that we did in 2011.

Frank Louthan – Raymond James

Okay, great. Thank you for that clarification. I appreciate that.

Operator

Now we will take a follow-up from Tim Horan with Oppenheimer.

Timothy Horan – Oppenheimer & Co.

Thank Mike. The ¢98 you are paying on the debt. I think that's for basically about $80 million worth of debt, which is obviously a fairly high interest rate. Is there any thinking to maybe looking at the whole capital structure and potentially we try and set that at a lower rate as you refinance these senior debt?

Michael Weaver

Tim, you are right. The ¢98 and actually inflating the bonds or blowing the total is closer to $106 million of total debt, which is the sub-debt plus the $8.5 million of bonds. The interest rate on that is disclosed and our parlance is 10%. There is an advantage that we have this year that we have never had in the past and that is that that debt until 1st January of this year, the sub-debt was not callable. It is callable starting now with a premium that declines each year over the next several years. What that means is in the past we have not had the ability to call the day and so we now do. And it would now be possible to do a financing transaction that rolled in some way combined both senior debt and sub debt if the market, if there is a market for that kind of paper which we think there has been and perhaps there is today and it’s certainly an option and it’s one that our board would take under advisement and consider.

Timothy Horan – Oppenheimer & Co.

Thank you.

Operator

At this time there are no further questions.

Michael Weaver

Thank you Vicky, and I appreciate your questions and your attendance on the call and we will look forward to speaking to you again next quarter. Thank you.

Operator

That does conclude today’s teleconference. Thank you all for joining.

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