FairPoint Communications 2011 Annual Report Download - page 37

Table of Contents
• a permanent decline in market capitalization;
• implementation of restructuring plans;
• changes in industry trends; and/or
• unfavorable changes in our capital structure, cost of debt, interest rates or capital expenditures levels.
Situations such as these could result in an impairment that would require a material non-cash charge to our results of operations and could have a
material adverse effect on our consolidated results of operations.

We require significant capital expenditures to maintain, upgrade and enhance our network facilities and operations. While we have historically been able
to fund capital expenditures from cash generated from operations and borrowings under our revolver, the other risk factors described in this section could
materially reduce cash available from operations or significantly increase our capital expenditure requirements, and these outcomes may result in our inability
to fund the necessary level of capital expenditures to maintain, upgrade or enhance our network. This could adversely affect our business.
Risks Relating to Our Regulatory Environment

We operate in a heavily regulated industry. Laws and regulations applicable to us and our competitors may be, and have been, challenged in the courts,
and could be changed by Congress or regulators. In addition, the following factors could have a significant impact on us:
. A portion of our revenues comes from network access charges, which are paid to us by
intrastate and interstate interexchange carriers for originating and terminating communications in the regions served. Through 2011, this also includes
Universal Service Support payments for local switching support, long-term support, and Interstate Common Line Support (“ICLS”). Starting in 2012, these
forms of universal service funding will be replaced by CAF which is described below and more fully in “Item 1. Business – Regulatory Environment.”
Further, in recent years, several of the long-distance carriers have declared bankruptcy. Future declarations of bankruptcy by a carrier that utilizes our access
services could negatively affect our business, financial condition, results of operations, liquidity and/or the market price of our Common Stock.
The amount of access charge revenues that we receive is based on rates set by federal and state regulatory bodies, and those rates will change according
to the schedule established by the FCC in its recent order on universal service funding and intercarrier compensation. These impacts are described below and
in “Item 1. Business – Regulatory Environment.” Further, from time to time federal and state regulatory bodies conduct rate cases, “earnings” reviews, or
make adjustments to price cap formulas that may result in rate changes. In addition, reforms of the federal and state access charge systems, combined with
the development of competition, have caused the aggregate amount of access charges paid by long-distance carriers to decrease.
On November 18, 2011, the FCC released the FCC CAF/ICC Order. In this order, the FCC replaced all existing USF for price cap carriers with its
CAF. The amount of CAF that will be available to us has not been determined nor have the specific obligations that would be associated with such funding.
We risk reductions in the amount of CAF that will be made available to us compared to current USF amounts. The specific obligations that will be associated
with future CAF funding have not been determined and we risk not being able to accept CAF if the obligations exceed the funding. The FCC CAP/ICC Order
fundamentally reforms the ICC system that governs how communications companies bill one another for handling traffic, gradually phasing down these
charges. Additional reforms have been proposed. The reforms adopted by the FCC in their order will significantly change the access charge system and, if not
offset by a revenue replacement mechanism, could potentially result in a significant decrease in or elimination of access charges. Decreases in or loss of access
charges may or may not result in offsetting increases in local, subscriber line or Universal Service Support revenues. Regulatory developments of this type
could materially adversely affect our business, financial condition, results of operations, liquidity and/or the market price of our Common Stock.
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