General Communication, Inc. Q2 2008 Earnings Call Transcript

Jul.31.08 | About: General Communication, (GNCMA)

General Communication, Inc. (NASDAQ:GNCMA)

Q2 2008 Earnings Call

July 31, 2008 2:00 pm ET

Executives

Ronald Duncan - President, Chief Executive Officer and Director

John Lowber - Chief Financial Officer, Senior Vice President, Treasurer, Secretary

Dana Tindall - Senior Vice President - Legal, Regulatory and Governmental Affairs

Bruce Broquet - Vice President of Finance

Peter Pounds - Senior Financial Analyst

Lynda Tarbath - Chief Accounting Officer

Bonnie Paskvan - Corporate Counsel

Analysts

Anupam - Jefferies

Jonathan Atkin - RBC Capital Markets

Ian Zaffino - Oppenheimer & Co.

James Crumm - Regiment Capital

Ana Goshko - Banc of America

Liam Burke - Janney Montgomery Scott

Operator

Welcome to the General Communication, Inc. second quarter earnings conference call. (Operator Instructions) I will now turn the meeting over to John Lowber, Chief Financial Officer. Sir you may begin.

John Lowber

Thank you very much and thank you all for taking the time to join our call today. I’m John Lowber the company’s Chief Financial Officer and we’ve got the usual supporting cast here today; we’ve got Ron Duncan, our President and CEO, we’ve got Dana Tindall who runs our Legal and Regulatory Operations, we’ve got Bruce Broquet, our VP of Finance and Peter Pounds our Senior Financial Analyst, Lynda Tarbath our Chief Accounting Officer and even Bonnie Paskvan our Corporate Counsel is here, so we’ve got a full crew.

We will all be available to participate in the question-and-answer-session which will follow the initial comments. A copy of our detailed press release can found on our website. The conference call is being recorded and will be available for playback for 72 hours beginning at 4:00 pm Eastern Time today.

The playback number is 866-413-9161 with an access code of 7461. In addition to the conference call you may access the conference through the internet. To access the call via net conferencing log on to our website at www.gci.com and follow the instructions. The webcast will be available for replay for the next two weeks.

I will now read the usual cautionary statement about forward-looking comments and then we’ll get started. Some of the statements made by GCI in this presentation are forward-looking in nature. Actual results may differ from those projected in forward-looking statements due to a number of factors. Additional information concerning such factors can be found in GCI's filings with the Securities and Exchange Commission.

We’re pleased with the second quarter results on both in operational and financial front. We established new highs for both revenues and cash flow reflecting the strong performance we’ve been seeing in the consumer business metrics over the last few quarters. Several operational items were accomplished which we expect will mitigate risk to this years business plan.

We transitioned our services in an orderly fashion to the recently launched Galaxy 18 satellite following at successful launch in late May. We closed the acquisition of the United Utilities Companies a month earlier than planned and received the necessary regulatory approval to complete the acquisition of Alaska Wireless.

We completed the Alaska Wireless transaction early in the third quarter. We’ve made considerable progress with our urban and rural wireless facilities expansion efforts and the construction of our new fiber facilities in Southeast Alaska and north of Fairbanks. These projects remain on scheduled and on budget.

We amended our senior credit facility in May to provide an additional $145 million in financing to fund our current business plan and we’ve entered into $60 million of fiber capacity agreements which yielded approximately $38.5 million in cash receipts during the second quarter. Our financial results are labeled as preliminary as our auditors have not yet completed their review, but we don’t expect any material changes to them at this time.

Second quarter revenues totaled a record of $142.5 million representing an increase of 9.7% over the prior year quarter. All four of our historical business segments recorded revenue increases on a year-over-year and a sequential basis. EBITDAS, which excludes share-based compensation expense, totaled $43.4 million which compares to the $41.6 million that we recorded last year.

Net income for the quarter was down when compared to the prior year quarter due mostly to increases in depreciation and interest expense. As a percentage of revenues, selling and general administrative expenses excluding share-based compensation expense dropped 77 basis points on a sequential basis and 10 basis points compared to the prior year quarter. On a sequential basis, revenues were up 5.8% and EBITDAS was up more than 13.6%.

On a year-to-date basis, net income and earnings per share are down from last year due primarily to increases in depreciation expense resulting from our ongoing capital expenditures programs. Our financial results benefited from one-month of activity of the United Companies, following our acquisition of those companies effective June 1, of this year.

Consumer; the consumer segment experienced another strong quarter with sequential and year-over-year revenue growth in all four product lines including wireless, video, voice and data. Consumer revenues were up 12.7% over the prior year and approximately 1.2% on a sequential basis. The gross margin percentage was up more than 200 basis points both compared to the year ago quarter and sequentially.

The consumer segment is continuing to benefit from expansion of our local services offerings into numerous new markets in Alaska and the ongoing efforts to move our customers onto our own facilities. It’s still early yet, but it appears that our new video on demand product is being well received by our customers.

The few of the more significant metrics for the consumer segment for the quarter included an increase of 1300 local access lines, 5000 local service lines provisioned on our own facilities and an additional 1500 HD/DVR converter boxes deployed. Including our Alaska DigiTel wireless subsidiary we added 4000 wireless subscribers.

We added a 100 cable modem subscribers and lost approximately 400 video subscribers, which is not uncommon as we enter the summer months. Reflecting consistently strong underlying customer metrics, consumer EBITDAS totaled $13 million for the quarter, as compared to $11 million a year ago and $12 million in the prior quarter.

Commercial; second quarter revenues were up 4.8% versus the same quarter of 2007 and were up 3.2% on a sequential basis. Growth in video and data revenues outpaced the declines in voice and wireless revenues as compared to the prior year quarter. All four product categories experienced growth on a sequential basis.

The commercial gross margin percentage decreased 390 basis points compared to the prior year quarter primarily due to rate compression in the long business line and increased 222 basis points sequentially. Commercial EBITDAS increased $545,000 over the prior year quarter and $1.4 million on a sequential basis.

Notable commercial metrics include an increase during the quarter of 200 cable modem subscribers, 1700 commercial video subscribers and an additional 2000 local service lines provisioned on our own facilities. We added 1900 local service lines during the quarter. We now serve a total of 84,100 consumer and commercial wireless subscribers including those of our wireless subsidiary.

Network access services; the network access business experienced a steady quarter. Revenues were up 0.7% over the prior year and were up 6.9% sequentially. The gross margin percentage decreased 134 basis points sequentially and wasn’t really comparable to the prior year quarter as the year ago quarter benefited from a couple of favorable adjustments that enhanced the margin and EBITDAS percentages. We carried 326.2 million network access minutes during the second quarter, an increase of 8.5 million minutes as compared to the prior year quarter and an increase of 11.6 million minutes on a sequential basis.

EBITDAS decreased by approximately $2.23 million or 9.5% versus the prior year quarter, but increased about $1.6 million or 8% on a sequential basis. Our average rate per minute for all of our long distance traffic totaled $7.79 per minute compared to $8.59 per minute a year ago and $7.63 per minute in the prior quarter. The decrease from the prior year is largely due to a rate decrease effective the first of this year, while a sequential increase similar to what we experienced last year is due primarily to a seasonable change in the traffic mix.

Managed Broadband; managed broadband revenues were up 31.4% compared to the year ago quarter and we’re up more than 21% on a sequential basis. Revenues for the second quarter totaled $9.1 million as compared to $6.9 million in the same quarter of the prior year and just over $7.5 million in the prior quarter.

Quarterly EBITDAS was up $1 million as compared to the year ago quarter and $661,000 on a sequential basis. The Managed Broadband segment benefited by the United Companies acquisition and that a good portion of United’s unregulated activity will be recorded in the Managed Broadband segment.

Regulated operations; the results of the regulated local exchange business we acquired with the United companies are included in a new segment labeled Regulated Operations. One month of activity following the June 1 acquisition date is reflected in this segment for the quarter. Regulated revenues totaled $1.9 million and EBITDAS totaled $360,000 for the month.

Other items of interest, legal and regulatory; our regulatory folk continued to be focused on negotiations for local and wireless service interconnection with incumbent carriers. Today we have interconnection agreements in place that cover 90% of the access lines in the state and as a result we’ve initiated GCI local service in 30 communities.

Through our acquisition of the United Companies, we now offer local service in an additional 59 communities. We have completed negotiations and have submitted local interconnection agreements with Alaska Telephone Company, Interior Telephone Company and Arctic Slope Telephone due to Regulatory Commission for approval.

Additionally we completed a number of wireless interconnection agreements with ACS, Arctic Slope Telephone, Alaska Telephone, Bettles Telephone, North Country Telephone, Interior Telephone and Mukluk Telephone companies. We have new negotiations underway in some of the remaining wireless areas. These efforts will allow us to eventually provision local services and turn up our own wireless facilities in these new markets.

Following FCC approval of our applications for the acquisition of the United Companies and Alaska wireless both transactions have closed. We’re still waiting for the necessary FCC approval of the Alaska DigiTel transaction and we hope the necessary approval will soon be forth coming.

Wireless expansion and transition; we are working diligently on enhancing our urban wireless infrastructure in anticipation of converting our GSM customer base to our own facilities beginning this quarter. At the same time our wireless subsidiary; Alaska DigiTel has been enhancing its CDMA facilities to meet the requirements of our strategic roaming agreement with Sprint.

DigiTel will be the first in the market to deploy EV-DO Rev A as part of our obligation to Sprint. We’re continuing to work on our rural wireless expansion and expect to have service deployed in two regions encompassing approximately 40 rural communities by year end.

Local service expansion; our statewide local services expansion continued during the quarter as we added no under listed markets we now serve on a facilities basis. We rolled out service and Homer during the first quarter. Last year we expended into 12 new markets and during the remainder of this year we expect to rollout local services in three additional new markets. With the roll out of local services we’re able to extend our attractive and successful bundled product offerings into these new markets.

Guidance and economic prospects; as I mentioned last quarter we expect this will be the last year we provide financial guidance on a quarterly basis. This is a reminder that beginning next year we will provide guidance on an annual basis only. Each quarter we will indicate whether or not we believe we are on track to meet the financial goals we established for the year.

Last quarter we noted that we expected we will generate second quarter revenues in the range of a $133 million to $136 million and EBITDAS in excess of that generated in the first quarter. We exceed the high end of our revenue guidance and our EBITDAS target and consequently remain on track to meet our prior revenue and EBITDAS guidance for the year.

Our cash EBITDAS including expected cash receipts from fiber capacity agreements is expected to exceed $210 million. Our EBITDAS and revenue guidance contemplated mid year closings of our planned acquisitions of Alaska Wireless and the United Companies, those expectation have now the net. We will now be concentrating our efforts on transitioning our customers onto our new wireless platform and our hesitant to revise our guidance until we have better visibility into that process.

The Alaska economy appears to be holding up quite well. I will note again that we expect it will remain counter cyclical to what happens in the lower 48 states. High energy prices have historically had a favorable effect on state revenues on the Alaska economy and there seems to be legitimate interest in exploring means to transport Alaska’s natural gas to market.

Liquidity and capital expenditures; we ended the second quarter with $101 million in cash and investment securities and $96 million available for draw under our revolver. As mentioned earlier, we now have a facility in place that will meet the reasonably foreseeable requirement of our business plan. Our existing indebtedness including our capital leases will require approximately $9.2 million of the amortization during the next year.

Excluding the satellite capital lease we invested approximately $68.8 million in capital expenditures on a consolidated basis during the second quarter. Our capital expenditures requirements for 2008 excluding the capital lease of the new satellite capacity are expected to total approximately $225 million.

During the second quarter we made investments in the following areas; for our business lines primarily setup boxes and item supporting our statewide rollout of local service, $18.7 million; for IT projects $5 million; for support and expansion of our network $7.2 million; for product management primarily focused on the digitization of our cable plant and the rollout of our video on-demand product $2.6 million; for expansion of our wireless facilities including those of our wireless subsidiary $17.9 million; for construction of our new fibers to Fairbanks in southeast Alaska $11.7 million, for administrative support including capital inventory approximately $4.8 million and $0.9 million for United Companies network enhancements.

Our major capital expenditures initiatives for 2008 include approximately $78 million for expansion of our wireless facilities, $51 million for long-haul fiber and network capacity, $25 million for our statewide rollout of local services and $71 million for other projects including cable plant expansion, digital cable conversions, real estate, IT, new products including video on-demand expansion capital for the new companies that we acquired and growth and maintenance capital.

To recap our cash sources and uses for the first half of the year on a simplified basis, we generated approximately $81.5 million in EBITDAS, raised approximately $130.5 million through borrowings under our senior credit facility, received $38.5 million from fiber capacity agreements and realized a benefit of $15 million related to changes in the components of working capital, the total sources of approximately $265.5 million.

We used a net of $34.6 million to acquire the United Companies, invested $121.5 million in capital expenditures, incurred approximately $20 million in interest expense and paid $1.5 million in schedule principle payments. Total sources of $265.5 million less $177.6 million in uses implies an increase of the $87.9 million in cash which approximates the actual increase reflected on our balance sheet.

To summarize; the increase in debt since the first half year we raised $129 million net of principle payments to our senior credit facility. We recorded a capital lease of $98.6 million related to the new satellite and assumed $33 million as part of the United Companies acquisition. These items account for $270.6 million of the $273.7 million increase in debt since the first of the year.

At quarters end the interest rate on approximately $459 million of our $815 million in debt was fixed. Just after quarters end we purchased an interest rate cap, which limits the LIBOR element of 4.5% on an additional $180 million of debt. Our cash interest expense at current rates on our facilities at the end of the quarter was running at approximately $59 million per year. Compared to the last two quarters annualized cash flow of approximately $163 million, our cash interest coverage is approximately 2.76 times and our leverage on net debt is 4.38 times cash flow, on gross debt our leverage is 5 times.

In conclusion we are very pleased with the second quarter and year-to-date results. It’s been an extremely busy year and quarter. Much remains to be done during 2008 to position us to meet our 2009 goals, but if we stay focused and continue to execute we should remain on plan.

We will now be happy to answer your questions.

Question-and-Answer-Session

Operator

(Operator Instructions) The first question comes from Jonathan Schildkraut of Jefferies.

Jonathan Schildkraut - Jefferies

Hi this is Anupam covering for Jonathan here. I was just wondering if you could go over once again just the way the cost and revenues will shift between the various segments, once the Dobson deal has rolled off.

John Lowber

Okay, do you want to take a shot at that one Ron?

Ronald Duncan

Sure. Let’s give it to you in a broad summary form and then if you want to drill down, deep within that rather than holding everybody up on the call you could call us back afterwards. Basically, at last years run rates there were about $25 million in revenues that we paid Dobson and Dobson paid us and the intent of the agreement that we struck with AT&T Mobility was to preserve the relative economics of that arrangement by eliminating our payments to them for a wireless service and allowing them the flexibility to move off of our network.

We have said previously that there was about $17 million in carrier EBITDA associated with that $25 million in revenues and there is probably a larger amount of wireless EBITDA associated with our $25 million in payments to them post transition after we incur certain transition expenses.

On July 1, AT&T Mobility was free to stop using GCI transport facilities and they have commenced the process of migrating traffic off of our network. We’re unable to say how quickly that migration will occur, although we expect most of it to be done fairly rapidly and certainly the significant majority to be done by the end of the year.

We are also approximately in a position to begin migrating our wireless customer off of their network, effective with billing cycles that rolled into place during June. We stopped paying four minutes of use under our docs with AT&T agreement and are now receiving service in a bucket of essentially three minutes.

We are about to begin the process of migrating our 35,000 GSM customers to our own network that will involve changing out a SIM card in each of those phones and we anticipate $6 million to $8 million in transition expenses associated with that migration which will be incurred we believe over the next three to four quarters and once again we’re unable to predict the exact speed or sequence of that transition.

Post transition, we expect that the net effect will be EBITDA positive that we will report more wireless EBITDA in the consumer and commercial segments, than we will have lost in the carrier segments, but it will take about a year for now, before you see the full run rate effects of that, so I would invite a short follow-up to that, but if you want to drill much deeper than that, we got to do it offline.

Anupam – Jefferies

I just want to quickly ask just one more question, I’ve not been able to access that. I think you mentioned some seasonality at probably 10 per minute rate in the second quarter. I was just wondering what’s your expectation for seasonality will be on that metric for the rest of the year?

Ronald Duncan

Seasonality in network access should follow its normal pattern which peaks in the third quarter and falls off fairly dramatically in the first quarter and then starts to come back for the annual cycle in the first quarter again.

Operator

Our next question comes from Mr. Jonathan Atkin of RBC Capital Markets; you may ask your question.

Jonathan Atkin - RBC Capital Markets

I’m wondering if there’s anything unusual this period that’s leading to the delay in the completion of the auditor review and your ability to present, final results. Maybe just talk a little bit about some of the factors there and then I’m interested in just the competitive environment in wireless and in broadband, what you’re seeing on among your CDMA and GSM competitor and stage anything different going on with rate plans, pricing or just the general offer given the launch of the Rev A network earlier today?

John Lowber

Okay I’ll cover the first one. I think Ron and I both have travel commitments for next week. I think we’re presenting at a conference or something next week. I’m riding my motor cycle to Sturgis, so those items took present over the timing of the filing. So, we knew going in that we’re going to be hard pressed to get anything done by today. The 10-Q of courses isn’t due until I think the 9th or 10th of this month, but we knew going in that it would be unlikely that the auditors would be complete with their review in the course that has been born out.

So, there is some risk as they continue to do their review that things might come up. They’re particularly spending a lot of time on the purchase price allocation of the United Companies, but we have a lot of moving parts this quarter. All the fiber sales all had interesting new launches that needed to be analyzed and so on, so all that process is ongoing.

Over the years the company’s revenues have grown appreciably, our cash flow has grown appreciably, our total footings have grown appreciably, our number in employees have grown appreciably, just about everything has grown appreciably except our net income and unfortunately the SEC and our auditors think net income and a portion of that is really the definition of materiality for the company. So, as the company has continued to grow and get increasingly complex, the materiality level has continued to shrink along with our net income, so that has created some fairly significant burdens for us.

For an example, I think we spent two or three days analyzing the amount of the loan fees that should have been written-off as part of our refinance back in the good all days that took about five minutes and logically was just an amortization over the remaining period of the credit agreement. Today it’s; get out the manual, studied it for several days, consult with the department of professional practice, analyze the underlying transaction and analyze it ad nauseam. So, things have changed in this arena and we’re dealing with it the best we can, so thanks for asking. Ron I’ll turn it back to you.

Ronald Duncan

The second question was on competitive nature of the Wireless and the Broadband business. I think that in Wireless it's clear that the segment is becoming materially more competitive that there was certainly a change in January of this year, when AT&T entered the market and ACS preemptively lowered rates by what looked to us to be about 25% to 30% in the marketplace and we think we’ve performed quite acceptably since then.

As you see we had almost 4000 net new ads on the Wireless front for the quarter, so we’re comfortable that we’re on track with our plan and we had anticipated a accelerating degree of competitiveness in the Wireless space and I don’t believe that we’re going to be disappointed in that expectation.

The competition up here probably isn’t quite as bad here as it is in the lower 48 based on the number of competitors in the market, but we now are basically facing lower 48 rate plans several years ahead of where a year ago we would have anticipated, although I think we all expected in the long run that the rates had to migrate to lower 48 rates, which continue to drop.

We were also seeing service competition with the increase in various levels of service. Somebody handed me the ACS press release this morning. While they are up and operating in our network already, we just haven’t begun the market yet, so you can debate to who’s really first in the market, but that’s fine the services are going to be available up here and there’s going to be increasing competition for Wireless.

The pressure has not yet extended as much into the broadband environment. We continue to grow well with our cable modem product. We haven’t seen real changes in the pricing for that product other than that we do continue to see accelerating customer usage, bandwidth utilization for customer continues to march upward, so certainly the price per megabit goes down pretty dramatically year-over-year, but in looking at our numbers you can see that we’ve managed to grow both a raw number of customers and average revenue per customer primarily as a result of customers choosing more features, more services and higher capacity, higher speed plans.

Jonathan Atkin - RBC Capital Markets

On a consumer data side, I think the sequential decline was a little bit bigger than the past several years and you talked about seasonality; is there anything more to it than that this year compared to prior periods?

John Lowber

I’m not aware of a sequential decline on consumer data; what are you looking at?

Jonathan Atkin - RBC Capital Markets

If you can follow up that road, I guess I’m showing 2.9K in the first quarter but if you can follow up on that?

John Lowber

We show that, we grew consumer data revenue and consumer cable modem customers. Since the growth in customers was light, it was only 100 customers, but we’re showing average revenue per customer up and so the revenue for modem stuff.

Jonathan Atkin - RBC Capital Markets

Yes, the drop off in the growth is what I was referring too.

John Lowber

Okay, so that normal seasonality, if you look at the video customers, the video customers are very soft in the second quarter. You get most summers a lot of sunshine and a lot of outdoor activity up here and you see a typical seasonal dip in the second quarter. We expect that to comeback towards the end of the third quarter as people comeback inside for the winter, but our penetration numbers continue to look good.

Jonathan Atkin - RBC Capital Markets

And finally, just on the regulatory side; anything at the state level or other levels of government that are worth noting.

Dana Tindall

Regulatory commission is ongoing forward with applications for a central telecommunication carrier status for us, they’re looking at access charges, but we don’t see that happening anytime soon, At the FCC we are closely tracking the Chairman Martin’s statements regarding wanting to get long-term USF reform in place before the end of the year as well as inner carrier compensation; we’ve been active in those proceedings and we’ve been in a good position in the regulatory front all around.

Operator

Our next question comes from Mr. Ian Zaffino of Oppenheimer; you may ask your question.

Ian Zaffino - Oppenheimer & Co.

Just one quick question, I know you had suspended the share buyback any thoughts of reestablishing that or what are your there; what type of metrics do you need to see the business perform at in order to I guess reengage or with that type of stock price? Thanks.

Ronald Duncan

There are two conditions that precedent to resume stock buybacks, one of which is free cash flow generation, which we expect to achieve by the third quarter of next year and the other of which is meeting or waving certain leverage covenants in the current credit agreement which our internal business plans suggests would not be attained at the current leverage levels until sometime in 2010, but if we perform strongly, we obviously have the option to seek a waiver modification of those covenants. I wouldn’t anticipate our attempting to do so until we turn to free cash flow generation, but we expect to be comfortably in that range by this time next year.

Operator

Mr. James Crumm of Regiment Capital, you may ask your question.

James Crumm – Regiment Capital

Just a couple of housekeeping; what was the actual cash EBITDAS? If you’re looking for 210 for the full year, what was it in the first six months?

John Lowber

We generated $81.5 million in EBITDAS and then we collected another $38.5 million in fiber which is mostly not in that number. There might have been little amortization, a few hundred thousand dollars of amortization in the EBITDA number. So, take your 81.5 and had 38.5 to it and then that’s the true cash generation from operations.

James Crumm – Regiment Capital

Okay and so then most of the EBITDAS performance in the second half is not for fibers, just general operations?

John Lowber

That’s correct. I think the current run rate on the amortization of the fiber deals is going to be, something over $2 million, $2.2 million or so a year and revenues going forward.

Ronald Duncan

But we’re expecting another $10 million to $15 million in cash for IRU payments prior to the end of this year and there are all sorts of heads nodding around here that the actual amortization of the IRU payments is unknown at this point because the auditors are still scratching their ahead about how we treat certain of those IRUs.

James Crumm – Regiment Capital

And then could you just talk about your go-to-market strategy. Now that you’re going to be able to do CDMA and GSM and just maybe is there a demand for bundles and for quad play and I know your marketing it that way right now or is that something that capital may have…?

Ronald Duncan

The principle focus for the next six months will be completing the transition of the existing customer base of 35,000 to 40,000 GSM customers, closing the Alaska DigTel transaction which is still stuck in the regulatory process and then integrating the operations of Alaska DigTel and GCI into a single wireless units.

We already offered a number of bundles that include wireless. I know parenthetically that those bundles have less success as a four part bundle than they do as a bundle that let’s you substitute wireless for wire line; three part bundle, but not a tremendous push or focus on those. At this point the company has got a lot to accomplish in the next six to nine months to complete the acquisition role in the integrated Alaska DigTel and swing 35,000 GSM customers, but in the long run, yes I think more bundled service are important.

James Crumm – Regiment Capital

Just from the capital perspective in the second half, should we expect most of that CapEx in the September quarter given sort of weathered seasonality or is there a big chunk that happens in the December quarter?

Ronald Duncan

Yes, it’s mostly ratable during the year. It steps up a little bit in summer months, but it will lag in the tail end to Q4 as well, so I’d model that fairly steady throughout the year.

James Crumm – Regiment Capital

And just a last question; in your guidance it seems like you closed some of your acquisitions early and so if I heard you correctly I think you said because of wireless transition it’s not more upside, but is that correct. I’m just wondering whether is it more upside; it seems like the executions are going well. I would think that there should be more upside in the second half?

Ronald Duncan

There maybe, we’re not ready to call that yet. The third quarter is hard to predict at this point because we don’t know how fast AT&T Mobility traffic will transition off the network that has a positive effect; we don’t know how fast we’ll be able to swing the GCI, GSM customers from an AT&T SIM card do a GCI SIM card. There is cash neutral effect to that swing other than the cost of the swing, although it reduces the volume of the “free minutes” that we use and extents the duration of availability of free nationwide access for us and there are number of other expenses associated with the transition that we’re unable to predict.

We don’t know when the Alaska DigTel deal is going to close and there maybe some adjustments that flow from the Alaska DigTel post closing that we haven’t fully annualized yet, there are just a lot of moving parts in the third quarter that made us uncomfortable giving a specific guidance number for the third quarter.

The assessment is that the run rate for the company is strong; cash generation should be very similar to what it was in the second quarter with the possible exception of transition expenses on wireless, but there are likely to be some other adjustments and just not enough clarity to really make any changes to the guidance at this point. We’re still holding firm to our 2009 targets as well and that should tell you that we’re quite comfortable with the status and operation of the business.

James Crumm – Regiment Capital

I’m sorry just one more. In the passing can you give us a little more detail on the dollars you captured migrating on your own network. Can you provide an update as to where you are in terms of the benefit your seeing in the business?

Ronald Duncan

We didn’t publish that number this quarter in part because it’s getting hard to the track which of the lines on our own facilities come off with ACS; we have that internally, but we haven’t published that, but I think that were probably…

John Lowber

$18 million to $19 million range on a annual run rate.

Ronald Duncan

On that basis, okay. I probably stepped up 3000 or 4000 lines off of ACS that were on them last quarter that are not right now.

Operator

Our next question comes from Ana Goshko of Banc of America. You may ask your question.

Ana Goshko - Banc of America

I wanted to follow-up first, on the $8 million that you quoted on the wireless transition, I wanted to know what’s in that number and get a sense of how much variability that potentially is there and I guess what I’m thinking about is, there’s a lot work to touch that number of customers and it becomes a risk of churn. So, in that number are you providing credits or is there any kind of assumption of having to so some handset upgrades to mitigate any churn that may result in the transition.

Ronald Duncan

We have taken a fairly good shot at what we think it’s going to take to covert all those. We recognize there’s a lot of difficulty in toughing that many handsets. We’re ramping up, staffing and other promotional efforts and at this point I‘d rather not go into the details of exactly what that plan is, because I think there are people other than our investors who might have a keen interest in that.

So, the number we believe is that the $8 million level is conservative, we hope to beat that, but then we recognize the potential fore churn in the process. I think you’ll just have to see how that one plays out and obviously as we launch those initiatives, there’ll be more color on exactly what that includes.

Ana Goshko - Banc of America

Okay, that’s fair. I apologize if you addressed this already, I was interrupted just for a quick minute, but the requisite question in the second quarter earnings calls are the impact of the economy, so I’m wondering if you haven’t addressed this already, if you’re seeing anything positive or negative on the consumer and on the commercial front there?

Ronald Duncan

I think Mr. Lowber addressed it. The general economy of Alaska is a beneficiary of the rest of the country’s misery right now with respect to energy prices. I believe the legislature or the state senate is going to bolt this week on some of the final actions related to moving the gas line forward.

Oil revenues for the state are up by multiple billions of dollars and there is a lot of new cash coming into the economy up here. We’re seeing new businesses related to oil and gas line development move into town; anecdotally we have turned up several office complexes with new commercial service for companies expressly addressing energy opportunities up here, those are brand new employees moving into the state, they’re high-value jobs.

The Alaska Permanent Fund dividend will exceed $2,000 this year, which you multiply by 6,000 residents and there’s probably another $1200 on top of that for a new energy credit, so we’re kind of making the bush tax rebates look a little bit puny in an environment where we really probably don’t need all that much stimulus anyway. So, if we make any mistakes we’re certainly not going to be able to blame them on a soft economy.

Operator

Mr. Liam Burke of Janney Montgomery, you may ask your question.

Liam Burke - Janney Montgomery Scott

Ron, you’ve laid out the operational plans and specifically on the wireless and local. Over the next 18-most or so, do you see any change in your capital programs?

Ronald Duncan

We don’t see any change right now from what’s been laid out in the five year plan. We expect to run probably right at the covenant levels for CapEx which next year will be 125 and this year I think you know what they are and it depends on how you count the capital release on the satellite, so near-term no shifts in that.

There is lots of opportunity for investment, lots of potential to grow with the market. At this point CapEx is constrained by the covenants and the credit agreements and future prospects really dependent on our ability to drive return on that capital investment, but nothing in our horizon that suggests any uneasiness about of our probability of success.

Operator

We have no further questions in queue.

John Lowber

That will be a wrap then. We will get back to work and thank you all for your participation. We’ll have another call in another 90 days or so. Thanks a lot.

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