UBS began coverage of the rural LEC sector Fri., adding CenturyTe...

increased regulatory uncertainty as access charge and Universal Service Fund reform move to the fore. While we do not expect a resolution of these issues until late 2004 at the earliest, the process itself and the likelihood of a negative outcome should increase volatility in RLEC shares.” The report said there were positives in the rural area such as: (1) Strong free cash flow that would drive debt reduction. (2) Less competition. (3) Greater margin stability. However, there also were investment concerns such as: (1) “RLECs are acquisitive operators” with additional access line purchases likely. “Although most of the operators are well versed in merging acquired operations, integration, regulatory and financing risk remains high.” (2) RLECs generated 40-50% of their total revenue from network access fees paid by long distance carriers. That offers greater stability in revenue and profits but creates risk as the FCC begins to more closely examine the USF and intercarrier compensation regimes. (3) Competition will grow, with wireless substitution already making an impact on long distance usage.